UBC Sauder School of Business Prof. Thomas Ross breaks down the $12.4-B merger between Canada’s largest grocer and pharmacy chain.
What are your first impressions of today’s Loblaw-Shoppers deal?
This is a very large deal. Canada’s largest grocery chain is moving to acquire the largest pharmacy chain in the country. Both players’ shares have taken a jump, which suggests that shareholders and the market like what they see, though share price increases do not inform us about the likely effects on consumers.
Why does Loblaw want Shoppers?
The national retail landscape is changing and both companies face greater competition from several large U.S. companies. We saw a somewhat similar merger by Sobeys and Safeway recently and Wal-Mart, Costco and Target are all expanding their footholds in Canada’s grocery and pharmacy sectors.
What are the primary benefits for Loblaw and Shoppers?
By joining forces and bulking up, Loblaw and Shoppers believe they can strengthen their position and improve their ability to compete with those international and other large domestic players in Canada that are growing in size.
They believe they can find efficiencies in their operations, which is a common claim when mergers are proposed. For Loblaw and Shoppers, these efficiencies could happen through bulk purchasing and more efficient supply networks for servicing their numerous locations.
What are the risks?
A deal of this size will be reviewed by Canada’s Competition Bureau. It will explore whether consumers will be impacted negatively – perhaps by higher prices or reduced selection. In some previous retail merger cases, companies have been forced to sell off certain stores to third parties before the merger was approved. Over the next few weeks, we will see if the Bureau has any concerns and how significant these might be.
The other big question mark – which is applicable to any merger – is just how compatible the different organizational cultures of the two companies are. A deal can look great on paper, but if the people at Loblaw and Shoppers can’t work together, the benefits of this merger might be just a pipe dream.