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The Globe and Mail

Competition Bureau sets stiff limits in Loblaw’s deal for Shoppers

A Shoppers Drug Mart in downtown Toronto on Feb. 6 2014.

Fred Lum/The Globe and Mail

In an unusual move, the Competition Bureau is putting limits on Loblaw Cos. Ltd.'s ability to squeeze some suppliers of Shoppers Drug Mart Corp. in order to get approval for the $12.4-billion acquisition of the drugstore chain.

In giving the nod to the industry-shifting deal, the bureau opened the window on a web of dealings between Loblaw and its suppliers which "could raise concerns" of anti-competitive practices. The bureau said that without restrictions on some of Loblaw's vendor practices, the proposed transaction "would likely lead to higher wholesale prices paid by other retailers to suppliers and, in some circumstances, higher retail prices."

Loblaw, the country's largest grocer, also agreed to the bureau's requirement that it sell 18 stores and nine pharmacies, which observers said was a relatively small number.

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Even so, industry insiders said the bureau findings were a breakthrough in putting a spotlight on the growing array of penalties and demands that Loblaw – and other grocers – impose on their suppliers.

"This is not a Loblaw specific issue," said Tom Barlow, president of the Canadian Federation of Independent Grocers. "These issues are going on in a broader sense throughout the industry."

The issues were highlighted earlier this year when The Globe and Mail disclosed that grocer Sobeys Inc. had demanded its suppliers cut prices retroactively by 1 per cent and not increase prices for the remainder of the year. The demand was made shortly after Sobeys's $5.8-billion acquisition of Safeway Canada closed. Other grocers followed suit with similar demands, although suppliers didn't necessarily comply.

In the past, Loblaw has demanded price cuts or freezes from its suppliers for initiatives such as systems upgrades and store renovations and expansions. For their part, major suppliers such as Coca-Cola and Nestle have begun to impose minimum advertised prices on retailers, The Globe has reported.

The jostling has spurred some industry groups, including the CFIG and the Food and Consumer Products of Canada, to call on Ottawa to introduce a code of conduct to guide grocers and their suppliers.

Jessica Fletcher, spokeswoman for Industry Minister James Moore, said he has heard arguments for a code and looks "forward to more discussions in the future."

Kevin Grier, senior market analyst at the agri-food think tank George Morris Centre, said big grocers have got "a bit heavy handed" in imposing penalties and other retroactive payments on suppliers. But government regulation could open up a can of worms for industry members who may be forced to do things they don't want to do, he warned.

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Loblaw, which expects the Shoppers transaction to close on March 28, still predicts it will generate $300-million in annual savings in three years from the acquisition, spokesman Kevin Groh said. It doesn't expect to close stores as a result of its divestitures.

The bureau's "behavioural restrictions" on Loblaw only affects its dealings with Shoppers's suppliers in some food and other categories and Loblaw suppliers of new business categories, he noted. "The Competition Bureau has not asked us to stop anything."

Galen G. Weston, executive chairman of Loblaw, said in a statement the merger will allow it to "continue to deliver more choice, more value, and more convenience to Canadians."

Loblaw acknowledged that the bureau "expressed potential concerns about certain Loblaw supplier practices. The company will co-operate with the Competition Bureau in its continued review of these practices."

To address the concerns, the bureau requires Loblaw to adhere to "behavioural restrictions" on its agreements with suppliers for up to five years from the deal's closing. It said it will "continue to investigate Loblaw programs, agreements and conduct related to pricing strategies and programs with suppliers that reference rivals' prices."

The bureau's concerns include Loblaw increasing incentives to influence and impose restrictions on competing retailers' pricing decisions; making suppliers financially accountable for competing retailers' pricing decisions; increasing incentives to penalize competing retailers for vigorous price competition; diminishing incentives to continue to offer promotions to all retailers; and prompting Loblaw "and some supplier interests to be aligned towards an increase in wholesale prices paid by competing retailers," spokeswoman Melanie Beauchesne said.

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