Metro hopes Jean Coutu takeover will help counter e-commerce competition

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Amazon.com Inc.'s acquisition of Whole Foods has the retail grocery industry quaking in the aisles, and with good reason.

With the $13.7-billion (U.S.) deal, fear has spread among traditional food outlets, and their investors, that the business will get buried in a wave of inexpensive and efficient online shopping.

For Metro Inc., the Quebec-based grocery chain, a takeover of pharmacy operator Jean Coutu Group could help inoculate itself against the effects of the growth of Amazon and any other e-commerce entrants.

"Pharmacies are more protected from the Amazon model. Amazon wants to start in the U.S., but mail-order drugs are a very small part of the overall business," said Laura Lau, vice-president and fund manager with Brompton Group. "Distributing prescription drugs is a very different business with true barriers to entry."

Amazon has hired a team to help break into the pharmacy market in the United States, according to U.S. media reports.

Metro and Jean Coutu said on Wednesday they are in advanced talks about a $4.5-billion (Canadian) cash-and-stock deal that would free the drugstore chain from family control for the first time since it was established in 1969, and give Metro a large chunk of the market in Quebec, New Brunswick and Ontario.

Investors speculated that the discussions got under way earlier this year after founder Jean Coutu railed against the Quebec government's changes to its generic medicine policy, a move that threatened the profitability of the company's own generic drug manufacturing unit. That raised questions about the future of its overall vertical integration strategy.

Because of a combination of regulation and consumer behaviour, the added pharmacy business would shore Metro up against online competition, while taking control of a well-known brand in Quebec to which customers are loyal.

The business of dispensing medicines, including explaining potential side effects and interactions with other drugs to customers as well as dealing with insurance providers, requires the advanced training and experience that pharmacists have, and Amazon order fillers do not, said Brian Madden, portfolio manager at Goodreid Investment Counsel.

"It's going to be difficult for Amazon to take a meaningful share of the pharmacy market in Canada, particularly, and even elsewhere," Mr. Madden said. "They haven't done it in a meaningful way in the United States."

The online threat was not likely factored into the calculus in 2013, when Loblaw Cos. Inc. shelled out $12.4-billion for Shoppers Drug Mart, but it would have been today, Mr. Madden said.