Companies & Industries

Loblaw's 'brilliant tactical move' captures Shoppers Drug Mart

Loblaw takes the offensive.

Domenic Pilla, president and CEO of Shoppers Drug Mart Corporation; left to right, along Galen Weston Jr., executive chairman of Loblaw Co. Ltd.; Holger Kluge, chair of Shoppers Drug Mart Corporation; and Vicente Trius president of Loblaw Co. Ltd., pose for a photo at a press conference announcing that Loblaw Companies Limited will acquire Shoppers Drug Mart Corporation for $12.4 billion in cash and stock in Toronto on Monday, July 15, 2013. THE CANADIAN PRESS/Michelle Siu

Domenic Pilla, president and CEO of Shoppers Drug Mart Corporation; left to right, along Galen Weston Jr., executive chairman of Loblaw Co. Ltd.; THE CANADIAN PRESS/Michelle Siu

Loblaw Inc. is making a ‘brilliant tactical move’ in capturing Shoppers Drug Mart, analysts say, in a single stroke reaching more urban customers and thwarting the presence of U.S. retail giants.

In a Monday morning release, Loblaw announced it had acquired Shoppers for $12.4 billion in cash and stock, in effect combining Canada’s largest grocery and pharmacy companies. Shoppers has 1,242 store locations across the country while Loblaw has over a 1,000 corporate and franchise stores from coast to coast.

According to analysts, the purchase marks a unique approach to challenging the Canadian entry of major American retailers Target and Walmart. Rather than building more big box stores to sell grocery, health, and beauty products under one roof, Loblaw will be able to use urban-friendly Shoppers locations to offer its President’s Choice brand items while the drug stores continue to sell pharmaceuticals and cosmetics.

“I think it’s a brilliant tactical move from a market standpoint,” said retail analyst Doug Stephens, author of The Retail Revival.

“There are a lot of restrictions to opening a large store in an urban market—zoning restrictions, unions… The Shoppers brand, already having these stores dotting just about every major centre in the country, is an absolutely fantastic delivery mechanism for PC products.”

At the announcement Monday morning, Loblaw executive chair Galen G. Weston noted that Loblaw’s $30 billion in food sales each year is far greater than Shoppers’ $1 billion figure, the CBC reported. However, Loblaw only has 5 per cent of the pharmacy market, making Shoppers an attractive asset.

The agreement is still subject to approval, but if permitted, Shoppers will continue to operate as a separate division of Loblaw and keep its current branding. The offer from Loblaw, using Friday’s closing price, is worth $61.54 per Shoppers Drug Mart common share, with about 54 per cent of the price paid in cash.

The acquisition is set to have a major impact on the grocery marketplace in Canada.

“It positions Loblaw on the offensive with the evolution of the grocery model in Canada,” said Kenric Tyghe, a consumer and retail analyst with Raymond James, in a phone interview.

“This is going towards urbanization, small-format stores… It’s about convenience, access, and serving increasingly urban populations.”

Stephens is interested to see what Loblaw will do with the pharmacies already present in some of its stores, suggesting that they will perhaps become “Shoppers kiosks” or “Shoppers Lite,” in Loblaw store locations that don’t already have a Shoppers close by. He also commended Loblaw on a smart demographic move—pharmacies will be an increasingly important part of the consumer landscape as Canada’s population ages.

The Loblaw-Shoppers deal emerges on the heels of last month’s purchase of grocery chain Safeway by Sobeys Inc., for $5.8 billion.

Following the Shoppers purchase, Loblaw expects to have $300 million in cost savings over the next three years.

With files from The Canadian Press.