This past week Loblaw announced the historic purchase of 1,200-store pharmacy chain Shoppers Drug Mart for $12.4 billion. This is the largest Canadian acquisition year to date and propels the Canadian grocery store industry into further consolidation following on the heels of last months purchase of Safeway by Sobeys for $5.8 billion.
In a news conference, Loblaw executive chairman Galen Weston said, “This is a transaction about two complementary businesses.”
The two companies will continue to operate independently. Currently, Shoppers sells approximately $1 billion in groceries annually and executives anticipate the cross marketing of each company’s products.
Specifically, the President’s Choice and Blue Menu lines at Loblaw and the Life brand at Shoppers could begin to be sold across both sets of stores. Shoppers also carries lines Simply Food and Nativa Organics which we expect to be rationalized over the medium term as the economies of scale favor a President’s Choice and Life brand mix.
It is likely that in Loblaw stores we will see Exact and Teddy’s Choice be replaced by the Life brand equivalent, which have stronger equity. This will also aid in delivering supply chain efficiencies in HABA private label.
Another interesting cross-merchandising play will be Joe Fresh clothing (baby/children’s clothing in particular) at SDM. A great way to strengthen one-stop shopping for busy moms.
Shoppers Optimum with over 10 million active users is a key part of the acquisition. Both Optimum and the new PC Plus programs are expected to remain in place and cross marketing is between these programs as well.
Loblaw will see a significant increase in the pharmacy business that will poise the company well as the Canadian population continues to age and more and more seniors are in need of pharmaceuticals.
Loblaw will raise $500 million to finance the deal through the sale of new shares and says it doesn’t anticipate any store closings.
“We are changing the retail landscape in Canada,” said Weston. He also said the deal is about creating a Canadian “champion” specializing in health, wellness and nutrition.
This acquisition will immediately place Loblaw in the important small-urban sector where Shoppers has been gaining a foothold.
As the condo boom started to happen in urban centers access the country, higher density downtown areas started looking for smaller stores with a wide variety of merchandise. Proximity retailing is a strong global trend and will get a boost in Canada based on the Loblaw / Shoppers marriage.
The pharmacy chain has a strong presence in the downtown markets of major urban centers across Canada such as Toronto, Vancouver and Calgary.
Many Shoppers locations sit on prime real estate and these will likely be held in the recently formed Choice Properties Real Estate Investment Trust that contains the land that Loblaw stores are built upon.
Loblaw currently has over 1,000 stores and 134,000 employees while Shoppers has 1,242 stores and approximately 52,000 employees.
The newly combined company will see annual revenues of $42 billion, $3 billion in EBITDA and $1 billion in free cash flow. Loblaw expects to see $300 million in cost savings after three years.
For more about both companies download our Canadian Retailer Year In Review here.
The newly formed company will now compete more directly with other mass merchandisers like Wal-mart, Target and Costco in the combination of merchandise, pharmacy products and groceries being sold.
These mass merchandisers have been placing greater emphasis on their grocery sections lately according to David Soberman, professor of marketing Rotman School of Management, University of Toronto.
Wal-mart started selling groceries in Canada in 2006 and its current revenue will put it at approximately half of the newly combined Loblaw/SDM revenue.
The question remains whether or not further consolidation will happen in the grocery sector and according to equity analyst Bobby Hagedorn, Edward Jones St. Louis, “We’re seeing increased competition, but the growth really isn’t there, and that kind of lends itself to an acquisition-friendly environment.”
In the past, grocery retailer Metro has expressed interest in the purchase of pharmacy chain Jean-Coutu. However, this would place Metro’s future firmly in Quebec vs. expanding its footprint beyond Central Canada with another acquisition such as Overwaitea.
From a supplier perspective, it will be interesting to see how these brands manage the consolidation of their brand sales under one retailing organization. There are now many brands where over 50% of total sales will be made at a Loblaw/SDM banner store.
This may see suppliers invest more to support growth in other retailers such as Target, Costco and regional drug players (Rexall, Jean Coutu, Lawtons and London Drugs) in order to offset this consolidation and its potential risks.
Trade terms and business planning negotiations are in full swing for 2014 and suppliers will have to scale back vacations to ensure they thoroughly game plan and prepare their business plans or the upcoming year given these changes.
Further consolidation may be upon us and in the meantime, it will be interesting to see how Loblaw and Shoppers Drug Mart start to combine their product lines for customers as different products start appearing stores.