Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Combination of Canada’s largest grocer and largest drugstore chain conditionally approved, (Mar 24, 2014)

By Jeffrey May, J.D.

Loblaw Companies Limited, Canada’s largest food retailer and a leading provider of drugstore and general merchandise services, has received approval from the Canada Competition Bureau to complete its proposed acquisition of the country’s largest retail drug store operator—Shoppers Drug Mart Corporation. The combined retailer will operate more than 2,700 stores and 1,800 pharmacies across Canada. The acquisition is expected to close March 28.

On March 21, the Competition Bureau announced that the approval of the transaction requires the sale of 18 retail stores, and nine pharmacies within a Loblaw store to an independent operator. It also contains certain behavioral restrictions on Loblaw programs and agreements with suppliers, it was noted.

The terms of the consent agreement are intended to resolve Competition Bureau concerns that, with the modifications, the acquisition—valued at (Can.) $12.4 billion—would likely have resulted in a substantial lessening or prevention of competition in the retail sale of pharmacy products and drugstore-type merchandise in Canada, and in respect of certain Loblaw programs and agreements with suppliers.

The Competition Bureau explained that its review focused on the potential for the exercise of market power by Loblaw (1) in its retail operations, and (2) with suppliers. With respect to retail sales to consumers, the Bureau stated that it was concerned more with assessing competitive effects than on establishing a precise market definition. Despite differences between supermarkets, mass merchandisers and drugstore chains, “there is material competition between these retail channels for the sale of the overlapping products, including between the Parties themselves,” it was noted.

Supplier practices. The Competition Bureau also 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. Specifically, the competition authority was concerned that Loblaw might extend its agreements with suppliers that require them to compensate Loblaw for a pre-determined profit margin, to the purchase of products for Shoppers stores after the proposed transaction. As a result, for five years, Loblaw is prohibited 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, according to the Competition Bureau.

“This Agreement addresses the most significant negative competitive effects of the merger by ensuring that consumers continue to benefit from competitive prices in the retail sale of drugstore and pharmacy products in Canada,” said John Pecman, Canada’s Commissioner of Competition in announcing the resolution of the investigation. “The Bureau will continue to investigate Loblaw’s programs related to its relationship with suppliers to ensure that Canadian consumers benefit from vigorous competition.”

Loblaw currently operates 1,414 stores across Canada, approximately 500 of which include pharmacies. Shoppers is Canada’s largest drugstore retailer, with 1,324 stores.

News: Antitrust