Loblaw Cos. and Shoppers Drug Mart signed a definitive agreement under which Loblaw will acquire Shoppers Drug Mart. The move follows the acquisition of Safeway Canada by Sobey's last month and a growing incursion of U.S. retail north of the border, including both Target Canada and Walmart Canada.
When Loblaw announced last week it would debut a new health-focused format to take on Whole Foods, no one could have expected it would make a deal to become the No. 1 pharmacy retailer in Canada, leapfrogging from No. 8 to that top spot with the stroke of a pen. Together the companies will operate 1,797 pharmacies across a total of 2,348 locations, meaning 1-in-5 Canadian pharmacies now will be operated by the merged company. Shoppers Drug Mart represents $4.9 billion in annual pharmacy sales, representing 47.3% of overall sales and $3.9 million in pharmacy sales on a per store basis. And if Loblaw's pharmacy sales are brought up to that level, the merged companies will represent $6.8 billion in pharmacy revenue.
But the time is ripe for consolidation in Canada, because beyond emerging competition from U.S. competition, government reform also is fueling consolidation across the country. "We are seeing this increase in activity in terms of consolidation or in terms of new pharmacy development in Canada because right now it is a very challenging time for the actual pharmacy operator in Canada with the recent changes to generic drug legislation that have been going on since 2010," noted Derek Dley, Canaccord Genuity research analyst, in an interview earlier this year as part of DSN's special PoweRx Players report that included special coverage on the "Kings of Canada."
According to published reports, Domenic Pilla, president and CEO of Shoppers Drug Mart, will manage the pharmacy as a separate unit that will continue to operate under its own brand names. That will bring a level of continuity to the Shoppers Drug pharmacy banner as Pilla improves the pharmacy performance across Loblaw. Shoppers Drug Mart has long held a reputation as a savvy pharmacy operator focused on the consumer experience across HBA.
Shoppers Drug's latest BeautyBoutique concept store, opened late last year, encompasses more than 4,000 sq.-ft. — the larger space a testament to the success the company has had with that concept.
Loblaw is known as an innovator as well. The grocer recently launched a test pilot of a new retail concept called Nutshell Live Life Well, a stand-alone franchise catering to the health-conscious crowd. The first location of the new concept will open in Toronto this fall, according to published reports.
Billed as bringing Canada's No. 1 food operator and No. 1 pharmacy operator under one roof, each of the company's core competencies appear to complement one another. Shoppers Drug has domain across the front end with its beauty and health concepts. Shoppers Drug manages 55 medical clinic pharmacies under the name Shoppers Simply Pharmacy and 62 Home Health Care stores. Shoppers Drug also owns a specialty pharmacy operation and MediSystem Technologies, a provider of pharmaceuticals and services to long-term facilities.
Loblaw also will benefit from Shoppers Drug's robust loyalty card program, which boasts 98% consumer awareness and more than 10 million active Shoppers Optimum cardholders. Loblaw earlier this year had made customer acquisition a key goal, having earmarked 65% of its capex towards retail initiatives, up from 45% in 2012, according to Credit Suisse research analyst David Hartley.
And Loblaw's operation features a well-oiled supply chain. It's that supply chain, and Loblaw's expertise as a food operator, that will be able to beef up Shoppers Drug's food offerings. Shoppers Drug had already been mirroring U.S. trends in that regard, increasing the selection of food products in many stores.