July 16 (Bloomberg) -- Loblaw Cos.’ C$12.4 billion ($11.9 billion) purchase of Shoppers Drug Mart Corp. gives the Canadian grocer an edge over bigger U.S. rivals such as Wal-Mart Stores Inc. by adding downtown stores across the country.
The second-biggest grocery acquisition of the past decade will see Loblaw gain a drugstore chain with more than 1,240 small-format stores, many in inner cities. The downtown stores allow Loblaw to sell more groceries in the Shoppers’ drug stores, while adding more pharmacy items in its food outlets.
The Shoppers Drug Mart acquisition is the latest attempt by Loblaw, Canada’s biggest grocer, to fend off increasing competition from Wal-Mart and Minneapolis-based Target Corp. Target plans to open 124 stores in Canada this year, growing to 200 outlets by 2020. Wal-Mart is adding 37 stores to its 379 locations, while expanding its fresh-food offerings.
“There’s a great space for large one-stop shopping supermarkets or superstores in Canada,” said Galen G. Weston, Loblaw’s chairman and son of Canada’s second-wealthiest man. “But with the urbanization of the Canadian market, small stores that can offer a really compelling combination of goods and services is a fantastic bolt-on for us.”
As populations shift from the suburbs to cities, Canadian retailers are racing to open smaller-format stores in densely populated areas. More expensive real estate and a scarcity of good locations are two of the challenges facing retailers. Wal-Mart found this out earlier this year when residents of Toronto’s Kensington Market neighborhood collected 75,000 signatures for a petition opposing a new outlet planned by the world’s largest retailer.
“It gives Loblaw prime locations in urban areas where Wal-Mart and Target don’t compete as much,” said Alex Arifuzzaman, a partner of Interstratics Consultants Inc., a Toronto-based retail consulting firm. “They’re getting out of that really hectic competition in the suburbs and the big boxes and now they have a lot of access to the urban locations which are growing.”
The deal -- the largest between two Canadian companies since 2009 -- accelerates consolidation in the retail industry that saw Loblaw rival Sobeys Inc. buy Safeway Inc.’s Canadian grocery stores for C$5.8 billion last month.
Toronto-based Shoppers’ pharmacies are on average 10,500 square feet, compared with Loblaw’s average size that is six times bigger. Wal-Mart stores average about 180,000 square feet, according to data from Bloomberg Industries.
Not in Canada
Target’s City Target format and Wal-Mart’s Neighborhood Market stores, at about 40,000 square feet on average, are both intended for urban areas but haven’t made their debut in Canada. Target, whose food offerings in Canada don’t include fresh fruits and vegetables, opened its first store in Canada this year and is opening 18 more today. Bentonville, Arkansas-based Wal-Mart, the world’s biggest retailer, is adding fresh-food sections to its large-format stores.
Loblaw is already experimenting with smaller stores under its ’The Box’ banner. Canadian home-improvement chain Rona Inc. has announced plans to sell big-box locations to focus on “proximity stores,” which are often one fifth the size.
Investors welcomed the deal yesterday, with Shoppers Drug Mart rising 24 percent in Toronto, the biggest increase since the company started trading in 2001. Loblaw rose 5.4 percent, the biggest gain in seven months.
Loblaw fell 0.6 percent at 10 a.m. today to C$49.85 while Shoppers dropped 0.2 percent to C$59.99. Loblaw is controlled by W.G. Galen Weston’s George Weston Ltd. Weston is the world’s 88th-richest person, worth about $11.4 billion, according to data compiled by Bloomberg.
Lisa Gibson, a Target spokeswoman, wouldn’t comment on the impact of the Loblaw transaction.
“Target has announced plans to open 124 stores across 10 provinces in communities large and small this year and will announce plans at a later date for additional stores opening beyond 2013,” she said.
E-mails to Wal-Mart Canada’s press-relations department weren’t returned.
Loblaw will boost the food offering in Shoppers stores, including adding a section for fresh food and featuring Loblaw’s private-label brands, Vicente Trius, Loblaw’s president, said on a conference call with analysts.
“Imagine going into the stores and being able to do a very basic, full-grocery shop,” Trius said of the food offerings planned for Shoppers stores.
Shoppers’ private label brands will in turn find their way into Loblaw stores to help boost the grocers’ pharmacy offering.
With Shoppers projecting people over the age of 65 to make up 25 percent of the Canadian population by 2036, inroads into the pharmacy business, where Wal-Mart and Target also have a presence, was another reason for the acquisition, according to Trius. The combined company will have 125 million prescriptions, or 25 percent of the Canadian market, he said.
Canada’s Competition Bureau will review the proposed transaction, Greg Scott, a spokesman for the agency in Ottawa, said in an e-mailed statement.
“I think they probably will approve it,” Arifuzzaman said. “What they might do is sometimes they force a retailer that has above a certain threshold in certain markets to divest some of it.”
Loblaw doesn’t expect regulators will require store divestitures, Trius said on the conference call. The merger will lead to cost savings of about C$300 million by the third year, the companies said.
Shoppers had been in contact with other companies concerning a sale, Chief Executive Officer Domenic Pilla said on the call.
“Drug store retailing is a relatively high-margin business so it makes sense for the grocery retailers to concentrate more of their efforts on their pharmacy,” Dennis Mitchell, chief investment officer of Toronto-based Sentry Investments Inc., which manages C$10 billion including Shoppers stock, said in a phone interview yesterday. “If they can combine with the best-in-class provider in the country, it makes a lot of sense.”
Mitchell said Sentry hasn’t decided if it will vote for the deal.
The combined entity would have had revenue of more than C$42 billion in 2012, the companies said. Loblaw, based in Brampton, Ontario, and Shoppers Drug Mart together had earnings before interest, taxes, depreciation and amortization of about C$3 billion last year.
“The market is evolving rapidly and convenience and accessibility are an imperative,” Kenric Tyghe, an analyst at Raymond James Financial Inc., said in a telephone interview from Toronto. “It’s a lot easier for Loblaw to lead from the front than playing catch up afterwards as the formats evolve in Canada.”
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