July 15, 2013 12:19 pm

How the Loblaw-Shoppers merger will affect consumers

Loblaw Cos. Ltd., the country’s largest supermarket chain, has moved to acquire Shoppers Drug Mart Corp., the largest pharmacy, in a multibillion-dollar deal the pair say will save them hundreds of millions of dollars in costs annually while creating greater scale to be able to squeeze better prices from suppliers.

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The deal will face scrutiny from competition regulators while lighting a fire under rivals already entering into heated competition. But will shoppers save money? Here are some implications:

Will this mean lower prices at the checkout?

Maybe. It’s far too early to tell whether consumers’ pocketbooks and purses will benefit from the combined food and drug giant: lower operating costs don’t automatically equate to lower prices, analysts said Monday.

“I don’t see much impact at least in the short term on pricing. I don’t think Loblaw will want to tinker too much,” Doug Stephens, principal and consultant at Retail Prophet said.

But there may be a case for lower prices. With the merger expected to close within six or seven months, a combined Loblaw-Shoppers will pressure rivals like Walmart, to look long and hard at their own prices in order to better compete. If competitors respond by lowering prices, it will be difficult for Loblaw (and associated banners it owns, like Real Canadian Superstores and No Frills) to resist doing the same.

Loblaw execs said on a conference call with stock analysts they expect to realize $300 million in annual savings from merging operations such as marketing, IT, supply chains and other overlapping business functions.

“This is about realizing back-end efficiencies and cost savings,” Stephens said adding jobs could well be affected as “redundancies are identified.”

Loblaw management said however the deal was more than about trimming fat from two large businesses, assuring consumers will be better served in the end. “It’s not just about stripping out costs and banging the businesses together,” Loblaw executive chairman Galen Weston said.

Why is Loblaw buying Shoppers?

In short, because of  intensifying competition and the underlying pressure on profits. The heightened competition is being led chiefly by a three-pronged expansion by the Canadian arms of U.S. giants Walmart, Target Corp. and Costco.

Target has opened more than 48 stores in Canada since April with plans to add many more. Walmart Canada Corp. is spending half a billion dollars to open new locations and develop grocery aisles at its supercentres. Costco is also planning for another 25 locations. Combined with the growth in “ethnic” grocers, or those catering to immigrant populations, competition for your grocery dollars is growing fierce.

“New rapid square footage growth from Target, Wal-Mart, Costco and ethnic grocers is likely to cause a reduction in supermarket gross [profit] margins as everyone fights to maintain market share,” CIBC analyst Perry Caicco said in a note to investors earlier this year.

Loblaw also lost out on buying Safeway which Sobeys snapped up last month. The Sobeys-Safeway bid almost certainly hastened discussions between Loblaw and Shoppers — on a call with investors Monday, Weston said the two sides had been in informal discussions for more than three years.

How will branding and the in-store experience change?

What we know is that Loblaw intends to operate Shoppers as a separate and distinct division of the broader company, while the brand and stores may be refreshed or updated, it’s unlikely the Shoppers experience will make a drastic departure from its current look and feel, analysts said. Weston said Loblaw operates its businesses by giving each a certain amount of “autonomy”, a structure Shoppers “will bolt into very, very nicely.”

In Shoppers stores, expect to see PC signature items like Blue Menu and President’s Choice black label products occupy key real estate in dedicated grocery sections soon after the deal closes, analysts predict. Life brand products will also likely find their way onto grocery store shelves owned by Loblaw.

Importantly — how will this affect my Optimum points?

The combined heft of Shoppers’ hugely successful Optimum loyalty program and Loblaw’s brand new tech-savvy PC Plus program, which targets deals to members’ smartphones, could serve up relevant deals for shoppers across both chains – as well as a treasure trove of data about individual customers’ shopping habits.

Bringing the technology behind the PC Plus program to Optimum will help customize shopping trips for the far bigger pool of Optimum users, Kenric Tyghe, analyst at Raymond James said.

“It will allow you to get better [deals] on the items you care about which makes you care about them [Loblaw or Shoppers],” Tyghe said.

Allowing members to pool Optimum and PC points into a single bucket for use across the respective chains may well be another outcome – though it sounds like Loblaw is proceeding cautiously.

“We don’t anticipate at this stage merging the two currencies. The details we haven’t worked out yet,” Weston said. “But the potential is enormous.”

© Shaw Media, 2013

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