After big Loblaw and Sobeys deals, will Metro go west?

There has been much knocking on doors of various retail head offices as Canada’s top retailers sniff out possible takeover targets. Loblaw went knocking on Shoppers Drug Mart’s doors and came away with a deal that will see the drugstore chain taken over by Loblaw.

Sobeys knocked on Safeway’s door and landed an agreement to buy Canada Safeway. In order to remain fully competitive, Metro will have to knock on the few remaining doors and buy another retailer.

POLL RESULTS: Should Sobeys keep the Safeway banner?

Eric La Flèche, Metro’s president, says his company is in no hurry to strike a deal. But it’s almost a necessity for Metro to do so, if only to take advantage of quantity discounts with suppliers.

Metro is a member of United Grocers Inc., a buying group for a number of retailers, including Canada Safeway. With Sobeys’ purchase of Safeway, that western chain will remove itself, and its more than $6 billion in annual sales, from UGI.

Metro needs extra muscle to apply against suppliers or face higher prices, reduced margins or both. The only way to get that muscle is through increased buying power. And the only way to get buying power–and fast–is to acquire another retailer.

So whose doors can Metro knock on?

Analysts point to Jimmy Pattison’s Overwaitea Food Group in B.C. and Alberta. But many have knocked on Pattison’s door before, and walked away empty handed.

It may be a matter of just how much money Pattison wants. Or perhaps he simply doesn’t wish to sell his cash-cow baby. Longo’s in Toronto is another attractive retailer that has turned away suitors for years. It probably wouldn’t sell, either.

Then there is Western Canada’s H. Y. Louie grocery chain and its associated company, London Drugs. H. Y. Louie is a private company and the darling of the Louie family. It likely isn’t for sale. But London Drugs may be available as a separate entity.

The Grocery People is a wholesaler division of Federated Co-operatives that supplies a number of franchised and independent supermarkets in western Canada and the north. I don’t know if it can be bought, or if Federated would even want to sell it. But who knows what would happen if someone backed up to Federated’s door with a truckload of money.

READ: The distribution impact of Loblaw's purchase of Shoppers

That same truckload of cash may or may not hold sway with the Katz Group. It operates more than 400 Rexall drug and Pharma Plus stores across the country. Katz already sold off its franchised stores. Pure speculation says it might be willing to sell its corporate stores if the price were right.

A number of industry analysts theorize the best fit for Metro is the Jean Coutu Group of 400-plus drugstores in Quebec, New Brunswick and Ontario.

The president of Jean Coutu, François Coutu, recently said his company is looking for acquisitions itself. But to my mind that shouldn’t preclude it from entertaining a merger or takeover by Metro.

The only problem with such a deal would be that it still wouldn’t give Metro access to the fast-growing western Canada market, something I think Metro covets. At the moment, Metro only has grocery stores in two provinces: Ontario and Quebec.

In the absence of a purchase of either Overwaitea or the Grocery People, or perhaps London Drugs, Metro’s hopes for a western presence appear to be pretty much dashed. That is, unless it makes an offer for the North West Company.

The Winnipeg- based retailer operates stores in the northern parts of several provinces, including Quebec, as well as in the Yukon, Northwest Territories, Nunavut, Alaska, the Caribbean and South Pacific. Such a purchase would also bring with it some 37 Giant Tiger stores in western Canada.

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Two other options analysts haven’t yet commented on include: the possibility of Metro buying the Buy-Low Foods division of Overwaitea Group (without the Overwaitea, Save-on, Cooper’s Foods and Urban Fare stores), which would give Metro 15 or so corporate supermarkets and about 50 franchised stores in B.C., Alberta and Saskatchewan; and any interest Metro might have in acquiring a chain of dollar stores, which opens up a whole new direction of thought.

Gosh, speculation is fun!

George Condon is Canadian Grocer's consulting editor