TORONTO - The country's largest grocery retailer plans to "aggressively" increase market share in its drug store business to help offset a move by the Ontario government to cut the funding pharmacies receive.

Loblaw Companies Ltd. (TSX:L) has nearly 500 pharmacies in its grocery stores across the country, and said that if Ontario eliminates the professional allowances currently paid to drug stores by generic drug manufacturers, the impact on its pharmacy business will be "substantial."

"The (profit and loss) impact on our business is substantial but not material and we intend to mitigate as much as we can by aggressively driving share in our drug store business," president and deputy chairman Allan Leighton said on a conference call Tuesday.

Loblaw is already implementing a variety of plans to increase its market share in the competitive pharmacy business, Leighton said. These plans include extending operating hours and services, introducing state-of-the-art technology, as well as a pilot program to create a smaller pharmacy that could fit in smaller stores.

Loblaw also sees an opportunity to expand the number of medical centres in its stores from 84 now to more than 200 over "the next few years," Leighton said. This would boost the amount of business at its pharmacies, as more customers could see a doctor and get a prescription filled at the same place.

"I've always felt we underperform (in our pharmacy business)," Leighton said.

"We see this as a big opportunity for us to drive our drug store business and frankly we're going to have to do that as part of our mitigation."

He added that Loblaw has been working to increase market share in its drug store business for "four or five months" and is well prepared to deal with the changes once they're implemented.

The Ontario government says ending the professional allowances will cut the price of generic drugs by at least 50 per cent, knocking $500 million a year off the cost to the province's public drug plan for seniors and others. The province hopes this will help it control health spending and trim its $21-billion deficit.

But drug store operators like Shoppers Drug Mart Corp. (TSX:SC) have complained that the cuts will force them to slash pharmacy services and patient care.

However, this hasn't stopped Loblaw's competitors in the grocery industry from also eyeing expansion opportunities. Last month, Montreal-based Metro Inc. (TSX:MRU.A) said it remains committed to expanding its pharmacy network despite the Ontario government's plans.

Earlier Tuesday, Loblaw said its first-quarter profit rose nearly 26 per cent over last year but warned its operating income will be under more pressure later this year due to the cost of new information technology.

The Toronto-area company said it earned $137 million or 50 cents per share during the quarter. That's up from $109 million or 40 cents per share in the comparable period of 2009.

Loblaw's revenue was up 3.1 per cent compared with the same time last year, rising to $6.9 billion from $6.7 billion - thanks largely to the acquisition of T&T Supermarket Inc., a chain that caters to ethnic Chinese customers. Same-store sales inched up by 0.3 per cent.

Chief financial officer Bob Vaux - who will be succeeded by Sarah Davis at the company's annual shareholder meeting on Wednesday - said sales growth in food was flat, drug store growth was "modest," apparel was strong, other general merchandise "declined significantly," and gas bar sales were up due to higher retail gas prices and strong volume growth.

The company's executive chairman, Galen Weston Jr., said Loblaw is on track with a renewal program that includes a major investment in information technology.

Loblaw has had years of difficulties in updating its supply chain and merchandise management as it moved to compete with Walmart by offering a broader range of non-grocery items including furniture, clothing and consumer electronics.

Shares in Loblaw added 65 cents to $38.45 in early afternoon trading on the Toronto Stock Exchange.

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