Competition Bureau Review of the Proposed Acquisition of Shoppers Drug Mart Corporation by Loblaw Companies Limited
OTTAWA, March 21, 2014 — The Competition Bureau announced today that, following an extensive review of Loblaw Companies Limited’s ("Loblaw") proposed acquisition of Shoppers Drug Mart Corporation ("Shoppers", and collectively, the "Parties"), it has reached a Consent Agreement with Loblaw that preserves competition in the retail sale of pharmacy products and drugstore-type merchandise in Canada by requiring divestitures in 27 local markets. The Agreement also prohibits certain specific conduct with suppliers.
In reaching its conclusions in this matter, the Bureau obtained information from many different sources with a view to assessing the relevant facts and evidence regarding the likely competitive effects of the proposed transaction. The Bureau’s review of the proposed transaction included interviews with market participants of all sizes, consultations with industry experts, foreign antitrust agencies and industry associations, the review of internal company records from Loblaw and Shoppers, and econometric analyses of large volumes of industry and economic data.
This statement summarizes the approach taken by the Bureau in its review of the proposed transaction.1
The Proposed Transaction
Pursuant to an Arrangement Agreement announced on July 14, 2013, Loblaw proposed to acquire all of the outstanding common shares of Shoppers for a total purchase price of $12.4 billion.
The merger would combine Loblaw, Canada’s largest grocery chain, with Shoppers, Canada’s largest drugstore chain. The combined retailer would operate approximately 2,738 stores and 1,824 pharmacies across the country.
Loblaw is a publicly-traded corporation that operates as Canada’s largest food retailer and is a leading provider of supermarket, drugstore and general merchandise, as well as financial products and services, through a variety of corporate-owned, franchised and affiliated store banners. Loblaw currently operates 1,414 stores across Canada, approximately 500 of which include pharmacies. Loblaw’s retail locations operate under 22 store banners, including: Loblaws, Real Canadian Superstore, No Frills, Fortinos, Your Independent Grocer and Provigo & Maxi. Loblaw also sells "private label" supermarket products primarily under the President’s Choice (PC) and No Name brands, and certain drugstore-type merchandise under its Exact brand.
Shoppers is a publicly-traded corporation that operates as Canada’s largest drugstore retailer. Shoppers is the licensor of full-service retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in the province of Quebec), with 1,324 stores throughout Canada. Shoppers sells "private label" products under the Life brand.
The Bureau approached this merger review recognizing that both Loblaw and Shoppers had differentiated businesses with a strong competitive position in retail food and drugstore operations, respectively. The Bureau was also mindful that Loblaw would, post-merger, be the largest purchaser and retailer in Canada for many of the overlapping products sold by both companies. The Bureau’s review focused on assessing two main theories of competitive harm: the first involved the assessment of the potential for the exercise of market power by Loblaw in its retail operations which could lead to higher prices for consumers; and the second involved the assessment of market power by Loblaw with suppliers, and the potential impact on competition and consumers.
Retail Sales to Consumers
The downstream investigation focused on whether the acquisition of Shoppers is likely to create, maintain or enhance Loblaw’s market power by enabling it to sustain materially higher prices than would exist in the absence of the merger by diminishing existing competition and/or preventing future competition with Shoppers. The Bureau was not only focused on the effect of the merger on price, but on other dimensions of competition that consumers value, including quality, product choice, service and innovation.
Overlapping Product Categories
Loblaw and Shoppers both have stores engaged in the retail sale of the following product categories:
- prescription drugs, which are prescribed by a physician and must be sold by a pharmacist;
- over-the-counter ("OTC") medications, which do not require a prescription;
- behind-the-counter ("BTC") medications, which require a pharmacist’s intervention;
- health and beauty aids ("HABA"), which consist of a wide variety of products relating to health and beauty, including vitamins, deodorants, soaps, dental care, baby care, hair care, razors, skin care and various household cleaning products;
- drugstore-type food ("DTF"), which consist of food products typically sold in a drugstore, including beverages, snack products, milk and a limited selection of both dairy products and bread; and
While the number of competitors differs locally, these types of products are sold by many retailers in Canada, such as supermarket chains (e.g., Sobeys, Metro), mass merchandisers (e.g., Wal-Mart, Target), wholesale clubs (e.g., Costco) and drugstore chains (e.g., Rexall, Jean Coutu, London Drugs, independent pharmacies). Importantly, the breadth of product offerings for the overlapping product categories varies significantly depending on the size and type of retailer.
Loblaw and Shoppers are differentiated in their retail operations, although they both compete for the sale of the overlapping products. Owing to this differentiation and to the level of diversity in the overlapping products, the Bureau’s review focused primarily on the assessment of competitive effects rather than on precise market definition.
Although it was not necessary to define the specific product markets, the Bureau generally focused its analysis on the retail sale of:
- pharmacy products, which includes the sale of prescription medications, OTC and BTC medications; and
- drugstore-type merchandise, which includes HABA, cosmetics and DTF.
The Bureau concluded that the relevant geographic market for the retail sale of the overlapping products is local. Consumers choose where to fill their prescriptions or shop for drugstore-type merchandise based on a number of factors, including convenience, the proximity of a store to their home, and the location of physicians and medical services. The Bureau’s local geographic market analysis was primarily based on the distribution of customers around a particular store. In this regard, the Bureau used trade area information provided by the Parties and third parties (which was generally obtained through customer surveys and loyalty program data) and interviews with market participants to determine the origins of customers and the associated trading areas of each store.
The local market review in this merger was very resource-intensive owing to the sheer number of stores operated by Loblaw and Shoppers across all regions of Canada. In order to efficiently examine these local markets, the Bureau used geomatics software and other computerized tools to focus on those areas where Loblaw and Shoppers are particularly close competitors and where there were few other competitors. Importantly, for each overlapping local market, the Bureau examined concentration levels and the extent and nature of effective remaining competition separately for the sale of pharmacy products and drugstore-type merchandise. The set of competitors for each of these categories of products may differ significantly depending on the local market in question. The Bureau was able to estimate market shares for each overlapping market to identify high concentration markets, using actual sales data from the parties and from many of their major competitors.
In particularly contentious markets, the Bureau interviewed local market participants, examined internal documents provided by the Parties, consulted with industry experts and visited local competitors’ stores. Using this approach, the Bureau successfully examined hundreds of local markets where Loblaw and Shoppers are both present and competing to varying degrees, and was able to concentrate discussions with the Parties on the local markets of greatest concern. In particular, the presence of effective competitors was a key consideration in the Bureau’s analysis.
Loblaw and Shoppers operate a wide range of different stores under different banners that compete to varying degrees in the overlapping products, depending on the size of the store, customer focus, proximity to each other and local competition.
With respect to competitive rivalry between Loblaw and Shoppers, the Bureau assessed the extent to which the Parties actively monitor and respond to each other’s pricing for the retail sale of various overlapping products. With respect to prescription fees, since the prices of drugs produced and sold by pharmaceutical companies are subject to differing provincial regulations, the relevant prices that the Bureau examined for competition purposes were generally the "dispensing fee", "co-payment" and "mark-up" charged by the pharmacy. With respect to the other overlapping products, the relevant prices include flyer pricing and in-store pricing, including discounting, that is ultimately aimed at attracting consumers.
The Bureau also recognised that there are significant non-price elements of competition. Retail stores compete on factors other than pricing to draw customers and, accordingly, competition may occur along such dimensions to the benefit of consumers. With respect to the overlapping products, there are a number of important non-price considerations for consumers, including:
- innovation (e.g., new methods to improve prescription processing time);
- loyalty programs;
- service (e.g., presence of in-store dieticians, medical clinics, etc.);
- variety, quality and product selection;
- wait times; and
- store hours.
While the Bureau recognizes an important level of differentiation among competitors offering the overlapping products, namely supermarkets, mass merchandisers and drugstore chains, the documentary evidence collected from the Parties’ internal records and oral evidence obtained from industry stakeholders suggested that there is material competition between these retail channels for the sale of the overlapping products, including between the Parties themselves.
The Bureau engaged internal and external economic experts to analyse pricing and sales data received from the Parties and others. The Bureau employed a cross-sectional methodology used in a number of previous merger reviews associated with localized retail competition. This type of cross-sectional analysis was used to quantify the competitive impact of the stores controlled by Loblaw on the stores controlled by Shoppers or vice versa, providing a basis for estimating the potential loss in competition that would arise from the combination of Loblaw and Shoppers. The competitive effects analysis suggested there was material price competition between the Parties. This finding informed the Bureau’s structural local market analysis described above, particularly in high concentration rural markets with few remaining competitors.
Using the above approach, the Bureau was able to estimate the potential competitive effects resulting from the merger in each local market and, consequently, to identify the local markets of greatest concern. In the end, the Bureau determined that the proposed merger would result in a substantial lessening of competition in 27 local markets for the retail sale of pharmacy products and/or drugstore-type merchandise. The Bureau found that entry into these local markets would not be likely, timely or sufficient to address the likely anti-competitive effects of the merger.
The Consent Agreement reached with Loblaw will preserve competition in 27 local markets. In conducting its review, the Bureau found that different remedies were appropriate in order to address the specific issues identified in a particular market. For example, there were certain local markets where there was a competition concern only with respect to pharmacy products and not in the other product categories. The Bureau was careful to fashion the remedies to address the particular local competition concerns arising from the merger while ensuring that the remedy would be robust.
In nine of the 27 markets where the concern was only for the retail sale of pharmacy products, the Bureau found that requiring Loblaw to divest its pharmacy business within a Loblaw store to an independent operator was an appropriate remedy. The approval of the terms of any such divestiture is at the sole discretion of the Commissioner so as to ensure that the remedy is effective. In the remaining 18 local markets, Loblaw will be required to divest a stand-alone store.
Under the terms of the Consent Agreement, Loblaw is required to divest the following 18 retail stores to an approved purchaser and nine pharmacies within a Loblaw store to an independent operator:
|Devon, AB||Shoppers Drug Mart Southport Common, 180 Miquelon Avenue|
|Innisfail, AB||Shoppers Drug Mart Henday Centre, 4804 50th Street|
|Westlock, AB||Shoppers Drug Mart Simply Pharmacy, 10030 106 Street|
|Sechelt, BC||Shoppers Drug Mart Trail Bay Mall, 5740 Teredo Street|
|Dalhousie, NB||Save-Easy, 170 Renfrew Street|
|St. Stephen, NB||Shoppers Drug Mart Charlotte Mall, 210 King Street|
|Barrington Passage, NS||No Frills, 3695 Highway #3|
|Tantallon, NS||Shoppers Drug Mart St. Margaret’s Crossroads, 5181 Saint Margaret’s Bay Road|
|Montague, PEI||Shoppers Drug Mart Montague, 521 Main Street|
|Aylmer, ON||Shoppers Drug Mart Aylmer, 6 Talbot Street East|
|Blenheim, ON||No Frills, 286 Chatham Street North|
|Chelmsford, ON||Shoppers Drug Mart Chelmsford, 3672 Highway 144|
|Elmira, ON||No Frills, 232 Arthur Street South|
|Exeter, ON||Shoppers Drug Mart Exeter, 38-44 Thames Road West|
|Kingsville, ON||Shoppers Drug Mart Main & Wigle, 271 Main Street East|
|Mount Forest, ON||Shoppers Drug Mart Mount Forest, 129 Main Street South|
|Port Hope, ON||Shoppers Drug Mart Barrett and Ontario, 60 Ontario Street|
|Petrolia, ON||Shoppers Drug Mart, 4177 Petrolia Street|
|Bay Roberts, NF||Dominion Bay Roberts, Bay Roberts Shopping Centre, Main Highway, General Delvy|
|Carbonear, NF||Dominion Carbonear, Trinity Conception Square London Road|
|Almonte, ON||Patrice’s YIG, 401 Ottawa Street|
|Embrun, ON||Embrun YIG, 753 Notre Dame Street|
|Ingersoll, ON||YIG Ingersoll, 273 King Street West|
|Listowel, ON||Zehrs Listowel, 600 Mitchell Road|
|Port Perry, ON||Vos’ YIG Port Perry, 1893 Scugog Street|
|Prescott, ON||O’Reilly’s YIG, 150 Prescott Centre Drive|
|Tillsonburg, ON||Zehrs Tillsonburg, 400 Simcoe Street|
Purchasing from Suppliers
In respect of purchasing issues with suppliers, as previously noted, the merger would combine Canada’s largest grocery chain with Canada’s largest drugstore chain and, post-merger, Loblaw would be the largest purchaser for many of the overlapping products.
During its review, the Bureau conducted numerous interviews about the potential effects of the proposed transaction with parties that supply products to Loblaw and Shoppers for resale. These interviews included suppliers of all sizes. The Bureau also interviewed other competing retailers, buying groups and industry associations representing market participants of all sizes. The Bureau reviewed internal Loblaw documents with respect to Loblaw’s relationships and interactions with its suppliers. In addition, the Bureau obtained advice from its own independent economic and industry experts and reviewed submissions from the Parties’ economic experts. Finally, the Bureau obtained information from stakeholders in certain foreign jurisdictions.
This part of the Bureau’s analysis of the proposed transaction was limited to the merger-specific effects of the proposed transaction on the supply of products for retail sale. The Bureau concluded that Loblaw could exercise market power, and in some circumstances would have increased market power, in its dealings with suppliers as a result of the acquisition of Shoppers and, in particular, as a result of the increased volume of purchases from suppliers attributable to sales in Shoppers stores.
The Bureau’s review identified certain Loblaw programs and agreements with suppliers which effects give rise to competition concerns in the context of the proposed transaction. In that context, these concerns were particularly serious for those Loblaw programs and agreements that require suppliers to compensate Loblaw for a pre-determined profit margin, where the compensation is established or calculated using a pre-determined method and referencing the advertised (flyer) prices of a competing retailer or retailers.
The Bureau concluded that if such Loblaw programs and agreements were extended to the purchase of products for Shoppers stores after the proposed transaction, it would likely cause a substantial lessening or prevention of competition. The Bureau determined that without restrictions on certain Loblaw programs and agreements, the proposed transaction would likely lead to higher wholesale prices paid by other retailers to suppliers and, in some circumstances, higher retail prices for consumers.
After the proposed transaction and without such restrictions, the Bureau determined that these Loblaw programs and agreements would likely impact the incentives and conduct of suppliers to Loblaw, and the ability of other retailers to compete vigorously with Loblaw, particularly on price and product selection. The Bureau’s concerns about the impact of the Loblaw programs and agreements in the context of the proposed transaction included: increasing incentives of suppliers to influence and impose restrictions on competing retailers’ pricing decisions; making suppliers financially accountable for competing retailers’ pricing decisions; increasing incentives of suppliers to penalize competing retailers for vigorous price competition; diminishing supplier incentives to continue to offer promotions to all retailers; and causing Loblaw and some supplier interests to be aligned towards an increase in wholesale prices paid by competing retailers.
The Consent Agreement between the Commissioner and Loblaw includes restrictions on certain Loblaw programs and agreements lasting up to five years from the date of closing of the proposed transaction. In general, the Agreement prohibits Loblaw from entering into agreements or obtaining financial compensation from suppliers using the volume of the supplier’s sale of products to Shoppers stores in specified circumstances. Those circumstances are where Loblaw and the supplier have previously agreed to ensure that Loblaw achieves a stated profit margin on those products and where the compensation is determined using a pre-determined method that uses a competitor’s flyer advertised retail price. Specifically, the Agreement provides that, for a five year period:
- Loblaw shall not enter into any agreements of this nature with suppliers for certain categories of products sold by both Loblaw and Shoppers;
- Loblaw shall not enter into new, amended or renewed agreements of this nature with suppliers for products to be sold in Shoppers stores;
- Loblaw shall not require or induce any supplier into entering any agreement of this nature using the volume of products purchased from that supplier for sale at Shoppers stores; and
- Loblaw shall not include the volume of products purchased from a supplier for sale in Shoppers stores in the calculation of financial compensation to Loblaw under any such agreements.
The Agreement further prohibits Loblaw from obtaining financial compensation from suppliers using the volume of products sold at Shoppers stores under another Loblaw program, for a five year period. Under that program, Loblaw seeks compensation from a supplier if the retail price of a product advertised in a competing retailer’s flyer is lower than the price of the same product in a Loblaw flyer, at the same time or during an overlapping period. Each specific agreed prohibition outlined above is contained in the Consent Agreement.
Loblaw has also committed, for a period of two years from closing, not to charge penalties related to short deliveries (known as "fill rate" penalties) and not to charge new supply chain penalties and fees to suppliers that supply less than $4 million of products to Loblaw. Loblaw further committed for a period of two years not to require the reduction in the current cost of products of such smaller suppliers, subject to certain specified exceptions.
The Agreement finally requires Loblaw to ensure that all of these agreements and programs are provided or made available to suppliers in writing and to provide suppliers with confirmation in writing of which agreements and programs apply to each supplier.
The review by the Mergers Branch and the remedies contained in the Consent Agreement only addressed the merger-specific concerns arising from the proposed transaction. The Bureau’s Civil Matters Branch will continue to investigate Loblaw policies, agreements and conduct related to pricing strategies and programs with suppliers that reference rivals' prices. Vigorous competition in the market is essential to ensure that Canadian consumers continue to benefit from low prices, a high quality and selection of products, and high service levels.
This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.
However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case-by-case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.
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1 Analytical methodologies are applied, and enforcement decisions are made, on a case-by-case basis. The methodologies and conclusions discussed in this statement are specific to the review of the proposed transaction in question and are not binding on the Commissioner. The legal requirements of section 29 of the Competition Act, and the Bureau's policies and practices regarding the treatment of confidential information, limit the Bureau's ability to disclose information obtained during the course of a merger review. (back to footnote reference 1)
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