Loblaw Companies and Shoppers Drug Mart – Marriage of Convenience

On July 15, 2013, Loblaw Cos Ltd – the largest Canadian grocery retailer – announced the acquisition of Shopper Drug Mart – the largest Canadian drugstore retailer-, for C$12.4 billion in cash and stock. Under conditions of the acquisition, Shoppers Drug Mart will operate as a separate division of Loblaw Cos and will maintain its brand names – Shoppers Drug Mart and Pharmaprix.

The acquisition – the largest in Canadian retail – highlights problems and perturbations faced by retailers in a highly developed Canadian retail space, with fierce competition from a large number of domestic and a growing number of foreign rivals, further complicated by relatively small and ageing consumer base of 35 million and expected slow population growth going forward.

In addition to expected operating efficiencies and cost savings, both retailers are seeking to take advantage of each other’s expertise in the areas of growth they have been trying to develop on their own and not always very successfully.

Loblaw has been expanding into pharmacy business, and Shoppers’ 1,300-plus store network will provide the grocer with access to a solid business nation-wide. Moreover, the acquisition is giving Loblaw a strong presence in high margins beauty and personal care – something the retailer has not been able to achieve on its own. Shoppers Drug Mart is ranked number one in mass market beauty and personal care retail and is among the leading retailers of premium beauty care. Additionally, Loblaw will benefit from Shoppers outlets located in city centers. Given ongoing trend towards urbanization in Canada and increasing shortage of space within urban areas for new store development, access to a wide network of fully operational well-established urban locations will enable Loblaw a better and more efficient outreach to city dwellers.

On the other hand, Shoppers has been making consistent in-roads into foods, including organic and natural products. The deal will provide the retailer with the benefit of Loblaw’s expertise in food retail, access to Loblaw’s strong portfolio of private label under President’s Choice brand, and access to nation-wide network of over 1,000 grocery stores in a variety of formats – from discounters to hypermarkets.

The proposed deal is not without its potential caveats, which include supply chain management. Loblaw has long been plagued by information system and supply management problems. While the retailer has been upgrading its organization, it still has a way to go. The acquisition of Shoppers Drug Mart will put additional pressure on Loblaw supply infrastructure, with added complexity of healthcare and beauty care business merchandising.

Last but not least, it remains to be seen whether expected operational savings will result in improved pricing structures for Canadian consumers. Price wars coupled with cost savings could translate into lower retail prices. However, with consistently low profit margins of the recessionary and post-recessionary years, lower prices are not likely to be the priority as retailers are seeking to bulk up sales and revenues.