Skip to main content

What happens when Canada's biggest retailer buys its best?

In buying Shoppers Drug Mart, Loblaw has picked up a gem.

Call it the world’s biggest drug deal. And though no illicit activity occurred, the way in which Loblaw Companies firmed up its $12.4-billion purchase of Shoppers Drug Mart last month had all the makings of a Hollywood crime flick.

Just four days before the buyout was announced, on July 15, Galen Weston, Loblaw’s executive chairman, met Holger Kluge, Shoppers’ chairman, on a quiet country road northwest of Toronto. There, inside a minivan, the two men shook hands, sealing the deal that Weston later described as “transformational. changes the retail landscape in Canada.”

READ: State of the Canadian grocery industry 2012

It’s hard to argue with Weston’s assessment. Assuming the Competition Bureau gives its rubber stamp, Canada’s biggest retailer will soon take over what is arguably the country’s most innovative retailer.

Shoppers Drug Mart’s business was built around men in lab coats dispensing antibiotics and asthma puffers. But over the last decade the chain has transformed itself to a point where more than half its sales now come from the front of store.

For many, the Shoppers in their neighbourhood is their c-store for milk, eggs and other staples. Its Optimum loyalty program is one of the most popular in the country, with 10 million cardholders.

Eighty per cent of Shoppers’ customers are women. Analysts familiar with the chain say that women view a trip to Shoppers as a reward, whereas trips to the grocery store are drudgery.

No doubt Loblaw has bought a gem. Shoppers has stores in densely packed urban areas where Loblaw does not. Shoppers’ core pharmacy business also dovetails with Loblaw’s plan to make health and wellness the centrepiece of its business.

“We all know that pharmacy is a strategic fit with food. I give them credit. It’s very smart,” says longtime grocery industry executive Bill McEwan.

Loblaw isn’t giving details about its plans for the combined company other than that it’s confident of $300 million in cost savings after three years, mostly on marketing, IT and purchasing. A deal of this magnitude, however, will surely have wider implications.

Take private label. It is certain that Shoppers’ Life brand OTC and health and beauty products will go into Loblaw stores. Putting President’s Choice products into Shoppers is also a no-brainer, although it could mean fewer trips to Loblaw stores and create less shelf space for name-brand products.

READ: Loblaw's loyalty program aims for the smartphone age

“Wherever there’s an overlap in product, especially in food, you’ll have improved buying power and inventory turns,” says Marc Wulfraat, president of MWPVL International, a supply chain and logistics-consulting firm. SKU rationalization and the dominance of more private label could be the end result.

Loyalty is another area where a merged Shoppers-Loblaw could see long-term benefits. Loblaw can learn from Shoppers’ more sophisticated Optimum program, while a mobile app version of Optimum could be built based on Loblaw’s new PC Plus app.

“The cross-pollination potential on loyalty is big,” retail consultant Ed Strapagiel says.

More intriguing perhaps is how competitors will respond to this deal, as well as Sobeys’ June purchase of Safeway.

Analysts say rival supermarket operator Metro must now make some kind of acquisition. Likely targets include either B.C. grocer Overwaitea or Quebec drug- store chain Jean Coutu. Still, neither may be for sale.

READ: As experts wait for a big move, Metro makes two smaller ones

But the real impact might not be in grocery but in the retail pharmacy business. Loblaw-Shoppers is part of a wider consolidation trend that may see investors assemble another super pharmacy chain through multiple acquisitions and will definitely force independent drug stores and smaller chains to change their business model.

“The shakeout has already begun,” says Jim Danahy, CEO of CustomerLab, a retail consultancy that specializes in pharmacy. Citing private data, he says that as many as a third of independent pharmacies are now either at break-even operations or losing money.

For independent grocers, meanwhile, the question remains: How does the deal affect Loblaw’s ability to supply them? In an age where volume matters, the concern is that supplying independents will become insignificant in comparison to Loblaw’s overall volume.

Manufacturers are naturally worried as well. Together, Loblaw and Shoppers will control a staggering $42 billion in retail sales. In a research note last month, National Bank Financial analyst Vishal Shreedhar estimated that, once the deal closes, Loblaw will own 30% of the retail food market in Canada and 25% of the prescription market.

The issue for suppliers is that in both the Loblaw-Shoppers and Sobeys-Safeway deals “more than half of the syngery savings are expected to be affected through negotiations through suppliers,” says Peter Singer, CEO of Thomas, Large and Singer.

So more headaches then for suppliers? Maybe some Life pain medicine will help. After all, more stores will soon carry it

This ad will auto-close in 10 seconds