Will More Mergers Follow the Loblaw/Shoppers Drug Mart Deal?
Consolidation is alive and well north of the U.S. border. Close on the heels of Sobeys’ recent deal to acquire Safeway’s Canadian business comes the most recent blockbuster, which has Loblaw, Canada’s top grocery chain, agreeing to acquire Shoppers Drug Mart, the nation’s leading drugstore chain.
The recent deals, the analysis goes, were made to give the Canadian chains the power to compete with American rivals Walmart, Costco and Target, all intent on growing share north of their U.S. headquarters.
Interestingly, according to the National Post, Walgreens was interested in acquiring Shoppers and might have made a bid had it not been beaten to the punch by Loblaw. Walgreens has been clear about its plans to grow on a global scale as evidenced by its deal to acquire a 45 percent stake (with more to come) in Alliance Boots last year.
Loblaw’s deal to acquire Shoppers has been widely praised by Canadian retail watchers. Aside from giving the chain increased buying power, the deal also provides immediate access to many urban locations where its American rivals have yet to go. Loblaw was able to gather some of the cash needed to help swing the deal by spinning off its retail assets as a REIT.
"There’s a great space for large one-stop shopping supermarkets or superstores in Canada," Galen Weston, Loblaw’s chairman, told Bloomberg News. "But with the urbanization of the Canadian market, small stores that can offer a really compelling combination of goods and services is a fantastic bolt-on for us."
The plan, similar to what Walgreens is doing in the U.S., is for Loblaw to introduce fresh foods into Shoppers’ stores where there is a local need.
- Loblaw Companies Limited to acquire Shoppers Drug Mart Corporation for $12.4 billion in cash and stock – Loblaw Companies Limited
- Walgreens was scoping out Shoppers before Loblaw bought drugstore chain – Financial Post
- Walgreens on Global Path, Buys Stake in Alliance Boots – RetailWire
- Loblaw Shifts to Inner City in Battle With Wal-Mart – Bloomberg News
- Loblaw to buy Shoppers Drug Mart for $12.4-billion – The Globe and Mail
Discussion Questions
What do you make of the Loblaw/Shoppers deal? Does this — along with other recent acquisitions, including Sobeys/Safeway and Kroger/Harris Teeter — suggest that we will see an increase in M&A activity in North America over the near term?
Loblaw’s acquisition of Shoppers gives it instant penetration into urban markets where it didn’t have penetration. While this may not impact Walmart’s larger format stores’ plans it may alter some of their thinking about where their smaller footprints make sense.
Leveraging its PL products will allow Loblaw to increase Shoppers’s food selection at an attractive price point. Something that Walgreens has been doing with its PL albeit for a far smaller segment of its non-pharmacy selection. I would expect that Loblaw will also reevaluate the space allocation in the store to further enlarge the grocery section.
Selected mergers that make market as well as financial sense will be the trend. This acquisition by Loblaw and the Kroger/Harris Teeter deal are examples of mergers that satisfy both of the criteria. Particularly, the Loblaw purchase of Shoppers Drug Mart fits the projected 10% growth rate of prepared foods sold at retail, like drug stores and convenience stores. In fact, I expect drug stores to become the C-Store of choice for women. Good move by Loblaw.
The big retailers want to expand, the top executives and the boards of slipping retailers want to live on—in some financial fashion.
We’ll see an increase in M&A activity in the near term so long as there are struggling companies. That does not necessarily mean that all mergers or acquisitions are beneficial. Consider Supervalu and Albertsons.
Gene’s comments seem to hit the nail right on the head. M&A’s are going to continue at a fast rate as long as buyers need to grow to satisfy their stockholders and sellers need to sell to get out from under the financial pressures.
Has there ever been a time when we HAVEN’T seen M&A activity? It slowed down a few years after 2008, but never stopped entirely…and I’m sure there’s ground to make up.
Retail brands continue to see the power of partnerships, whether through M&A activity or through marketing. This has been going on in the travel loyalty space for years and just this week United and Marriott agreed to partner on their elite/VIP tiers.
In Canada, where we run the country’s largest coalition loyalty program,
we have experienced what we call the multiplier, or “network,” effect that exemplifies the value of strategic partnerships.
Whether you work through partnerships, coalitions or acquisitions, the goal seems consistent—reach more customers more of the time. There is scale in reach and understanding of a broader customer base. This translates into the ability to focus on those things that grow the business, while having the scale to make it meaningful in terms of bottom-line performance for your partners, be they vendors, manufacturers or marketing partners.
The probability of an increase In M&A activity is strong over the near term. The Loblaw acquisition makes good financial sense, expanding their reach with a solid foundation. The future for several companies depends on finding strong partnerships—it is all about retaining asset value in a very competitive marketplace.
Loblaw’s acquisition of Shoppers was strategic in that it gives the grocer easy access to urban markets in a convenience store format, and the two companies carry complementary product lines. Shoppers has been adding food items to its stores, and Loblaws has been a small player in the pharmacy business; the two can now leverage each other’s core strengths, and drive economies of scale.
I believe we will continue to see M&A activity as the largest retailers with the healthiest operations strive to find new opportunities to drive top-line growth. Their M&A activity could be initiated for any number of reasons, such as consolidation, geographic expansion, increased market penetration, operational synergies, or enhanced expertise in e-commerce, just to name a few.