For the exclusive use of A. Chhabra, 2020. W14251 1 LOBLAW AND SHOPPERS DRUG MART Leanne Bowden wrote this case under the supervision of Professors Mary Gillett and Christopher Sturby solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2014, Richard Ivey School of Business Foundation Version: 2018-03-19 INTRODUCTION In mid-2013, Galen G. Weston Jr., executive chairman of Loblaw Companies Ltd. (Loblaw), was considering whether it was in his company’s best interest to acquire Shoppers Drug Mart (Shoppers). Shoppers had often been viewed as an attractive acquisition target and a vehicle for future growth. With the recent spin-off of some of Loblaw’s real estate assets and with Shoppers’ shares currently trading at an historically attractive valuation, Weston wondered whether now would be the right time to make an offer and at what price. LOBLAW Loblaw Groceteria was founded in 1919 when Toronto grocers Theodore Pringle Loblaw and J. Milton Cork opened the first self-serve retail grocery store in downtown Toronto, Ontario. Building a network of chain stores, Loblaw Groceteria was the leader in delivering low prices to consumers and changing the way Canadians shopped. After a series of transactions, Loblaw was acquired in 1947 by George Weston Ltd.,2 which by 2012 had become the majority shareholder of Loblaw with a 64 per cent stake in the company.3 Weston Foods, the other operating segment of George Weston Ltd., was a leader in the North American bakery industry.4 With 1,027 outlets in Canada under 22 different banner names, Loblaw had a strong presence nationwide.5 Loblaw operated an almost even split of corporate and franchise stores, with approximately 100 more corporate stores compared to franchise stores.6 Accordingly, a substantial portion of the company’s revenue was generated through amounts received from franchisees. Loblaw sold merchandise to franchisees and also received fees from them in exchange for services related to operating the stores. Inherently, Loblaw was exposed to risks associated with franchise legislation and the reputations of 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Loblaw Companies Ltd. or any of its employees. 2 “About Us,” Loblaw Ltd, www.loblaw.ca/English/About-Us/history/default.aspx, accessed September 22, 2013. 3 Loblaw Ltd, Annual Report, 2012, p. 20. 4 “Home,” Weston, www.weston.ca/en/Home.aspx, accessed September 23, 2013. 5 Loblaw Ltd, Annual Report 2012, p. 3. 6 Ibid. This document is authorized for use only by Avnit Chhabra in 2020. For the exclusive use of A. Chhabra, 2020. Page 2 9B14B003 independent franchisee businesses. Loblaw set up loans to facilitate the franchisee’s purchases of inventory and fixed assets and supported these stores in most operational and brand related operations.7 Loblaw operated two segments: retail and financial services. The retail segment, which made up 92 per cent of the company’s 2012 earnings and 98 per cent of its 2012 revenue, was Canada’s leading provider in general merchandise products and drugs.8 With one of Canada’s strongest private label brand programs, the company was recognized as a pioneer of private label brands among Canadian retail grocers.9 The company’s retail stores sold products under the brand names President’s Choice, no name, PC Blue Menu, Organics PC, Joe Fresh — introduced in 2006 and now one of the leading apparel brands in Canada — and T&T Supermarket, a 2009 acquisition that featured Asian food products not normally found in other supermarkets. President’s Choice had reached such high levels of consumer recognition that it had become the equivalent of a national brand and no longer had the status of a regular private label.10 The success of these product lines encouraged Loblaw to focus heavily on private label products as part of its core strategy. The financial services segment consisted of President’s Choice Financial (PC Financial) which offered core banking and credit services, as well as insurance for cars, travel, houses and pets.11 Within this segment, the company also provided phone services through PC Mobile and a reward loyalty program. PC Financial had more than one million new credit card applications in 2012 alone.12 In May 2013, Loblaw launched its “PC Plus” loyalty program, a digital program designed for smartphones. As shoppers made purchases, they would receive personalized offers and loyalty points.13 Overall, making banking convenient for customers was a core strategy of PC Financial. Although Loblaw had maintained its strength in the industry since its inception, the company struggled in the early to mid 2000s. A leadership change in 2000 led to several initiatives to combat the threat of Wal- Mart’s entry into Canada.14 Conventional supermarkets were experiencing a decline in growth as multi- channel players such as Costco were expanding into the food market. The pressure was on to lower prices to compete with differing store formats.15 Loblaw responded with rapid operational changes including the creation of a new head office in Brampton, Ontario, new distribution centres and streamlined warehouse operations. Unfortunately, these operational changes proved to be a challenge and financial performance began to suffer throughout the mid 2000s. On a November 10, 2005 investor conference call, then President John Lederer admitted that the restructuring of the supply chain and adoption of a common systems platform had taken longer and had been more disruptive than planned. The company had made the strategic decision to move to a common platform to operate as a more efficient national merchandiser. However, problems in implementing the new platform led to difficulties in getting the right product out of the warehouse and on to store shelves.16 Empty shelves in retail stores, repeated stock-outs on staple items 7 Ibid., p. 27. 8 Ibid., p. 9. 9 “Passport Grocery Retailers In Canada,” Euromonitor International, March 2013, p. 26. 10 Ibid, p. 27. 11 Ibid, p. 26. 12 Loblaw Ltd, Annual Report, 2012, p. 4. 13 Media Centre, Loblaw, www.loblaw.ca/English/Media-Centre/news-releases/news-release-details/2013/Media-Advisory- and-Photo-Call—Loblaw-launches-the-PC-Plus-loyalty-program/default.aspx, accessed October 21, 2013. 14 “Reinventing Loblaw,” Weston, www.weston.ca/PDF/GWL_History_Reinventing_Loblaws.pdf, accessed October 21, 2013. 15 “Loblaw Companies Limited — The Evolution to Superstores: Perfect for Quebec; Challenging for Ontario,” CIBC World Markets, September 22, 2004, p. 2. 16 “L.TO — Q3 2005 Loblaw Companies Earnings Conference Call,” Thomson StreetEvents, November 10, 2005, p. 2. This document is authorized for use only by Avnit Chhabra in 2020. For the exclusive use of A. Chhabra, 2020. Page 3 9B14B003 and high-priced wilted produce were significant issues.17 Costs associated with supply chain problems were substantial and dramatically reduced profitability. In 2006, the company experienced its first annual loss in 19 years. Poor operational performance contributed to a significant management change in late 2006. Galen G. Weston Jr. was appointed to the role of executive chairman and Mark Foote was appointed president and chief merchandising officer. The company later developed a “simplify, innovate and grow” strategy with the ultimate goal “to make Loblaw the best again.” “Simplify” focused on clearly defining accountabilities and establishing consistent, simple and efficient processes. “Innovate” meant a continued focus on Loblaw label brands. The company developed a “formula for growth” that encompassed best format, best fresh food offering, private label advantage, great style at an affordable price, making healthy living affordable, providing best value, having products always available and developing friendly associates who were motivated to serve.18 After five quarters of declining earnings, Loblaw returned to profitability in 2007 and resumed its growth trajectory. In 2012, the company earned $650 million of profit on revenues of $31 billion19 (see Exhibit 1). Loblaw continued to explore new store formats and experiences to strengthen its position in the industry. Its flagship store, which opened in Maple Leaf Gardens in Toronto in 2011, included a sushi bar, pizza oven, Ace Bakery and an 18-foot cheese wall. Not only expanding grocery and supermarket stores, the company operated 12 stand-alone Joe Fresh outlets in 2012 to drive apparel sales and increase its presence in the market.20 These included the first international flagship store in New York City, opened on Fifth Avenue in the fall of 2011.21 Loblaw had also decided to test a small store format that would be a fraction of the size of its typical stores. “The Box by No Frills” was first tested in Calgary in 2013. The 10,000 square foot store compared to the usual 25,000 square foot size of other No Frills locations and featured similar merchandise. The 22 purpose of the new concept was to capitalize on urban consumers who valued convenience and value. CANADIAN RETAIL FOOD INDUSTRY The Canadian retail food business was facing significant changes. Industry sales for supermarket and grocery stores in Canada were estimated to be $76.6 billion in 2012 and forecasted to grow at a compound annual growth rate of 1.1 per cent through 2017.