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The Loblaws flagship location on Carlton Street in Toronto on Thursday May 2, 2013.Aaron Vincent Elkaim/The Canadian Press

Loblaw Co. Ltd.'s blockbuster deal to buy Shoppers Drug Mart Corp. not only unites two of Canada's biggest retail players and transforms the competitive landscape, it also gives the grocery giant a new chance to market itself to shoppers in urban centres, an area where it has lagged behind.

At the end of May, Loblaw in Calgary launched the Box by No Frills, a version of its discount No Frills chain of stores but in a format less than half the size. It was the first step in an experiment to augment the chain with stores better suited to urban centres. And just last week it was reported that the company would begin testing a smaller, health-focused concept retail store designed for urban centres called Nutshell Live Life Well, designed to cater to the type of shopper drawn to more upscale downtown grocery chains such as Whole Foods.

This retail trend is chasing Canadians' well-documented move to cities – and younger consumers' embrace of the downtown lifestyle. As of 2011, roughly 81 per cent of the population lived in urban areas, according to Statistics Canada. In the top 10 most populated census metropolitan areas, the population density rose by nearly 30 people per square kilometre from 2006 to 2011 – a 6.8-per-cent increase on average.

Among the people moving to city centres are Millennials, a highly sought-after consumer group for marketers in every industry. These consumers behave differently than any generation in the past, are more digitally connected and are poised to control a massive amount of buying power as they mature, making this a key time to build loyalty among them.

However, in recent years retailers have focused mainly on catering to suburban neighbourhoods, opening big-box stores in lower-density areas that could accommodate them. Now, retailers have been looking to catch up downtown.

Shoppers Drug Mart has already increased its food offerings in many of its locations. And Loblaw competitors Sobeys and Metro have both been working to open more and smaller locations in urban centres.

"There's great space for large, one-stop-shopping supermarkets, Superstores, in Canada. But with the urbanization of the Canadian market, small stores that can offer a really compelling combination of goods and services [are] a fantastic bolt-on for us and a really great advantage to the folks at Shoppers Drug Mart," Loblaw executive chairman Galen G. Weston said at a press conference Monday.

"At the stroke of a pen, this transforms Loblaw's small-format strategy," said Stewart Samuel, program director with market researcher IGD Services (Canada) Inc. "What Loblaw has the potential to do is to appeal to new shopper groups and to convert a group of younger shoppers who have been drawn to Shoppers in recent years with the work they've done in beauty."

Mr. Samuel speculated that under Loblaw ownership, Shoppers stores would begin to offer more fresh foods, as well more meal solutions and on-the-go food options. Walgreen Co. in the U.S. has had success with a similar model, he noted, placing food products on the ground floor of smaller urban stores with drugstore products on the second floor.

"Certainly, Shoppers has a lot of great real estate in downtown urban cores. So I'm sure Loblaw will be able to at the very least get its products into Shoppers stores, and perhaps go even further," said retail consultant Ed Strapagiel. However, he voiced some skepticism on whether this would immediately fix Loblaw's having fallen behind in central urban expansion.

"The real estate problem will persist for main line supermarkets," he said.

The consolidation comes as Canada's retail landscape has become more crowded.

In March, U.S. retailer Target Corp. – lauded for its cheap chic clothing and housewares offerings – began opening its first locations in Canada, which also sell some grocery items. Wal-Mart Canada Corp. has been expanding its grocery offerings as well, and aggressively marketing to Canadians with advertising to help convince them to think about Wal-Mart when they think about groceries. Costco is also expanding its footprint in Canada.

This is also a play for "big data" – a huge marketing priority at the moment in every industry, as digital processing and better technology allow companies to better track consumer behaviour. U.S. giant Target Corp. has used it to great effect through its popular REDcard loyalty program.

With its roughly 10 million members, Shoppers' Optimum program is a robust resource with reams of data for Loblaw to get to know, and market itself more effectively to, the people in urban centres that it hopes to attract.

Loblaw only launched its PC Plus loyalty program this May. Optimum's lengthy experience in loyalty will give a leg up to PC Plus with a look at how the platform works. Optimum recently expanded its loyalty services to mobile devices, and the deal will help Loblaw also expand digitally more quickly.

While the two loyalty programs will remain separate, chief executive officer Domenic Pilla did refer to the possibilities of combining that data with PC Financial's for "additional customer insights." That combined knowledge will theoretically help Loblaw market its products more effectively, and in a more targeted way to each shopper, across all of its stores.

Editor's Note: An earlier version of this story incorrectly stated that, in Canada's top 10 most populated census metropolitan areas, the population density rose by nearly 90 people per square kilometre from 2006 to 2011, or a 23.8 per cent increase on average. There was a calculation error. In fact,  population density rose by roughly 30 people on average, or a 6.8 per cent increase.