Two Canadian retail giants will become even bigger thanks to yesterday’s news that Loblaw Companies Ltd. will purchase Shopper’s Drug Mart Corp.
The $12.4 billion deal will see Canada’s largest grocery and pharmacy chains (respectively) consolidate their already considerable buying power and logistics efficiencies, yielding $300 million in annual cost savings within three years—without closing any stores.
Thanks to these efficiencies, analysts expect that the deal will enable the new Loblaw/Shoppers hybrid to lower its prices, thereby allowing it to better compete against such discount rivals as Walmart, Target and Costco.
Loblaw’s executive chairman Galen Weston calls the partnership “transformational,” adding that it will change the retail landscape in Canada: “With scale and capability, we will be able to accelerate our momentum and strengthen our position in the increasingly competitive marketplace.”
Effects on Small Retailers
The move may intensify an already fiercely competitive retail landscape. So, who will win, and who will lose?
As retail analyst Doug Stephens told CBC Radio, mid-sized pharmacy chains such as Rexall or London Drugs will have to seriously examine their strategies going forward in order to compete.
The implications for smaller retailers, however, are less clear. If the combined Loblaw/Shoppers chain really does move towards discounting, it may turn off consumers looking for a more service-oriented or niche shopping experience.
Research conducted by Alberta’s department of Rural and Agricultural Development predicts mounting demand for “a ‘fresh, local market’ premium shopping experience that seeks to ‘inform, inspire and indulge’ Canadian consumers.” And recent backlash toward the entry of giant chains in local communities—such as local resistance to Walmart’s proposed store in Toronto’s Kensington Market neighbourhood—suggests some chain fatigue among certain buyers.
Then again, the deal may position Loblaw/Shoppers to capitalize on that very demand. Kenric Tyghe, a consumer and retail analyst with Raymond James, told Canadian Business that the transaction “positions Loblaw on the offensive” of changing retail trends: “This is going towards urbanization, small-format stores,” Tyghe says. “It’s about convenience, access, and serving increasingly urban populations.”
Another implication of the deal is on the supplier front. Both Loblaw and Shoppers source extensively from SMEs, both on the product and service front. It’s not yet known if, or how, its respective supplier bases will change as a result of the deal. But analysts suggest there’s a good chance anyone selling to either company will encounter some increased price pressure in the years to come.
The deal is expected to close this fall, pending approval from both Shoppers and Loblaw shareholders and the federal Competition Bureau.
How do you think the Loblaw/Shoppers merger will affect SMEs? Share your thoughts by commenting below.