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Loblaw paying $35-million for Zellers' prescription files

Shoppers leave the Zellers department store at the County Fair Mall in New Minas, Nova Scotia.

PAUL DARROW/For The Globe and Mail/paul darrow/The Globe and Mail

Loblaw Cos. Ltd. is paying about $35-million to nab coveted customer prescription files of discounter Zellers, beating out major rivals in a race that underlines the potentially lucrative appeal of the pharmacy business despite costly new drug rules.

Zellers put its files up for sale after U.S. discount giant Target Corp. bought most Zellers store leases with plans to close the outlets, including the pharmacy, for up to nine months while doing major renovations before re-launching them under its own banner early next year. In the meantime, Target decided it would not buy the current Zellers prescription files but instead launch new pharmacies, opening the way for Zellers to auction off its patient files.

An array of retailers, including Shoppers Drug Mart Corp. and Katz Group, which runs Rexall stores, expressed interest in getting a piece of Zellers pharmacy business. The interest in Zellers' files came even though pharmacies are feeling the pressure of new generic drug reforms, which pinch their profits as provinces try to rein in health costs.

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"Shoppers Drug Mart and Katz are knowledgeable buyers and I am sure were in the hunt," said Mike Jaczko, a partner in K. J. Harrison & Partners who specializes in advising pharmacies.

Loblaw, Wal-Mart Canada Corp. and Costco Wholesale are among chains to focus more on their pharmacies, which still can generate profit rates that are as much as twice as high as some other general merchandise and food categories when over-the-counter medications also are taken into account.

The drugstores also serve to draw more customers into stores to buy other products. And their medications are in growing demand among aging baby boomers.

Wynne Powell, chief executive officer of London Drugs Ltd. in Richmond, B.C., said his chain bid for Zellers' files in the four Western provinces where it runs drugstores. He's still interested in snapping up remaining Zellers files in British Columbia that Loblaw did not purchase.

And while the drugstore business is attractive, it may be less so in British Columbia if new generic drug proposals – similar to those adopted in Ontario two years ago – become law, other industry insiders said.

On Friday, Loblaw announced its deal to buy most Zellers prescription files in 95 of its stores, excluding those in B.C. and Quebec, where Zellers' pharmacies are franchise-owned.

Peter Sklar, retail analyst at BMO Nesbitt Burns, estimated that the Loblaw acquisition will raise its pharmacy market share to about 7 per cent from 6 per cent. But that assumes the grocer will retain all the customer files, "which is unlikely." Zellers customers will not be obliged to buy their prescriptions from Loblaw. A Loblaw spokeswoman said it will work at holding on to the Zellers customers in a number of ways, including personal phone calls.

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Loblaw has been rushing over the past couple of years to bolster its pharmacy and overall health and wellness offerings. It runs medical clinics, optical shops and fitness centres in its stores, and last fall added dieticians to about 25 Loblaws and Real Canadian Superstore locations across Ontario.

The Loblaw spokeswoman said it is looking at hiring Zellers' pharmacists and technicians for its stores to help serve the anticipated higher number of customers as a result of its planned prescription-file acquisition.

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