July 24, 2013 2:50 pm

Mega-merger may lower checkout bill for Loblaw, Shoppers customers

Left to right: Domenic Pilla, chief executive of Shoppers Drug Mart Corp., Galen Weston Jr., executive chairman of Loblaw Co. Ltd., Holger Kluge, chair of Shoppers and Vicente Trius president of Loblaw pose for a photo at a press conference announcing that Loblaw will acquire Shoppers for $12.4 billion in cash and stock.

Canadian Press

Loblaw Cos. Ltd. has opened a “powerful new chapter,” its chairman said Wednesday, in large part because of the company’s planned takeover of Shoppers Drug Mart Corp.

Typically, the merger of the two biggest players in overlapping or even adjacent markets draws considerable concerns about pricing power over customers – fewer players, especially when the ones merging hold the most heft, invariably makes it easier for prices to rise.

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But not this time, industry watchers and analysts suggest. If the deal is successful, Loblaw will reap bigger sales and profits, for sure, but the combined company will be strongly inclined to keep prices in check or more likely, pass some savings back to customers.

“Any time you have this kind of deal, you get these kinds of synergies and opportunities to generate some leverage and scale. The result is a bigger cash flow and higher level of profitability,” Ken Wong, a business and marketing professor at Queen’s University said.

“But if these firms are smart, they take at least some portion of those savings and they reinvest it to give the customer a source of value and quality that they couldn’t get before.”

Better value means lower prices on everyday goods, he said, while a portion of the savings gleaned from combined “synergies” will be spent on enhancing the quality of the in-store experience – already a key focus for Loblaw in recent years.

Sarah Davis, Loblaw’s chief financial officer, said on a conference call Wednesday the company plans to shave $100 million in expenses by the end of the first year after the $12.4-billion deal closes in early 2014.

The main means – pressuring suppliers to lower the cost of goods on everything from produce to generic drugs. Year two will see more savings squeezed from suppliers, and by the end of year three, Loblaw will have shaved $300-million off its operating costs, much of that from lowering its so-called COGs (cost of goods).

“We have calculated the savings,” Davis said.

Loblaw is the country’s largest owner of grocery stores, operating “banners” or store brands that cater to the full spectrum of shoppers, from upscale urbanites to the value-conscious single parent. Its banner chains include Loblaws, Fortinos, Real Canadian Superstore and No Frills among others across the country.

Shoppers and Loblaw shop for many of the same products, like personal care items and certain food categories, like carbonated beverages, crackers and other non-perishables – what Shoppers watchers call “front-of-the-store” goods that are apart from its drug and pharmacy business.

They often share suppliers, and if two becomes one – and one with more purchasing power – those suppliers will cut a deal, market watchers say.

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Stock analysts who cover the company aren’t sure yet how Loblaw will utilize the savings but say they do expect some to be passed along to customers.

“Retail is a scalable business, so if you’re buying, say, 1.7 tons [of apples, or bananas, or cheese, etc.] you’ll save more than if you’re buying one ton. Some of that certainly would or should” flow through to lower prices for shoppers, one equity analyst told Global News.

There are some formidable forces emerging on the Canadian retail landscape at present that will entice Loblaw to cut its customers a better deal post-merger. While domestic grocery rivals, like Sobeys and Metro certainly remain respected foes, U.S. giants Walmart and Target are in expansion mode in Canada, and looking to take turf from their Canadian competitors.

“If I save 10 cents, I’m smart if I take five of that and give it back to the customer in terms of a lower price, better services or better quality,” Prof. Wong continued.

“I’m still getting five cents more than I was getting before, but now the consumer is getting a better deal. And if the consumer is getting a better deal, and I’m doing my job of delivering on that, I get more sales, which gives me even more scale, which lowers my costs again.

“That’s what we call a virtuous circle – or the Walmart formula,” Prof. Wong said.

© Shaw Media, 2013

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