Loblaw's Shoppers Drug Mart bid escalates grocery wars

Loblaw's decision to buy Shoppers Drug Mart is an attempt by the country's largest supermarket chain to stay atop the heap in Canada's intensifying grocery wars, retail and marketing analysts say.

It may also be part of a strategic move into the new condominium-filled markets of Canada's biggest cities.

• Loblaw to buy Shoppers Drug Mart for $12.4B

On Monday, Loblaw announced it had agreed to buy the 1,200-store pharmacy chain for $12.4 billion, part of a broad strategy, analysts say, to resist the encroachment of U.S. retailers such as Wal-Mart and Target, which now have significant fresh food offerings.

These U.S. operations are broadly "mass merchandisers, but they've been placing great emphasis on their grocery sections," says David Soberman, a professor of marketing at the Rotman School of Management at the University of Toronto.

"This poses a threat to Loblaw, so Loblaw is trying to think up, 'What are we going to do to ensure that we remain, in many respects, the dominant grocery retailer in Canada?'"

But another of the underlying aims of buying Shoppers is to enable Loblaw to gain a greater foothold in the coveted downtown market, says Maureen Atkinson, a senior partner at the retail consultancy JC Williams Group.

The condominium boom in cities like Toronto, Vancouver and Calgary has led to greater urban density and an appetite for smaller grocery stores that carry a wide variety of high-quality products.

Shoppers Drug Mart has excelled in this area, says Atkinson, and the deal gives Loblaw products immediate access to moneyed downtown consumers.

"I think it's really part of the reason Loblaw's got involved with Shoppers – what the consumer wants is a convenient shopping experience," says Atkinson.

Paying a premium

Loblaw will pay $61.54 a share for Shoppers Drug Mart, which is almost 30 per cent higher than the last closing price on Friday.

In a statement, Loblaw executive chairman Galen Weston said the deal "changes the retail landscape in Canada," which is not quite true, says Atkinson.

While she acknowledges that "it's a big deal," she says the takeover is more of a consolidation of two companies that have become increasingly similar in their offerings.

In recent years, Shoppers has introduced food brands such as Simply Food and Nativa Organics, and currently sells about $1 billion in grocery items annually.

Loblaw happens "to be in a business that is stabilized and there isn't a lot of opportunity to grow sort of organically," says Atkinson. "So this is getting into an allied business that has become more and more similar to their own business, so there's huge crossover."

Grocery wars

The Canadian grocery sector has become increasingly competitive in recent years, thanks in large part to Wal-Mart's expansion into fresh food. Wal-Mart Canada, the country's largest mass merchant, started selling groceries in many of its Canadian stores in 2006.

Another complicating factor was the arrival of Target in 2013. The U.S. retailer, which took over the leases of 220 Zellers stores in Canada, currently offers a limited number of food items in Canadian stores.

But the company has promised to increase that inventory, aiming to provide the same range of supermarket products that it offers stateside.

In anticipation of Target's Canadian arrival, Wal-Mart Canada made a pledge to redouble its grocery efforts. Speaking at an industry analyst conference in Toronto in 2012, Wal-Mart Canada CEO Shelley Broader said "we intend to put fresh food in every store that we can put it in."

In light of these machinations, there has been significant consolidation in the grocery market. Last month, Sobeys, Canada's second-largest grocery store chain, spent $5.8 billion to buy 213 Safeway stores in Western Canada, a deal that included 199 in-store pharmacies.

• Sobeys takes aim at big-box retailers with Safeway takeover

Loblaw's introduction of the chic, low-priced Joe Fresh line of apparel in 2006 was a concerted effort to compete with clothing retailers like Wal-Mart and Hudson's Bay.

At Monday morning's press conference, Weston emphasized that Loblaw and Shoppers Drug Mart will continue to operate independently. But he did confirm that Shoppers will begin to carry Loblaw's brands, such as the President's Choice line of products.

Soberman says that allying itself with Shoppers Drug Mart also allows Loblaw to increase its brand recognition as a grocer that sells healthy products.

Whether or not it improves Loblaw's stake in the supermarket sweepstakes, the Shoppers deal shows the company's willingness to grow, which is essential, says Atkinson.

"The thing about retail is you can't not change," says Atkinson. "Retail constantly changes. Not everything you do works, but you have to try, because otherwise, somebody out there is doing it, and you're going to be roadkill."