The distribution impact of Loblaw's purchase of Shoppers

In July, it was announced that Loblaw Companies Ltd. would acquire Shoppers Drug Mart Corporation for $12.4 billion. This deal was announced only one month after Sobeys' parent company, Empire Company Limited reached a deal to buy 213 Safeway grocery stores in Western Canada for $5.8 billion.

The Loblaw-Shoppers merger is being touted as a win for both firms as it provides Loblaw Companies with a best-in-class retail pharmacy business and Shoppers can expand its product variety to include Loblaw's private label and convenience food.

But how does the deal impact the supply chains for both firms and what efficiencies are enabled through the merger of the distribution networks of these two firms?

First off, it is important to understand the fundamental differences between grocery distribution and retail drug distribution. Here's a short synopsis for those who may not be familiar with distribution operations.

1. Grocery distribution centres process large multi-temperature store orders of dry grocery, produce, fresh meat, deli meats, dairy, frozen foods, general merchandise (GM) and health & beauty care (HBC). The vast majority of product being processed in the distribution centre is in full case quantities meaning that the products are shipped in the same case format that the vendor supplies to the retailer. In other words, pallets come in and cases go out. For the most part, only HBC and GM ship in a less than full case format(i.e. 'split case'). Think of it as the 80/20 rule where 80% of the products ship through the warehouse as full cases and 20% ship as inner packs or retail units.


2. The 80/20 rule also applies to retail drug distribution except that it is the exact opposite in that 20% of the products ship as full cases and 80% ship in less-than-case quantities. Retail drug stores are not able to order as much full case merchandise because they are smaller stores that have less shelf space per product as compared to a typical supermarket store. They also stock merchandise that has a higher cost of goods so stores order split cases to lower inventory assets at the store.


3. The full case versus split case distinction is important to understand because the supporting distribution centres are designed very differently. For the most part, grocery distribution centres are designed as conventional facilities that support high volume multi-temperature full case throughput. Retail drug distribution centres also ship full cases, but they tend to have material handling systems designed to support split case picking (e.g. conveyor belts).


4. Of equal importance to understand is the outbound transportation characteristics of retail grocery versus retail drug. Grocery supermarkets typically receive deliveries from the supporting distribution centres that are loaded onto 48' or 53' full size trailers. On the other hand, retail drug stores are often smaller format stores located in urban cities such that there are constraints on the type and size of truck that can be used to service the store. Thus a mix of smaller delivery trucks and larger trailers is common within retail drug store distribution.

Unlike the Sobeys-Safeway deal where two grocery retail companies are being merged, the Loblaw-Shoppers deal provides less distribution synergy because of these differences between their distribution environments.

Let's take a closer look at the distribution infrastructure overlap between Loblaw Companies and Shopper Drug Mart.

Shoppers Drug Mart Distribution Infrastructure

The most recent information that I have is that Shoppers Drug Mart operates from five (5) distribution centres totaling 2.08 million square feet across Canada. From East to West:

1. In Moncton, N.B., Shoppers operates from a 230,000-sq.-ft. distribution centre in the Moncton-Caledonia Industrial Estates. The facility was originally opened with 150,000-sq.-ft. in 1995 and was later expanded by 80,000-sq.-ft. in 2005. This facility services stores throughout the Maritimes.


2. In Cornwall, Ont., Shoppers operates from a 550,000-sq.-ft. distribution centre that was opened in October, 2010. The facility services stores in Eastern Ontario and Quebec.


3. In Mississauga, Ont., Shoppers operates from a 711,000-sq.-ft. distribution centre that services the Greater Toronto Area and Western Ontario. This facility was last expanded by 80,300-sq.-ft. in 2006.


4. In Calgary, Alta., Shoppers operates from a 415,000-sq.-ft. distribution centre in Airdrie that was last expanded in 2007. This facility services stores across Alberta, Saskatchewan and Manitoba.


5. In Richmond, B.C., Shoppers services B.C. stores from a smaller 175,000-sq.-ft. facility.

It is our understanding is that all of the Shoppers Drug Mart distribution centres are outsourced to the third-party logistics firm Matrix Logistics Services, which is an operating division of Exel Logistics.

Loblaw Companies Distribution Infrastructure

The most recent information I have is that Loblaw operates from nineteen (19) distribution centres totaling 7.2 million square feet across Canada. Our information is a little dated so the figures may not be exact but they are close. From East to West, Loblaw's distribution centres are:

1. In the Maritimes, Atlantic Wholesalers Ltd (a wholly owned food wholesale subsidiary of Loblaw Companies) operates two distribution centres in Moncton: A 118,000-sq.-ft. dry facility; and also a 185,000-sq.-ft. freezer/perishables facility which opened in 2010. As well, Atlantic Wholesalers operates a 215,000-sq.-ft. DC in Halifax, N.S.; and National Grocers operates a 125,000-sq.-ft. facility in Mount Pearl, N.L.


2. In Quebec, Loblaw's Provigo subsidiary operates distribution centres in Boucherville, Laval, Loretteville, and Montreal (St-Laurent) totaling approximately 1.96 million sq. ft.


3. In Ontario, Loblaw operates three main food distribution centres in: Ajax (1,035,000 sq. ft. full-line facility operated by Atlas Logistics Services that was last expanded in 2010); the Cambridge Maple Grove facility (828,000 sq. ft.); and National Grocers in Ottawa (372,600 sq. ft.).


4. In Western Canada, Loblaw operates a 458,000 sq. ft. facility in Winnipeg, a new 500,000 sq. ft. facility in Regina,  (which is outsourced to 3PL Atlas Logistics Services); two facilities in greater Calgary; one distribution centre in Edmonton; on facility in Pitt Meadows, B.C.; and one facility in South Surrey, B.C.; for a total of roughly 2.4 million square feet.

Loblaws operates a mix of regionally-based wholesale and retail grocery distribution centres under different corporate subsidiaries with some operations that are outsourced to 3PLs.

Assessment of Distribution Centre Consolidation Synergies

My assessment is that there is a very low probability that the Shoppers/Loblaw distribution network will undergo any major transformation due to facility consolidation. Why?

1. In Moncton, both firms operate distribution centres but Loblaw operates a wholesale grocery operation that supplies full-line groceries to stores across the Maritimes. The Shoppers DC is small and is dedicated to servicing retail drug stores in the same market area. The synergy here will be that Atlantic Wholesalers Ltd can purchase and supply dry grocery merchandise for the Shoppers warehouse to gain more volume and better purchasing brackets; and Shoppers can likely purchase non-food for the grocery supermarkets.


2. Shoppers just opened a new DC in Cornwall, Ont., and while Loblaw has been rumored to have a distribution project in this area, to the best of my knowledge, this project has been placed on hold. No change expected here.


3. Shoppers has a large distribution operation in Mississauga that could eventually play a role in servicing Loblaw stores with non-food merchandise and similarly, Loblaw operates food distribution centres in Ajax and Cambridge that will likely supply grocery merchandise to Shoppers stores via the Shoppers DC. All in all, I view this distribution centre consolidation as a low probability event, with the main synergy being the cross-supply between the firms to expand the variety of private label merchandise available at both firm's retail stores.


4. The same theme holds true at Calgary and Vancouver where similar situations exist on a smaller scale. While there may be a consolidation opportunity in Calgary for example, this is seen as being a low probability event because the reduction in operating expenses will likely be insufficient to justify the labour turmoil.

The main supply chain synergies coming out of this merger have more to do with (1) increasing retail sales of private label products that generate higher margins; (2) leveraging increased purchasing power within the consolidated corporate entity; (3) reduction in back office white collar labour expense where common overlap exists at corporate headquarters; and (4) developing a common IT infrastructure that reduces the cost and complexity of running two firms on different systems and platforms.