Metro Inc
TSX:MRU
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Metro Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the Metro Inc. 2020 Fourth Quarter Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would like to now hand the conference over to your speaker today, Sharon Kadoche, Manager of Investor Relations and Treasury. Please go ahead, sir.
Thank you, Joanne. Good morning, everyone, and thanks for joining us today. The comments will focus on the financial results of our fourth quarter, which ended September 26, 2020.With me today is Mr. Eric La Flèche, President and Chief Executive Officer; and François Thibault, Executive VP and Chief Financial Officer. During the call, we will present our fourth quarter results and comment on its highlights. We'll then be happy to take your questions.Before we begin, I would like to remind you that we will use in today's discussion different statements that could be construed as forward-looking information. In general, any statement which does not constitute a historical fact may be deemed as a forward-looking statement. Expressions such as expect, intend, are confident that, will and other similar expressions are generally indicative of forward-looking statements. The forward-looking statements are based upon certain assumptions regarding the Canadian food and pharmaceutical industries, the general economy and our annual budget as well as our 2019/'20 action plan. These forward-looking statements do not provide any guarantees as to the future performance of the company and are subject to potential risks, known and unknown, as well as uncertainties that could cause the outcome to differ materially. A description of these risks, which could have an impact on these statements could be found under the risk management section of our 2019 annual report.As with the preceding risks, the COVID-19 pandemic constitutes a risk that could have an impact on the business, operations, projects, synergies and performance of the company. We believe these statements to be reasonable and pertinent at this time and represent our expectations. The company does not intend to update any forward-looking information, except as required by applicable law.I will now turn the call over to François Thibault.
Thank you, Sharon, and good morning. I hope everyone on the line is in good health. Our fourth quarter sales totaled $4.1 billion versus $3.9 billion last year, an increase of 7.4%, and excluding the impact of IFRS 16, the increase stood at 7.7%.Food same-store sales grew 10% versus the fourth quarter of last year. And pharma same-store sales grew by 5.5%.Our gross margin stood at 20.2% of sales or 20.4% excluding IFRS 16, representing a 20 basis point improvement in margin versus the same quarter last year. Operating expenses as a percentage of sales came in at 10.4% or 11.8% without the impact of IFRS 16, and this compares to operating expenses of 11.9% of sales for the same period last year. There were $27 million of COVID-19-related expenses in the quarter.Our numbers include cost synergies related to the Jean Coutu acquisition of $16 million in this quarter and $69 million for our fiscal year 2020. I am pleased to report that we have now secured an annual run rate of $35 million of cost synergies. And now that we've achieved our target of $75 million in cost synergies within 3 years of the acquisition, we will no longer disclose the level of synergies going forward.Our EBITDA for the quarter stood at $403.5 million, representing a margin of 9.7% of sales, and excluding IFRS 16, EBITDA was up $37.9 million, an increase of 11.8% versus last year and represented a margin of 8.6% of sales versus 8.3% of sales in the same quarter last year.Total depreciation and amortization expense for the fourth quarter was $118.5 million. Of the $50 million increase versus last year, $35.1 million results from the adoption of IFRS 16 and $10.7 million or $0.03 a share represents an accelerated depreciation charge related to our new fresh products distribution center in Ontario. Making way for the opening of our phase 2 fresh DC, some existing assets will no longer be used, and this charge brings down the value of these assets in line with their remaining shorter useful life. We did not adjust earnings for this amount.Adjusted net earnings were $193.1 million compared to $174 million last year, an increase of 11%. And our adjusted net earnings per share were $0.77, up 13.2% versus last year adjusted EPS of $0.68.Our capital expenditures for the fourth quarter totaled $203 million, bringing total CapEx for the year to $511 million. At the beginning of the year, we had planned a higher level of CapEx, but some projects, namely our new Ontario automated DC got delayed due to the pandemic. We will carry forward some investments going into the new fiscal year. And we expect CapEx for fiscal 2021 to stand at about $600 million.On the retail side, we opened 7 stores this fiscal year, including 2 conversions; relocated another 2; and carried out major renovations in 17 stores for a net increase of 168,800 square feet or 0.8% of our food retail network.Under the normal course issuer bid program, we have repurchased between November 25, 2019 and November 10, 2020, 4.26 million shares for a total consideration of $240.8 million, representing an average share price of $56.52.We remain committed to return excess cash flows to our shareholders. And as such, we have renewed our normal course issuer bid program, sorry, giving us authority to repurchase up to 7 million shares between November 25, 2020 and November 24, 2021. That's it for me.I will now turn it over to Eric.
Thank you, François, and good morning, everyone. We are very pleased with our performance in fiscal 2020. And what a year it has been. We delivered a strong performance across the board as we grew our sales 7.7%, our adjusted EBITDA by 11% and our adjusted EPS by 14.4% for the year. All this, excluding the impact of IFRS 16.After a strong first half of the year, our performance in the second half of the year was fueled in part by the sales growth caused by the pandemic. This performance was also the result of sustained investments in our store network, our supply chain, our merchandising programs, e-commerce, and of course, the dedication of our employees.I want to again thank our teams for all their hard work to ensure that retail and distribution center operations continued to run in an efficient manner, all the while, providing a safe and secure environment to our employees and customers.Let me now turn to the fourth quarter. We delivered solid results, driven by strong comparable sales and good operating leverage. Food same-store sales were up 10%. Our internal food basket inflation was 2.8%, slightly lower than the 3% recorded in the previous quarter. We saw traffic trends improving compared to our third quarter, but still significantly down year-over-year. A larger basket continued to more than offset the decrease in traffic.We are pleased with the performance of both Metro and our discount stores, Super C and Food Basics. Our Metro stores continued to grow more than our discount stores, again, this quarter, although the gap between them has narrowed significantly. This strong performance resulted in market share gains in both of our markets.On the pharmacy side, same-store sales grew by 5.5%, prescription drug sales grew by 5.3% and front-end sales increased by 6%, led again by COVID-related items such as masks and hand sanitizers, supported by strong merchandising and marketing plans. These gains were partly offset by a softer performance in our cosmetics and beauty categories, which remain under pressure during the pandemic.We are pleased that the labor conflict at the Jean Coutu warehouse in Varennes was -- that started on September 23, was resolved last week. Employees returned to work on Sunday, and we expect a gradual return to normal operations over the next few weeks.As François mentioned, we achieved our target of $75 million in cost synergies related to the Coutu acquisition. There is still room for additional synergies with the transfer of operations from our McMahon distribution center to the Varennes center. These activities can resume now that the labor conflict is behind us, and we expect them to be completed at the end of fiscal '21.During the fourth quarter, online grocery sales grew by 160%. As mentioned on our last call, we are now accelerating our investments in e-commerce to add capacity as demand grows. First, we just opened a third hub store in the GTA in Scarborough, and it's off to a good start.Second, we will be opening a dedicated store for online grocery next summer to serve the Island of Montréal. This dedicated store will leverage our key learnings and technology investments made over the last 4 years. This store will offer the same variety and freshness found in our regular Metro stores with next-day home delivery, with the option of the same-day delivery.Third, we will be deploying click-and-collect to most Metro stores, increasing the number of stores offering click-and-collect from the 40 planned to more than 100 by the end of fiscal '21.Finally, we will continue to work with Cornershop, a third-party delivery partner, offering 2-hour delivery, which adds flexibility to our online capacity.These investments will be part of our regular CapEx and will enable the company to increase its online grocery capacity, gain efficiencies and better meet our customers' evolving needs.Our Ontario supply chain modernization project is coming to fruition. The start-up of the first facility is planned for next January. In Québec, the automated distribution center project was submitted to city officials and was well received. Key contractors have been selected, and the preparation of the main construction activities is underway.Looking ahead, while we can't predict how long the pandemic will last or exactly how it will evolve, we expect that in the short term, food revenues will continue to grow at higher than normal rates versus last year as a portion of restaurant and food service sales continue to transfer to the grocery channel. In the first 4 weeks of fiscal '21, food same-store sales increased by about 11% versus the same period last year.On the pharmacy side, we are pleased that our contingency plan secured the supply of prescriptions and OTC products to our pharmacy network, although commercial sales were negatively impacted. In the first 4 weeks of fiscal '21, comparable prescription sales were up 3.6% versus the same period last year, while front-end same-store sales were down 3.4%. We expect front-end sales will remain under pressure during the first quarter as we gradually ramp up inventories and promotional activity, and this will negatively impact our pharmacy division results in the first quarter of fiscal '21.In closing, we're pleased with our performance and how our team stepped up to the challenge. Our priority remains the safety of our employees and our customers as we continue to run our operations as efficiently as possible and invest in our long-term growth. That's it.We'll now take your questions.
[Operator Instructions] Your first question comes from the line of Karen Short from Barclays.
This is actually Renato Basanta on the line for Karen. So first, I guess, one of your competitors called out a pretty intense competitive environment on the discount side and actually some price investments. So wondering if you're sort of seeing the same thing? And how you would characterize the level of competitive intensity out there on the discount side? And if you feel the need to respond from a price perspective?
Well, our market is always very competitive. Yes, we did notice a little more competitive intensity and promotional activity towards the end of our quarter, leading into Thanksgiving this year. As usual, this is not unusual in our market that it heats up around that time of the year. So nothing out of the extraordinary. But yes, it did heat up a little bit. That said, we're priced well. I think we have strong merchandising programs and our discount banners are well positioned as our Metro stores in both provinces. So we're in a good position to face this.
Okay. That's helpful. And then just wondering if you could provide some context around the type of investment that may be necessary this year as you sort of ramp up these e-commerce capabilities. Maybe any color on how you're thinking about the relative magnitude of these investments this year versus last year? And how they'll potentially show up on the P&L at all versus maybe CapEx as the model continues to evolve?
Yes. So as we accelerate deployment of e-comm, there are some expenses associated with that. But like we've done from the beginning, we're taking a gradual prudent approach. As demand grew faster than we expected this year, we needed to ramp up, and that's what we announced the acceleration today. I think the level of demand will allow us to support the expenses that come with it, but there will be some extra expenses.There will be some investment this year to set up click-and-collect in more stores. So with that facility, clearly, that's going to take some transition time and some expenses. So I won't give you specific guidance. There will be extra expenses, but we think we can manage that and that the volume we expect to get will enable us to deliver decent returns.
Okay. That's very helpful. And then just last one, if I may. Presumably, you've picked up quite a number of new customers during the pandemic. But just wondering what you're sort of doing to cultivate those new customer relationships? Just whether there's anything, in particular, being done to specifically target those new customers so that they're sticky and they become loyal customers as you get through and beyond the pandemic?
Well, we try to operate great stores, offer great value and execute every day. That's how you keep customers happy. We measure our customer promises every month and have been for many, many years. So no change there. That's going to continue. The big change this year is the big basket, as you know. So traffic is down, basket is way up. Those trends are improving "a bit," but it's still similar in what we're seeing.So I think all sorts of good initiatives, merchandising, marketing, loyalty, we communicate with our loyal customers, we personalize offers. So stuff that we've been doing for a while, we are continuing to do. So when we say we try to execute day in, day out to serve our customers and exceed their expectations, that's what we mean.So yes, we, I'm sure, got new customers over the next -- last little while. But I think our execution was behind the ability to generate a large basket, decent margins and good returns.
Your next question comes from the line of Peter Sklar from BMO Capital Markets.
First on the dedicated store for online, I just had a few questions. I guess the first one is this, conversion of an existing store. And there is a period of time of, looks like, infrastructure development of the store, where I think you said you're not opening it up until next summer. And is there -- what is the extent? Is there automation technology in the store? And you can discuss CapEx? I'm just wondering if you could talk around all those points.
Okay. So it's not a conversion of an existing store. This is an existing facility in an industrial location. So it's a building of about 100,000 square feet that needs -- it's an existing building that needs some modifications to adapt to an e-commerce store operation. So changes to receiving, shipping, everything inside needs to be done to build a food store, basically, a food store that will be efficient for an e-comm model. So that's why we need a few months to build it out and start operations next spring, wrapping up to next summer.So the CapEx is south of $15 million, say, around $15 million is what we're talking about, 1-5. There is no automation per se to start that's planned. We have a lot of technology. We are leveraging the technology and the systems and the learnings that we've used in our hub stores that we continue to use in our hub stores. Those will be used in the new facility.So there's a heavy technology component to it, obviously, but there's no pure automation to start. We continue to monitor the automation alternatives. It's still early days for those technologies. The building where we will operate from will allow us to incorporate micro fulfillment, if and when we choose to do so, but that's not the way we're going to start. So I hope that answers your question.
Yes. And Eric, I take it that this store is only for home delivery. It will not be building click-and-collect baskets?
That's right. That's correct.
Yes. Okay. Just a couple of questions for François, if I may. François, the amortization charge that you took on the pre-existing distribution assets in Ontario, I take it that's just a onetime. We're not going to see further charges as we go forward?
It's a onetime, partly new information, partly catch-up. There's going to be some remaining -- as you shorten the useful life, we will continue to depreciate faster, but it's nothing like this amount that we just booked.
Okay. And then on the COVID costs that were $27 million during the quarter, can you talk a little bit about what the run rate looks like for Q1? Is it -- are we kind of at that level or the costs going down or up? Or where are you at on that?
No. We're pretty much on it. Last quarter, if you remember, Peter, I said we were running about -- we estimated that we'd be running about $10 million to $12 million. This was a little over $9 million per month this quarter. So it's around that ballpark, but it's -- expect a similar amount, everything else being equal.
Yes. Okay. And Eric, sorry, I forgot to ask you one thing on the dedicated store. Can you talk about -- like I would think eventually, you're going to bring that to the -- to Toronto as well. Can you talk about, like, as you look into the future, how many of these stores do you think you could have to service your customers?
Yes. So the evolution of our omni-channel strategy is to have a dedicated facility in large, dense urban centers. So clearly, Toronto would qualify. So we will look to build something similar in the Toronto market. So not ready to announce anything. We will keep you posted as they say, but we will start with this one in Montréal.Like I said, we now have a third hub store operating in Toronto. Our businesses -- we're pleased with our business in Toronto. We will need to add capacity there, but it's going to be in the year following or so. And in the meantime, by adding click-and-collect stores more quickly, we think we can capture our fair share. And that's our plan.
Our next question comes from the line of Irene Nattel from RBC Capital Markets.
Just wanted to talk, if we might, about the step-up, I guess, in the pace of same-store sales from the end of Q4 through to Q1? And anything you can tell us around what you're seeing as, here, in Québec, we went into shutdown? Is it kind of even in Québec and Ontario? And also, just really how you're thinking about in-store same-store sales have a potential lift in e-commerce as they move into the totally colder winter months as it's starting to feel today?
Yes. So the lift, I wouldn't call it a big lift from 10% to 11%. It's a 4-week number. So it's not the full quarter. So I think we're in the same ballpark. The first 4 weeks of fiscal '21, there's Thanksgiving in there. So Thanksgiving is a big week or 10 days, especially in Ontario, even more than Québec. So I think we had a strong week that week, but I wouldn't call it a step-up in same-store sales between the end of the quarter and P1 to say that.Traffic in our stores with the cold weather, the impact of e-comm, e-comm demand is still strong. Let's put it that way. We're pleased with that. Will it increase with the cold weather? You can make an argument. I don't have the crystal ball, like I'd like to say. So we're preparing our stores for the most of the business, as you know, is in the stores and will be so over the course of this winter.So we have to take all the necessary measures that we have to keep our stores safe and clean. And if there are lineups outside, we will have to find ways to put some shelters. So we're all preparing for that. It will perhaps be challenging, but we have to do what we have to do to provide a safe environment for our customers and our employees, and we will spare no expense and no measure.
Well, that's great. And switching gears for a second to the pharmacy side of the business. Can you walk us through, I guess, the cadence over the next 12 months as you do now consolidate the distribution facilities in Varennes. And although you have talked about synergies, maybe you can give us an idea of the magnitude of, let's call it, dislocative costs that you're incurring because you've got McMahon and Varennes and the cadence with which we can expect those to kind of go away over the next 12 to 18 months?
So the priority now after the labor conflict is to really ramp up inventories in our Jean Coutu stores and in our Jean Coutu warehouse. Clearly, I said, we -- it's been challenging on the front-end commercial sales. So we have work to do there. So that's the first priority, and that's going to be over the next couple of months.Then after the holidays and beyond that, we will resume all the activities to schedule the transfer of stores, the Brunet stores from the McMahon warehouse in east end of Montréal to Varennes. So this will be done starting, I guess, in the spring, a number of stores per week or per month. And then we expect to have a full transfer done towards the end of fiscal '21 or early fall.So -- and at that time, yes, we expect further synergies, further SG&A reductions related to distributions. So it's something around $10 million is a number that we'll be shooting for, but it's going to take a bit of time, and it's going to be gradual.
That is great. And then just finally, following up on a question, I think it was Karen Short's associate who asked the question about -- at the top of the call. Just around what -- I mean, your metro&moi, your AIR MILES data, what are they showing you around existing customers versus new customers, shift in basket, the effectiveness of the direct communications that you're doing, particularly around metro&moi?
So there's no big change in that. Like I said earlier, we've been at it for a while with our loyalty programs and personalization, especially with metro&moi. So we're still using those tools and sharpening those insights and influencing our merchandising and our promotional activity. So metro&moi remains a popular, well-liked program in the province of Québec. We're seeing same kind and similar results that we've seen before.The online customer tends to be a metro&moi customer. So we're seeing more loyalty from them, which is a good thing for us, and that's part of the -- that is the omni-channel strategy to gain share of wallet through our stores and online. So metro&moi measures that pretty well, and we're happy with that.So it's all part of a larger digital plan, digital strategy that we're pleased with. More to do, and we're not there yet, but we're pleased with that. I can't give you specific insights with obvious competitive reason. But we're doing what we've been doing, and we'll continue to do it.
Your next question comes from the line of Mark Petrie from CIBC.
I wanted to just follow up on a few of the topics that you guys have already given some great information on. With regards to the dedicated online store, are you willing to share an estimated sort of range on the revenue throughput that you would expect from that store once it's ramped up?
No, we're not. We're adding capacity, and we think we will have enough capacity for a few years, several years. We'll see how demand evolves, but we think we'll be in good shape to serve this growing demand more efficiently than we are today with our hub store model in those -- in the city of Montréal, where there's more demand. And we have 5 stores -- hub stores around Montréal right now. So we will -- 3 of those stores will be "relocated" into the new one to be more efficient, add capacity and that's our plan. The stores will offer click-and-collect, but the delivery and -- the picking and delivery will be done from a central location. And at the level of volume that we expect, we expect to be efficient.
Okay. With regards to the gross margin performance in Q4, are you still seeing modestly lower promo penetration in larger baskets? And I'm just curious if there are any other impacts to call out for Q4 that were a change from Q3?
The gross margin performance, we're pleased with. Higher volumes, higher baskets tend to generate a good margin. The promo rate has steadily increased back to more normal levels. So I can't say that like early days in the pandemic, where the promo rate was way down, this is not the case. Promo is back up to more usual numbers. That said, I think our mix has been effective. Higher volumes is good for lower shrink. Private label penetration is stronger. So it's a bunch of factors that contributed to this good performance on gross margin, and we're happy with that.
Okay. With regards to the synergies, I know the distribution of Pro Doc generics through the Metro and Brunet network was not part of your original number, but could you just update us in terms of what type of progress you've made on that? And any comment about how much of an increase this has driven for the Pro Doc business? That would be helpful.
Well, so Pro Doc, the generic drugs are available to the Brunet pharmacists. It's their decision to order it or not. We've seen a gradual ramp-up in those sales to the Brunet pharmacists. There's more potential there. And those things takes time, and we're monitoring it. But again, it's the pharmacists' decision on that.
Okay. Yes, understood. And just the last one. Just sort of bigger picture, I mean, obviously, consumer eating habits have been changed dramatically through the pandemic. I'm just wondering how all this has affected how you look at your prepared food offerings, be it HMR, meal kits, or even something like prepared food delivery? How have you adjusted your thinking about what that business could look like over the next couple of years, given all of the change that we've seen over the last number of months?
These are good questions. The HMR and the kitchens in our store clearly were almost shut down early on in the pandemic. They're gradually coming back to life. And we're offering more and more prepared foods from our stores. So we have to continue to evolve and adapt. So it's clearly a big focus for our central stores in both Québec and Ontario to have the right offer at the right price, good fresh food and HMR.So for competitive reasons, we're not going to give you all our plans. But clearly, it's a requirement. Customers are looking for it. The way it's presented and merchandised can change, perhaps more prepacked, more refrigerated versus heated. So there are changes to the way we present, but we will -- we have to present convenient, fast, good foods to our customers. And that's what we're working hard to do. So I'll leave it to our good teams to come up with those answers, but that's the direction.
[Operator Instructions] Your next question comes from the line of Chris Li from Desjardins.
Online pharmacy has become more topical again with the Amazon pharmacy announcement in the U.S. yesterday. Eric, I know you don't have the crystal ball, but just love to get your thoughts on how do you see online pharmacies impacting the pharmacies in general over the longer term? Do you see them as a big threat? And then more importantly, how do you see your pharmacy network evolving over the longer term to continue to drive growth and take market share?
So our pharmacies in Québec have -- are offering prescription renewals and prescription home delivery online. So we have that. And it's, certainly, there to stay and keep growing. The front-end sales, it's not really part of our model -- it's a small part of our model today. We'll see how that evolves.The Amazon announcement yesterday in the U.S., I don't think is a big threat short term anyway in this market. Regulations are very different. Price of drugs are regulated here. Prescription fees are regulated here by the government. So we don't see that as a big threat. That said, for convenience and professional care, our Jean Coutu and Brunet pharmacies through their online platforms for health files and prescription renewals and ordering are delivering that service to their patients.
Great. That's very helpful. And maybe just a quick follow-up on that. We know in Québec, the pharmacy regulations tend to be a bit -- be more strict than other provinces, such as the requirement that pharmacists also need to be owners of the business. Do you see that as a potential hurdle for some of the new online entrants in Québec?
Do we see this as a potential, I'm sorry?
Hurdle. Hurdle.
Hurdle, to make it harder because of the more stringent regulations.
I would think so, yes.
Okay. That's helpful. And then just shifting to online with the grocery business. Can you share with us what is the mix between your click-and-collect and home delivery volumes so far?
We don't disclose those ratios. The model that we worked on for the last 4 years has been more skewed to home delivery. So a large percentage of our sales are home delivered. But click-and-collect, especially in light of the pandemic, has picked up in the hub stores that we have today. Click-and-collect has accelerated. So given where things are and the level of demand in smaller markets for online shopping through click-and-collect, we think we can, like I said earlier, keep our fair share of those sales in our -- of our Metro customers in those markets with the click-and-collect model. So long answer, heavily home delivery today, the mix will change as we add click-and-collect stores over the next year.
Okay. That's helpful. And then appreciating that as you expand your click-and-collect to more stores next year, there will be more expenses. But since most of them are more variable labor costs, is it fair to assume that as you do expand the click-and-collect, presumably, you'll get more sales with that. So if most of the costs are more variable labor costs, the impacts on your profitability should be manageable. Would that be a fair assumption just on the click-and-collect business for next year?
Well, yes, like I said earlier, there will be some costs associated with offering that service. I think in lower-density markets, stores can manage their hours to -- with their existing employees, with the help of the technology that we will provide that they can fill that click-and-collect service within their hours that they manage every week. So the reassignment of hours, we think that it can be absorbed. And it will be that much easier if it's all additional sales.If it's a transfer of existing ones -- in-store sales to online click-and-collect, then it's a little more dicey, and we have to manage our costs really well. We think that -- we think we can, but we hope that it will be added volume, or parts of it that will be new volume, which will make it a little easier.
Okay. That's very helpful. And maybe my last one which is on capital expenditures. You're guiding $600 million for this year. Can you share with us sort of what are the big buckets? You mentioned the dark store will be like a $50 million investment. But in terms of other big buckets, like new DCs and store renovations, can you just give us a rough sense of what are the big buckets of spending for next year, hopefully, this year?
Yes, Chris, François here. You can assume that it's pretty well divided between DC and retail networks. So obviously, we have large -- we still have large investments in our automated DC in Ontario. We're starting Québec. And about half of what I said will be around the retail network, rough order of magnitude.
Your next question comes from the line of Vishal Shreedhar from National Bank.
Just another follow-up here on the e-commerce acceleration initiatives, particularly the Montréal facility for home delivery. Wondering why management decided to, at least, delay the installation of automated technology? Is it the business case? Is the technology not reliable? What's the issue with not trialing that at this point?
I think, I guess, the short answer is we have a good model. We're pretty efficient the way we operate today. We think we can be even more efficient with this online facility. Can automation help us? Maybe. Again, like, we are going to monitor that closely and incorporate it if and when we think it's going to be helpful.When you change the way of doing things, there's transition, there's cost, there's training, need people, need systems. So we have to be careful how we do it. Just to transition to a new building is a challenge. We're going to do it with the existing methods, and that will make it a little easier, smoother to start. And as we go down the road, we will incorporate automation gradually if we think it will help us. So we will measure, we will analyze. Where we think it can help us, we will incorporate it. But the priority for us was to open this rapidly. And to do so, we are choosing to go with our current model in a much more efficient -- efficiently built building adapted for pure 100% e-comm.
Okay. With respect to the investments in click-and-collect and delivery, and I understand the future is uncertain, and of course, I understand that in the past, delivery was a method that Metro thought would be more preferred by the customers. So given the pandemic, given the behaviors that you're observing, is it fair to say that Metro now believes that click-and-collect and delivery are both going to have a place in the future for the customer?
Well, our experience so far has been that the delivery was the chosen or preferred model. Click-and-collect is becoming available at other competitors, it's -- and it's being trialed. So we think that there's a customer for both, yes. What the proportions will be exactly, it's hard to tell. But e-comm, to me, is about convenience, first and foremost. And the way you deliver it depends on the density and the economics market-by-market.So in the Montréal market or the GTA market, a dedicated center makes sense at the levels that we're at today. And that's why we're going in that direction. And in other markets where delivery can't be justified or supported, then we should offer click-and-collect efficiently so that, that customer that prefers to shop online and pick up at store can be serviced. So yes, it's -- you need both, I think, to serve the customers well.
Okay. Wonderful. And just changing topics here a bit. With respect to the Adonis banner, I know it's a little bit more labor-intensive and has a different offer than call it most stores. Can you just comment how the pandemic impacted performance at Adonis, particularly, given its prepared food offering as well? And has that changed your view on the growth expectations of this banner?
Well, I don't think it has changed our views on the banner potential and that the concept is differentiated. We think it's a great concept with a lot of potential. That said, the pandemic has been a little harder on that banner than our regular food stores, a couple of reasons. We have large, I would call them, destination Adonis stores, and those stores early in the pandemic with -- the stores were with heavy volume and big crowds. Clearly, they were affected. People had to line up and wait for a long time. So that -- we lost some sales because of that. Some days we're closed early for a few weeks early on in Québec. So it was tough on Adonis, the big stores, I would say, early on. It's better now.And we have also downtown Urban Adonis stores that are near the students, the universities and heavily focused on prep food. So no big secret that those stores, even with our Metro banner in Québec and Ontario, those stores are under pressure. Downtowns are empty, and students are not there. So there's been pressure on Adonis, for sure, in the last year.That said, we're very confident about the banner, its potential. We've -- we opened a store last year in Ottawa -- this year, in fiscal '20 in Ottawa. That's off to a good start. We're opening in Québec city early the next winter. So we see more growth. But clearly, prepared food is a big part of the Adonis offer, and that was affected. So I think that's temporary. Vaccines are coming soon apparently. So we'll see.
Okay. And I was hoping to get your perspective on the trends for conventional versus discount. It's been well discussed about conventional doing better because of restaurants closing, one-stop shop, et cetera. But given that you've had presumably many new customers trial your conventional offers that presumably haven't shopped there as much as they usually have, do you think that, that trial will result in some stickiness in the conventional banner once this COVID-19 pandemic dissipates, your best perspective on that?
Well, yes, we think we should get to keep some of those new customers or get those existing customers to keep spending more with us than they did before. Hopefully, they found a good shopping experience, and they save money before -- versus their previous habits, and we get to keep more of their share of wallet. So we're working hard to do that. And I think we have a shot at doing that.That said, discount is a significant part of our business. We like our mix of discount and conventional. The search for value is not going away. And I think it's important to have both strong formats in the portfolio, and we do. So I think that's a good thing.
Your next question comes from the line of Michael Van Aelst from TD Securities.
Just wanted to touch back on the Montréal dark store or whatever you want to call it. Can you give us an idea of what the geographic area it can cover? And like, how many stores are you delivering from in Québec now? And will this replace some of those stores? Or is it just fully additive?
So we have 5 stores -- hub stores in the Greater Montréal area, 3 on the island, 1 in the South Shore and 1 in Laval. So the plan is to migrate the 3 Island of Montréal stores to the new central location. The 3 Island of Montréal stores will remain click-and-collect. The other -- Laval store and the South Shore store will remain as hub stores for click-and-collect and delivery. And that's the way we will start this new facility to service essentially the Island of Montréal.But it could service -- we'll see how it evolves. It could service the Greater Montréal eventually -- again, we learn, we adapt, we test, we learn and things change. It goes fast in e-comm, and I'm just giving you the original plan, and we'll see how it goes.
Again, which city is the actual facility located in?
Saint-Laurent.
Okay. Great. As far as the synergies are concerned, so you were at $16 million in the quarter, which is roughly $70 million if you annualize it. And now you're talking about $75 million annualized going forward. So I was just wondering where the incremental improvement is coming from going out of Q4 and into Q1?
Yes. So Michael, François here. So many little things, but mostly additional procurement synergies that were secured, but has not flown through the Q4 results, so you will -- they will flow through the Q1 results now. But we have secured an additional $5 million, it just hasn't flown into the P&L yet.
Okay. And did I hear Eric say that the new -- the converting or getting brand ramped up and taking over Brunet is going to add $10 million more?
Yes. That's the -- you can assume that, that's the goal. There were already some -- there were some SG&A that had been removed from the facility. But the remaining combination, you can assume an additional $10 million going forward.
Okay. And did the new labor agreement take away from that at all?
Well, again, we're pleased with the outcome of the labor negotiation. There are some added costs. There are some rate increases. I will spare you all the details of the changes in the collective bargaining agreement. But I would say that it's market and the increases that we will pay are normal course.
That's right.
Not taking away from this -- from the combination here.
Okay. And can you just explain the steps that have to be done to get your stores, your PJC stores back up to where they were prior? Like, why does it take a few months to get the stores restocked fully and promotion ramp back up?
It's just a few weeks leading into Christmas. We think we'll be in good shape around Christmas. But the contingency plan, we reduced assortment, we reduced promotions, we changed supply mechanisms to third parties, to direct delivery. So again, systems and order books and sizes, a million details here. But to provide a good contingency, to service our stores, we have to make some changes.Now we have to unwind all those changes, go back to normal, it takes a bit of time. So stores need to be filled, refilled. They have inventory, but they need more. And so we will gradually fill them up and reactivate our promotional activity, which since the beginning of the strike has been reduced. We skipped a week or 2 of flyers. Conflicts are tough. They're tough on everyone, employees, managers, retail. It was tough. So glad it's behind us. And that's why I say it's going to take a few weeks to get back to normal. So we want to get that done, and that takes us into the holidays. And then after that, we can restart the process to prepare Varennes to receive the McMahon business. But before they do that, there's a bit of work to do.
All right. And last question, I figure I'll take a stab at this. But are you willing to give us an indication of what your e-commerce penetration is in food at this point?
No. We -- it's still low single digits. It's the Metro banner only. It doesn't cover all geographies. So we can -- we know what our sales are. Obviously, we know what the percentage of all Metro is. We measure it in the markets where we offer click-and-collect, so -- or not click-and-collect, but e-comm. So it's low single digits. It's growing from a very small base. And we'll see where it ends up. But it's an important -- a more and more important part of the Metro business. It's part of the offer, and we'll see how it grows. When we have a more, I guess, say, the broader geographic coverage, perhaps we'll give you more color on the penetration. In the markets that we served, like Montréal, a few years, with our hub store model, it's in the low single digits and growing.
Our next question comes from the line of Chris Li from Desjardins.
Sorry, Eric, just maybe a quick follow-up to the front-end sales. Did -- the weaker cough and flu season, is that having a bit of an impact on your results so far in the current fiscal quarter?
The answer is yes. Still early in that season. But from what we can tell, early days, it's a much weaker cold and flu season versus last year. Last year, it was an "exceptionally strong" cold and flu season. Now it's an exceptionally weak one with all the sanitary measures everywhere. So yes, that's having an impact on our sales or the pharmacy sales right now. But there's also an impact because of the -- like I said, the fill rates and the promotional activity that was not the same as last year. So that's why we said at the outset of the call, pharmacy results, there will be an impact because of this conflict, for sure, in Q1.
Okay. That's helpful. And then lastly -- okay, perfect. And then just lastly, just with respect to the reduction in branded drug prices for next year. Do you expect that to have a material impact on your results next year?
We're not planning for a material impact on our results next year. We're following that file closely. I'm told there could be some reductions, but it won't be material in the next year or so. I don't have all those details. Chris, we can get back to you. But -- in our plan, we don't have a big impact from that.
There are no further questions at this time. I will turn the call back over to the presenters.
Thank you all for your interest in Metro, and we will speak again soon to discuss our first quarter results on January 26. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.