Make no mistake: Loblaw's $12.4-billion purchase of Shoppers Drug Mart makes sense for everyone, including Canadian consumers. The country's leading grocer now has an edge over its biggest menace, Wal-Mart.
Not only will Loblaw now be able to sell many products with higher margins – such as pharmaceutical products – the merger will create many co-branding opportunities, such as private labels and loyalty programs.
The addition of downtown stores across small-town Canada will give Loblaw a key real-estate edge in managing socio-demographic shifts as suburbia continues to push the borders of our cities outward.
Some experts have gone so far as to claim that this deal will be transformational for Canadian food retailing. It is indeed significant – the biggest industry transaction our country has ever seen – but is it transformational? Not quite.
Wal-Mart's purchase of Woolco in 1994 remains the most transformational transaction in Canada's food retailing industry. Everything happening in food distribution today continues to be affected by it. Most Canadians didn't realize it then, but Wal-Mart's entrance into the Canadian market would change everything: the way we shop; what we buy; and, most importantly, how we buy and value food.
Ever since Wal-Mart entered the Canadian market, it never hid its ambition of becoming Canada's top food retailer, as it has in the United States. Many believe it is just a matter of time. In fact, Wal-Mart added close to $700-million to its food sales this year alone. Loblaw's latest response suggests that it's not eager to let go of the top position and that it views Wal-Mart as a serious threat.
Wal-Mart's purchase of Woolco generated a few copycats, including Target's recent purchase of Zellers. As Target's first destination outside the United States (with almost 200 stores by 2020), Canada is considered fertile ground for future growth. Sobeys, desperate to penetrate the Canadian food market and Loblaw's closest rival in food retailing, agreed to become Target's key food distributor for a limited time. The strategy seems to be paying off as Target predicts to top $300-million in food sales in 2013. Given a very stagnant market, these sales are coming at the expense of its competition. But after last month's $5.8-billion purchase of Safeway's Canadian grocery stores, Sobeys might not prop up Target's effort for long, as it has other plans for future growth in a very condensed, mature marketplace.
In Quebec, meanwhile, Metro saw in Safeway the deal that got away. Metro, which was part of the United Grocers buying group with Safeway, will likely see its purchasing power diminish for several products, reducing its bottom line significantly in the near term. With Loblaw's purchase of Shoppers, many are now speculating that Metro will hunt down Jean Coutu, the large Quebec-based pharmacy chain. Jean Coutu himself stated that the company was not for sale, but that was before the Loblaw-Shoppers announcement. Equally affected by the acquisition, both Metro and Jean Coutu may be ready to talk.
Whether or not the Loblaw-Shoppers tie-up will work is difficult to tell at this point. Loblaw Cos. Ltd. has a poor track-record of streamlining processes quickly. The Shoppers purchase will likely add more pressure and could create opportunities for the competition. The market is evolving quickly, and while convenience and accessibility are imperatives in food retailing, price is still paramount. Wal-Mart understood decades ago that logistics are critical if you want to offer competitive prices to consumers. That will be Loblaw's main challenge.
Ever since Wal-Mart's big deal in 1994, food retailers have been looking at the Canadian market very differently. More consolidation is expected. Metro may consider B.C.-based Overwaitea Food as its consolation prize, but that is highly doubtful. Certainly, after the Quebec government's hostile reaction to Lowe's attempt to purchase Rona last year, it is highly doubtful anyone would want to touch Metro.
Both Sobeys and Loblaw have made their moves. Metro could be next. But let's not kid ourselves: Wal-Mart is still calling the shots.
Sylvain Charlebois is professor in food distribution and policy at the University of Guelph's College of Management and Economics.