The Threat of Wal-Mart and Target Drives Loblaw’s proposed acquisition of Shoppers Drug Mart

The major business news story in Canada this past week was the planned acquisition of Shoppers Drug Mart by Loblaw Companies Limited for $12.4 billion.  Loblaw Companies Limited, a subsidiary of George Weston Limited, is Canada's largest food retailer and a leading provider of drugstore, general merchandise and financial products and services. Loblaw is one of the largest private sector employers in Canada with more than 1,000 corporate and franchised stores from coast to coast.

It supplies more than 5,000 private label products that provide customers with healthy, organic, environmentally friendly and high-value alternatives. Introduced in 2006, its Joe Fresh brand is now available in more than 300 Loblaw banner stores across the country. This line includes the Joe Fresh collection (apparel and accessories), Joe Fresh beauty products (cosmetics) and Joe Fresh bath products (a range of bath and body products). 

Shoppers Drug Mart Corporation is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in Québec).  With 1,242 Shoppers Drug Mart and Pharmaprix stores operating in prime locations in each province and two territories, the Company is one of the most prominent retailers in Canada.  The Company also licenses or owns 57 medical clinic pharmacies operating under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Québec) and six luxury beauty destinations operating as Murale.  As well, the Company owns and operates 62 Shoppers Home Health Care stores, making it the largest Canadian retailer of home health care products and services.  In addition to its retail store network, the Company owns Shoppers Drug Mart Specialty Health Network Inc., a provider of specialty drug distribution, pharmacy and comprehensive patient support services; and MediSystem Technologies Inc., a provider of pharmaceutical products and services to long-term care facilities.

The deal will combine the country’s largest grocery retailer with Canada’s largest pharmacy chain and see combined revenue of $42 billion annually.  Shoppers has about $1 billion in food sales annually versus Loblaw's $30 billion. But Loblaw's share of the pharmacy market is only five per cent, so adding Shoppers health products and services to its grocery stores will allow the food retailer to expand its services in what it sees as a growing sector: health, wellness and nutrition.

The Driving Forces

The Canadian retail sector is consolidating.  The Canadian grocery sector has become increasingly competitive in recent years, thanks in large part to Wal-Mart's expansion into fresh food. Wal-Mart Canada, the country's largest mass merchant, started selling groceries in many of its Canadian stores in 2006. Another contributing factor was the arrival of Target in 2013. The U.S. retailer, which took over the leases of 220 Zellers stores in Canada, currently offers a limited number of food items in Canadian stores.  Last month, Sobeys, Canada's second-largest grocery store chain, spent $5.8 billion to buy 213 Safeway stores in Western Canada, a deal that included 199 in-store pharmacies. 

Potential Synergies

What are some of the possible synergies from this proposed merger of two of Canada’s retailing giants?  Here are a few that come to mind.

• Loblaw’s will be able to market its private label President’s Choice products in Shopper’s Drug Mart.
• Shopper’s Drug Mart will be able to market its private label Life brand products in Loblaw's stores.
• The companies will be able to improve their E-Commerce value propositions when they leverage their combined product lines.
• They should be able to achieve much greater efficiencies in their home delivery operations (e.g. larger size shipments at higher revenue levels).
• Loblaw's introduction of the low-priced Joe Fresh line of apparel in 2006 was a concerted effort to compete with clothing retailers like Wal-Mart and Hudson's Bay.  They may choose to extend the availability of these product lines, and others, to Shoppers Drug Mart.
• The two companies will be able to leverage their combined freight spend when they do their freight rate negotiations.
• By taking advantage of their combined loyalty program data bases, they should be able to deliver more successful cross-promotion campaigns.  Loyalty programs divulge a wealth of information, including consumers’ gender, demographic, address, and purchasing preferences. The deal would allow different Shoppers locations to tie their offering of President’s Choice or Joe Fresh products to the demographics of the area, putting the items people are most likely to buy in the most relevant locations                                                                                                                         .
• Loblaw’s will gain access to a large number of smaller store footprints in urban and in some rural markets that are not cost effective to serve.  More than 80% of Canadians currently live in urban locations and the numbers are on the rise.  They may explore some hybrid stores in the smaller markets.  It is easier for the food giant to snare a bigger reach of consumers within a variety of formats, pricing structures and store banners.
• The two companies may be able to take advantage of their respective IT resources.
• There may be opportunities to achieve other supply chain efficiencies in warehouse and inventory management.

Many of the blockbuster mergers, and this is certainly one of them, start off with great promise but fail to live up to expectations.  With the geographic coverage, complementary scope of their products and their high visibility, these companies have an opportunity to transform the Canadian retail scene. Most Canadians will be watching to see if they can make this happen.