Winnipeg Free Press - PRINT EDITION

Grocers target pharmacies

Offer higher profits in low-margin business

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LOBLAW Companies Ltd.'s blockbuster offer to buy Shoppers Drug Mart Co. for $12.4-billion shows Canadian grocers are hungry for pharmacy companies.

It's a match that makes sense, and investors certainly think so.

Under the terms of the agreement, which is still subject to approvals, Shoppers will keep its brand name and operate as a separate division of Loblaw.

Investors reacted positively on the Toronto Stock Exchange, with shares of Shoppers rising 24 per cent, or $11.72, to close at $60.12 while Loblaw shares were up $2.58 or more than five per cent at $50.13.

The Loblaw-Shoppers deal is the biggest retail acquisition in Canadian history.

It's also the culmination of a lot of jostling by Canadian grocers to move into and expand their pharmacy businesses. When former Canadian retail company Zellers went out of business last year, there was a scramble by companies to scoop up its prescription files. The companies that ended up buying those files were telling: Loblaw, Metro and The Overwaitea Food Group in B.C.

It's simply a matter of demographics. An aging population means even though costly new drug rules in Canada might curb profits, pharmacies remain a lucrative business opportunity.

Grocers and pharmacies make for a good pairing. As one analyst pointed out Monday, the synergies between the two businesses are strong, and there's evidence of that in the Shoppers and Loblaw deal.

The grocery business requires massive distribution channels, which offer plenty of benefits to smaller scale pharmacies. Meanwhile, prescription drugs offer grocers higher margins to compensate for their fairly low-margin business.

The Loblaw deal isn't the only big acquisition this year to highlight grocer-pharmacy convergence. When Sobeys' parent, Empire Co. Ltd., announced its surprise $5.8-billion over of Safeway Inc.'s Canadian division earlier this year, it also acquired Safeway's sizable pharmacy business along with it.

Pharmacies are an appealing business because they bring back customers, compared with other retail segments, which struggle to keep customer loyalty in an age of fierce price competition.

Zellers is a perfect example of that. While it lost large chunks of market share to competitors such as Walmart, its pharmacy segment remained its most profitable division until the end.

-- Financial Post

Republished from the Winnipeg Free Press print edition July 16, 2013 B6

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