Loblaw and Shoppers Drug Mart1

For the exclusive use of A. Chhabra, 2020.

W14251

LOBLAW AND SHOPPERS DRUG MART1

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.

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.

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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.

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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 purpose of the new concept was to capitalize on urban consumers who valued convenience and value.22

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. Loblaw held 32.5 per cent of the grocery retail market share in 2012, although this market leadership position had been threatened by strong domestic competitors as well as growing threats from U.S. firms expanding into Canada. Sobeys Inc. (Sobeys) was the second largest firm in the industry with 17 per cent share, followed by Metro (10 per cent) and Safeway (9.3 per cent).23

17 “What Ails Loblaws?,” Canadian Capitalist, November 28, 2007, www.canadiancapitalist.com/what-ails-loblaws; accessed June 26, 2014. 18 Loblaw Ltd, Annual Report, 2006, p. 4. 19 All currency in Canadian dollars unless specified otherwise. 20 “Passport Grocery Retailers In Canada,” p. 27. 21 Media Centre, Loblaw, http://www.loblaw.ca/English/Media-Centre/news-releases/news-release-details/2011/THE-JOE- FRESH-BRAND-TAKES-A-BITE-OUT-OF-THE-BIG-APPLE1124271/default.aspx?print=1, accessed on November 2, 2013. 22 “Loblaw Testing Small Discount-Store Format in Calgary,” The Canadian Press, June 19, 2013, www.cbc.ca/news/business/loblaw-testing-small-discount-store-format-in-calgary-1.1360574, accessed June 25, 2014. 23 Eben Jose, “Supermarkets & Grocery Stores in Canada,” IBISWorld Canada (44511CA), January 2013, http://clients1.ibisworld.com/reports/ca/industry/default.aspx?entid=1040, accessed June 25, 2014.

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Sobeys Inc. (Sobeys)

Sobeys was a wholly owned subsidiary of Empire Company Ltd. (Empire) and was headquartered in Stellarton, Nova Scotia. Founded in 1907 by J.W. Sobey, the company continued to have a strong East Coast presence in Canada.24 Sobeys operated 1,259 retail outlets across the country, more than half of which were located in Quebec and Atlantic Canada, under the banners Sobeys, IGA, Thirty Foods, IGA extra, Fresh Co, Lawtons Drugs, Rachelle-Béry, Needs Convenince Boni Choix, Tradition and Fast Fuel. The company had three private labels: Compliments, Gourmet Minute and S!gnal. To grow revenues and to diversify, Sobeys expanded into financial services in 2012, introducing a no fee chequing and high interest savings account. It had also expanded into the gas station and convenience store market, recognizing the shift in consumer spending to non-traditional vendors.25

Metro

Headquartered in Montreal, Metro was founded in 1947 through the formation of a buying group of independent retailers in Quebec.26 Metro acquired The Great Atlantic and Pacific Company of Canada (A & P Canada) for $1.7 billion in 2005 in order to enter the Ontario market and to contend with Loblaw and Sobeys.27 In 2011, Metro acquired Marché Adonis, a chain of food stores specializing in Mediterranean food and ingredients, to enter the ethnic food segment. In 2013, Metro had more than 600 stores under several banners including Metro, Metro Plus, Super C and Food Basics and over 250 drugstores under the banners the Brunet, the Pharmacy and Drug Basics. The company operated two private label brands, Irresistibles and Selection, each with related sub-brands. In the Quebec market, Metro introduced private label wines Hémisphere and Les Vins du Marché.

Market Changes

The historic leaders in the industry were affected by a number of industry trends. Canadian consumers were not only shopping for food at traditional grocery stores such as Loblaw but at various non-traditional vendors including mass merchandisers, warehouse clubs, convenience stores, drug stores, specialty food stores and gas stations. Domestic retailers had shifted focus to consumer preferences for fresh, healthier and ethnic groceries to compete in the mature but changing market. The hypermarket28 channel recorded growth of 10 per cent in 2012 and was expected to rise in 2013 with Target’s entry into Canada.29 In 2006, Wal-Mart Canada had begun to build supercentres that sold food (along with other merchandise) and had 164 supercentres in place in 2012 with plans to build more.30 Costco had 85 locations in Canada with plans to grow to 110.31 Favourable increases in the duty-free exemption on cross-border consumer goods became effective in June 2012, further driving Canadian shoppers to the United States. Online

24 Our History,” Sobeys, www.sobeyscorporate.com/en/Our-Company/History.aspx, accessed September 23, 2013. 25 “Passport Grocery Retailers In Canada,” p. 34. 26 Corporate Profile, Metro, http://corpo.metro.ca/profil-corpo/historique/1947.en.html, accessed September 23, 2013 27 Metro Inc, “Metro Inc. Acquires A&P Canada,” http://corpo.metro.ca/centre- nouvelles/archives/communiques2005/20050719.en.html, accessed September 23, 2013. 28 A hypermarket is a retail store that combines a department store and a grocery supermarket. Definition provided by www.investopedia.com/terms/h/hypermarket.asp, accessed September 29, 2013. 29 “Passport Grocery Retailers In Canada,” p. 1. 30 Arnika Thakur, “Walmart Canada Bets Big on Supercenters,” Reuters, January 26, 2011, http://ca.reuters.com/article/domesticNews/idCATRE70P2YH20110126, accessed June 25, 2014. 31 Hollie Shaw, “Costco Continues No-Frills Expansion as Target, Walmart Retail Race Heats Up,” Financial Post, April 6, 2013, http://business.financialpost.com/2013/06/04/costco-continues-no-frills-expansion-as-target-walmart-retail-race-heats- up/, accessed June 25, 2014.

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shopping options were entering the market during this time, adding to the already heated competitive environment.

Canadian retailers were responding to the increased competition by offering in-store promotional activities — selling at lower prices to draw customers into the store and increase sales volume.32 Higher income Canadians, however, were trending toward cross-shopping.33 They would go to discount retail outlets for staples but then move to high-end outlets for higher quality foods such as cheese and produce. Retailers sought ways to keep customers in the store by offering the full package. A 2011 survey by a Toronto-based firm suggested that 15 per cent of Loblaw grocery shoppers would switch to Target.34 Although it was too early in 2013 to quantify the effect of Target’s entry, the pressure to respond was at the forefront of traditional retailers’ minds.

SHOPPERS DRUG MART (SHOPPERS)

Founded in 1962 by Toronto pharmacist Murray Koffler, Shoppers was the licensor of full-service retail drug stores across Canada under the banners Shoppers Drug Mart and Pharmaprix.35 At the end of 2012, there were more than 1,240 Shoppers Drug Mart/Pharmaprix retail drug stores located in prime locations across the country. Shoppers also operated 55 medical clinic pharmacies under the name Shoppers Simply Pharmacy (Pharmaprix Simplement Santé in Quebec) and six luxury beauty stores operating as Murale.36

The majority of stores were operated under the “associate” model, under which a pharmacist is licensed to operate a retail drug stores at a specific location using the company’s trademarks. Shoppers would provide capital and financial support 37 to enable associates to operate the stores, as well as support in the form of operational assistance, marketing and advertising, purchasing and distribution, information technology and accounting. Associates would pay Shoppers for this support and would also remit a substantial share of store profits.38

Shoppers had a number of initiatives that encouraged customer loyalty. It had numerous private label brands that were highly respected, including Life Brand, Quo, Etival Laboratoire, Balea, Everyday Market, and Bio-Life. Life Brand was the number one over-the-counter brand in Canada. Shoppers had an extremely popular loyalty program, “Optimum,” which had more than 10 million cardholders. Customers could accumulate points through purchases and were sent offers that were personalized to their tastes. Shoppers also leveraged information technology through programs such as “HEALTHwatch,” which offered patient counselling and advice on medications and general health and wellness.39

Shoppers generated net earnings of $608 million on sales of $10.8 billion in 2012 (see Exhibit 2). The company focused on two main segments: front store sales and pharmacy sales. Front store sales consisted of over-the-counter medications, health and beauty aids, cosmetics and fragrances, everyday household

32 “Passport Grocery Retailers In Canada,” p. 1. 33 Cross-shopping occurs when consumers shop for a product category through more than one retail format or visit multiple retailers on one shopping trip. Definition provided by www.prenhall.com/divisions/bp/app/berman3/cw/glossary.html, accessed June 25, 2014. 34 “Passport Grocery Retailers In Canada,” 49. 35 “Our History,” Shoppers Drug Mart, “http://corporate.shoppersdrugmart.ca/en-ca/about-us/our-history, accessed September 24, 2013 36 Shoppers Drug Mart, Annual Report, 2012, p. 3. 37 Including a guaranteed minimum earnings. 38 Ibid., p. 24. 39 Ibid., pp. 6–13.

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needs and seasonal products. Sales within the two segments were fairly evenly split40, and the company actively sought ways to increase front store sales focusing on health, beauty and convenience. Sales growth in 2012 was 4% in this area compared to 2% in pharmacy sales.

CANADIAN PHARMACY AND DRUG STORE INDUSTRY

The size of the pharmacy and drug store industry in Canada was $33.4 billion in 2013. Shoppers was the largest company by far, owning 33.3 per cent market share. This was followed by Katz Group Pharmacies Inc. (parent company of Rexall pharmacies), which had 21.9 per cent share, and the Jean Coutu Group, which had 8.7 per cent share. Shoppers was the only pharmacy chain with locations in every part of the country, as Rexall locations were all west of Quebec and a vast majority of Jean Coutu locations were within Quebec. Overall, concentration of the largest firms was high, with the remaining landscape relatively fragmented. However, threats were emerging from mass merchants such as Costco, Walmart and Target, as well as online drug providers, who competed mainly on price.41

There were a number of trends that affected pharmacy and drug store sales. First, Canada had an aging demographic. By 2036, it was expected that people over 65 would represent over 25 per cent of the population (more than twice the current rate) and would account to close to 45 per cent of government spending on health care. This demographic shift would result in a consistent and growing demand for health care services and pharmaceuticals.42

While Canada was aging, it was also becoming increasingly diverse. By 2031, the percentage of foreign- born citizens was expected to grow from 20 per cent to 26 per cent. The majority of immigrants were expected to settle in major metropolitan areas. This resulted in the need to cater to diverse cultural needs in areas where they resided.43

Technology also created opportunities in the pharmacy business. The promise of new and better pharmaceuticals developed by cutting-edge research and technology was a huge potential source for growth. Also, improvements in information technology allowed for pharmacies to better understand their customers and offer products that improved their health.

The most significant external influence on the pharmacy and drug store industry was health care reform and the related regulatory environment. Most drug sales were reimbursed or paid for by third-party payers, including governments, insurers and employers. Governments had authority to regulate many aspects related to drug sales, including the allowable drug cost of a prescription product, the permitted markup of such products, the allowable dispensing fee that could be charged and the degree to which drug manufacturers could provide allowances to pharmacies in exchange for carrying products.44

In the interest of reducing its own costs for publicly administered drug plans as well as private plans, the Ontario government announced a series of reforms in 2010 that substantially impacted the profitability of pharmacies. Among the most consequential reforms was the reduction in the price allowed for generic drugs to 25 per cent of the branded drug equivalent (previously it was 50 per cent). Additionally, manufacturer allowances would be eliminated. These changes would be applicable to both private and

40 In 2012 pharmacy and front sales were 47 per cent and 53 per cent of total sales respectively. 41 Anna Son, “Pharmacies & Drug Stores in Canada,” IBISWorld Canada (44611CA), March 2013, www.prweb.com/releases/2013/3/prweb10550272.htm, accessed June 25, 2014. 42 Shoppers Drug Mart, Annual Report, 2012, p. 5. 43 Ibid. 44 Ibid, pp. 52–54.

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public drug plans, but the timing of the cuts would be different for each. The Ontario government also banned drugstores from manufacturing their own private label generic drugs, a concept that Shoppers had initiated under the “Sanis” brand.45

Given that the majority of Shoppers’ stores were in Ontario, the new regulatory changes significantly affected the future profitability of the company. Following the news of these changes on April 7, 2010, shares in Shoppers immediately declined by 9 per cent to $38.92 and continued to fall as other provinces announced similar plans (see Exhibit 3). In early 2013, there were further developments when provinces collaborated and reached a deal whereby provincial drug plans would pay only 18 per cent of the branded drug equivalent for six widely used drugs by buying the drugs in bulk.46

Shoppers and other pharmacies had vigorously opposed the imposed regulatory changes to the point that they appealed the decision to ban pharmacies from manufacturing their own private label drugs all the way to the Supreme Court of Canada. The outcome of this case had not yet been decided and was far from certain. This, in addition to the potential for further prohibitive regulations, was a major risk factor in operating the business.

SHOPPERS AS A POTENTIAL ACQUISITION TARGET

For a number of years, Shoppers had been perceived as an attractive merger candidate by Loblaw management. Beyond the apparent strategic fit with Loblaw’s ongoing focus on health, wellness and nutrition, there were numerous synergies that were obvious, including the promise of reduced operating expenses, reduced cost of goods sold and opportunities to enhance each company’s loyalty and financial services programs. With respect to operating expenses, management saw opportunities for savings in marketing, supply chain, information technology and infrastructure costs. In the area of cost of goods sold, there were opportunities for efficiency in purchasing and also increasing the penetration of private label brands. Management also saw an opportunity to integrate each company’s loyalty program and to grow the PC Financial brand. The total potential synergies in the event of a Loblaw/Shoppers merger were estimated to be in excess of $300 million per year.47

Management at Loblaw and Shoppers had held discussions with respect to a possible merger over the previous three and a half years. Over that period, Shoppers had also been approached by many other firms and had reached out to some of them to discuss potential deals.48

Throughout 2013, there were a number of developments that affected the competitive landscape within the supermarket and grocery store industry in Canada. On June 12, Empire announced that Sobeys had acquired substantially all of the assets of Canada Safeway Ltd. (the Canadian assets of the U.S. parent company) for a cash purchase price of $5.8 billion, plus the assumption of some liabilities. Canada Safeway Ltd. had 213 full service grocery stores in Western Canada, along with 199 in-store pharmacies, 62 fuel stations and 10 liquor stores. The company generated $6.7 billion of sales and $513 of EBITDA (earnings before interest, taxes, depreciation and amortization) without synergies, which Sobeys anticipated to be $200 million per year. The Canada Safeway acquisition would solidify Sobeys’ position

45 Perry Caioco, “Shoppers Drug Mart Corporation — A Heavy Blow,” CIBC World Markets, April 7, 2010. 46 Susan Lunn, “Provinces Reach Deal to Save on 6 Generic Drugs,” CBC News, January 18, 2013, www.cbc.ca/news/politics/provinces-reach-deal-to-save-on-6-generic-drugs-1.1331370, accessed June 25, 2014. 47 Loblaw and Shoppers conference call, July 15, 2013, http://event.on24.com/eventRegistration/EventLobbyServlet?target=lobby.jsp&eventid=658120&sessionid=1&key=CE6458F ADBA8B6E1FB869CBF5E40B764&eventuserid=88925411, accessed on October 20, 2013. 48 Ibid.

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as the second largest retailer in Canada, with anticipated consolidated sales of $24 billion, and would make Sobeys the largest grocer in Alberta.49

Loblaw itself had undergone quite an organizational change when it decided to sell its real estate assets into a newly created real estate investment trust (REIT).50 Under the proposal first made in December 2012, Loblaw would initially transfer approximately 75 per cent of its substantial real estate holdings, which were estimated to be worth between $9 and $10 billion, to the REIT and continue to hold a substantial 83.1 per cent ownership interest in the newly formed entity.51 Units of “Choice Properties REIT” would trade on the Toronto Stock Exchange (TSX) exchange where they could be bought and sold by investors. The initial public offering was planned for early July 2013.

Management believed that the REIT transaction could unlock value for Loblaw shareholders, maximize the value of its real estate portfolio and ultimately lower the cost of capital for real estate projects. Additionally, when the transaction was announced in December 2012, REITs were in very high demand by the investing community. Given that interest rates were very low, it was a challenge for investors seeking high-yielding investments to generate a high rate of return. REITs were perceived by some as a riskier alternative to fixed-income investments, and the demand for new issues was very high. Immediately after the REIT transaction was announced, the Loblaw share price increased from $33.6 to $38.2 (a 13.7 per cent increase), and shares continued to climb until they reached a closing high of $50.64 in early June 2013.

With Loblaw shares trading near a six-year high (see Exhibit 4), there was now the attractive opportunity to use the shares as a currency to make an acquisition. Was now the appropriate time to make an offer to acquire Shoppers? Did the acquisition make strategic sense? If so, at what price and how would Loblaw pay for the acquisition? As a starting point, management looked at comparable companies to get a sense of relative valuation (see Exhibit 5).

In less than a century, Loblaw had grown from a single location in downtown Toronto into Canada’s largest grocer, with nationally recognized private label brands, an embedded financial institution and exciting new growth vehicles like the Joe Fresh fashion label. It was time to decide whether an acquisition of Canada’s largest pharmacy chain was the next logical step in the company’s evolution.

49 Empire Company Ltd. Press Release, “Sobeys Inc. To Acquire Canada Safeway. Empire Company to Own 100 per cent of the Combined Company,” June 12, 2013. 50 A trust was an organizational form that allowed an entity to distribute its cash to investors in a tax-efficient manner. 51 Loblaw Press Release, “Loblaw to Create One of the Largest Real Estate Investment Trusts in Canada,” December 6, 2012.

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EXHIBIT 1A: LOBLAW CONSOLIDATED BALANCE SHEET, 2011/2012 (IN CDN$ MILLIONS)

2012 2011 For the period ended 12/29/2012 12/31/2011 Assets Current Assets Cash & Near Cash Items 1,079 966 Short-Term Investments 716 754 Accounts & Notes Receivable 456 467 Inventories 2,007 2,025 Other Current Assets 2,409 2,250 Total Current Assets 6,667 6,462 LT Investments & LT Receivables 463 413 Net Fixed Assets 8,973 8,725 Other Long-Term Assets 1,858 1,828 Total Assets 17,961 17,428 Liabilities & Shareholders’ Equity Current Liabilities Accounts Payable 3,720 3,677 Short-Term Borrowings 1,577 992 Other Short-Term Liabilities 99 49 Total Current Liabilities 5,396 4,718

Long-Term Borrowings 4,997 5,493 Other Long-Term Liabilities 1,151 1,210 Total Liabilities 11,544 11,421

Shareholder’s Equity Share Capital & APIC 1,622 1,588 Retained Earnings & Other Equity 4,795 4,419 Total Equity 6,417 6,007 Total Liabilities & Equity 17,961 17,428

Source: Loblaw 2012 Annual Report – Financial Review, Pages 43-47

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EXHIBIT 1B: LOBLAW CONSOLIDATED STATEMENT OF EARNINGS, 2011/2012 (IN CDN$ MILLIONS)

2012 2011 For the period ended 12/29/2012 12/31/2011 Revenue 31,604 31,250 Cost of Merchandise Inventories Sold 24,185 23,894 Gross Margin 7,419 7,356 Selling, General and Administrative Expenses 6,223 5,972 Operating Income 1,196 1,384 Interest expense and other financing charges 331 327 Earnings before income tax 865 1,057 Income Tax 215 288 Net Earnings 650 769

Source: Loblaw 2012 Annual Report – Financial Review, Pages 43-47.

EXHIBIT 1C: LOBLAW CONSOLIDATED STATEMENT OF CASH FLOWS, 2011/2012 (IN CDN$ MILLIONS)

2012 2011 For the period ended 12/29/2012 12/31/2011

Cash From Operating Activities Net Income 650 769 Depreciation & Amortization 777 699 Other Non-Cash Adjustments 155 338 Changes in Non-Cash Capital 55 8 Cash From Operations 1,637 1,814 Cash From Investing Activities Disposal of Fixed Assets 62 57 Capital Expenditures (1,017) (987) Increase in Investments − − Decrease in Investments − − Other Investing Activities (34) 74 Cash From Investing Activities (989) (856) Cash from Financing Activities Dividends Paid (177) (193) Change in Short-Term Borrowings − 360 Increase in Long-Term Borrowings 111 287 Decrease in Long-term Borrowings (115) (909) Increase in Capital Stocks 22 21 Decrease in Capital Stocks − − Other Financing Activities (376) (415) Cash from Financing Activities (535) (849) Net Changes in Cash 113 109

Source: Loblaw 2012 Annual Report – Financial Review, Pages 43-47.

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EXHIBIT 1D: SELECTED LOBLAW RATIOS

FY 2012 FY 2011 FY 2010 FY 2009 FY 2008 For the period ended 12/29/2012 12/31/2011 1/1/2011 1/2/2010 1/3/2009 Liquidity Ratios Current ratio 1.24 1.37 1.20 1.20 1.23 Quick ratio 0.42 0.46 0.39 0.60 0.50 Cash flow from operations 0.30 0.38 0.41 0.53 0.31 Resource Management Ratios Days inventory 30 31 33 33 26 Days receivable 5 5 9 9 10 Days payable 56 56 53 50 36 Financial Capacity Ratios Debt to total capital 0.62 0.82 0.70 0.72 0.45 Debt to equity 1.62 1.70 1.17 1.24 0.81 Times interest earned 3.61 4.23 4.65 4.48 3.98 Operating cash flow to debt 0.16 0.18 0.20 0.25 0.21 Profitability analysis Earnings margin 3.78% 4.43% 4.09% 3.90% 3.42% Gross margin 23.47% 23.54% 24.53% 23.00% 22.44% Pretax margin 2.70% 3.38% 3.21% 3.00% 2.50% Profit margin 2.10% 2.46% 2.20% 2.10% 1.80% Return on assets 3.67% 4.49% 4.24% 4.53% 3.98% Return on equity 10.46% 13.25% 11.37% 10.86% 9.69% Utilization Ratios Capital assets turnover 3.52 3.58 3.40 3.59 3.90 Total asset turnover 1.79 1.82 1.94 2.12 2.23 Basic EPS,1 GAAP2 2.31 2.73 2.42 2.39 2.01

1EPS: earnings per share 2GAAP: generally accepted accounting principles

Source: Bloomberg and case writer calculations.

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EXHIBIT 2A: SHOPPERS DRUG MART CONSOLIDATED BALANCE SHEETS, 2011/2012 (IN CDN$ MILLIONS)

2012 2011 For the period ended 12/29/2012 12/31/2011 Assets Current Assets Cash and Short Term Investments 105 119 Accounts Receivable—Trade, Net 470 493 Total Inventory 2,148 2,042 Prepaid Expenses 42 41 Total Current Assets 2,765 2,696 Property/Plant/Equipment, Total—Gross 3,184 3,064 Accumulated Depreciation, Total (1,457) (1,286) Goodwill, Net 2,573 2,500 Intangibles, Net 340 282 Long Term Investments 7 6 Other Long Term Assets, Total 62 39 Total Assets 7,474 7,300

Liabilities & Shareholders’ Equity Current Liabilities Accounts Payable and Accrued Liabilities 1,207 1,109 Notes Payable/Short Term Debt 421 172 Current Port. of LT Debt/Capital Leases 450 250 Associate Interest 174 153 Other Current liabilities, Total 83 92 Total Current Liabilities 2,335 1,776 Long Term Debt 247 696 Provisions 4 2 Other Long-term Liabilities 517 520 Deferred Income Tax 47 39 Total Liabilities 3,150 3,032 Shareholders’ Equity Common Stock, Total 1,431 1,486 Additional Paid-In Capital 11 10 Retained Earnings (Accumulated Deficit) 2,916 2,806 Treasury Stock — Common 0 (5) Accumulated other comprehensive loss (35) (30) Total Equity 4,323 4,268 Total Liabilities & Shareholders’ Equity 7,474 7,300

Source: Shoppers Drug Mart Corporation Annual Report 2012, pages 67-70.

This document is authorized for use only by Avnit Chhabra in 2020. For the exclusive use of A. Chhabra, 2020.

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EXHIBIT 2B: SHOPPERS DRUG MART CONSOLIDATED STATEMENT OF EARNINGS, 2011/2012 (IN CDN$ MILLIONS)

FY 2012 FY 2011 12/29/2012 12/31/2011 Revenue 10,782 10,459 Cost of Revenue 6,609 6,416 Gross Profit 4,173 4,042 Operating Expenses 3,292 3,132 Operating Income 881 911 Interest Expense 58 64 Pretax Income 823 847 Income Tax Expense 215 233 Net Income 608 614

Source: Shoppers Drug Mart Corporation Annual Report 2012, pages 67-70.

EXHIBIT 2C: SHOPPERS DRUG MART CONSOLIDATED STATEMENT OF CASH FLOWS, 2011/2012 (IN CDN$ MILLIONS)

2012 2011 For the period ended 12/29/2012 12/31/2011

Cash From Operating Activities Net Income 608 614 Depreciation & Amortization 318 296 Other Non-Cash Adjustments (25) 31 Changes in Non-Cash Capital 15 32 Cash From Operations 917 974 Cash From Investing Activities Disposal of Fixed Assets 51 55 Capital Expenditures (254) (342) Increase in Investments 0 0 Decrease in Investments 0 0 Other Investing Activities (192) (63) Cash From Investing Activities (395) (349) Cash from Financing Activities Dividends Paid (219) (211) Change in Short-Term Borrowings 248 (165) Increase in Long-Term Borrowings 0 0 Decrease in Long-term Borrowings (253) (3) Increase in Capital Stocks 1 1 Decrease in Capital Stocks (335) (207) Other Financing Activities 21 14 Cash from Financing Activities (536) (570) Net Changes in Cash (14) 54

Source: Shoppers Drug Mart Corporation Annual Report 2012, pages 67-70.

This document is authorized for use only by Avnit Chhabra in 2020. For the exclusive use of A. Chhabra, 2020.

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EXHIBIT 2D: SELECTED SHOPPERS DRUG MART RATIOS

FY 2012 FY 2011 FY 2010 FY 2009 FY 2008 For the period ended 12/29/2012 12/31/2011 1/1/2011 1/2/2010 1/3/2009 Liquidity Ratios Current Ratio 1.18 1.52 1.92 1.62 1.29 Quick Ratio 0.25 0.34 0.36 0.33 0.26 Cash flow from operations 0.39 0.55 0.53 0.41 0.26 Resource Management Ratios Days inventory 115 113 110 110 107 Days receivable 15 17 15 18 18 Days payable 63 59 55 57 62 Financial Capacity Ratios Debt to total capital 0.37 0.37 0.38 0.52 0.56 Debt to equity 0.60 0.58 0.61 1.09 1.29 Times interest earned 15.30 14.22 14.80 15.38 13.56 Operating cash flow to debt 0.36 0.39 0.33 0.26 0.19 Profitability Analysis Earnings margin 5.64% 5.87% 5.81% 5.86% 6.00% Gross margin 38.70% 38.65% 38.35% 37.53% 36.92% Pretax margin 7.64% 8.10% 8.21% 7.64% 7.64% Profit margin 5.64% 5.87% 5.81% 5.64% 5.64% Return on assets 8.24% 8.51% 8.47% 8.24% 8.24% Return on equity 14.17% 14.46% 14.70% 14.17% 14.17% Utilization Ratios Capital assets turnover 6.28 5.92 5.96 6.38 7.08 Total asset turnover 1.46 1.45 1.46 1.51 1.57 Basic EPS, GAAP 2.92 2.84 2.72 2.69 2.55

Source: Bloomberg and case writer calculations.

This document is authorized for use only by Avnit Chhabra in 2020. For the exclusive use of A. Chhabra, 2020.

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EXHIBIT 3: SHOPPERS DRUG MART STOCK CHART

Shoppers Drug Mart Stock Price 70

30 Closing share price 20

Source: https://ca.finance.yahoo.com/q/hp?s=L.TO, accessed June 26, 2014

EXHIBIT 4: LOBLAW STOCK CHART

Loblaw Stock Price 90

40 Closing share price 30

Source: https://ca.finance.yahoo.com/q/hp?s=SC.TO, accessed June 25, 2014

This document is authorized for use only by Avnit Chhabra in 2020. Page 16 9B14B003

EXHIBIT 5: SELECTED COMPETITOR FINANCIAL INFORMATION

North American Food Retailers Relative Valuations (May 1, 2013) P/E EV/EBITDA (x) EBITDA ROE Mkt Cap Margin Company (US$) Ticker Share Price ($) LTM CFY NFY TTM CFY (TTM) (%) ($M) Whole Foods Market WFM 89.02 31.2 31 26.2 13.3 12.8 9.62 16.4 16,498 Costco Wholesale COST 108.22 24.9 23.8 21.5 12 11.4 3.76 17.1 47,224 Loblaw Cos Ltd (C$) L 44.75 16.3 17.4 15.8 8.5 8.3 6.45 11 12,623 Wal-Mart Stores Inc WMT 78.06 15.5 14.6 13.3 8.5 8.2 7.74 23 257,008 This document is authorized for use only by Avnit Chhabra in 2020. Metro Inc. (C$) MRU 68.26 13.5 13.6 12.6 8.4 8.2 7.03 18.8 6,513 Empire Co Ltd (C$) EMP.A 68.4 12.7 13.1 12.4 6.3 5.8 4.88 10.5 4,648 Safeway Inc. SWY 22.7 10.2 9.9 9.4 5.1 5.2 5.01 17.7 5,471

North American Drugstores Relative Valuations (May 10, 2013) P/E EV/EBITDA (x) EBITDA ROE Mkt Cap For the exclusive use of A. Chhabra, 2020. Margin Company (US$) Ticker Share Price ($) LTM CFY NFY TTM CFY (TTM) (%) ($M) Rite Aid Corp RAD 2.56 9.5 18.6 12.7 7.4 7.4 4.46 N/A 2,316 Shoppers Drug Mart SC 46.67 15.8 15.7 14.8 8.9 8.8 11.05 14.2 9,448 Walgreen Co WAG 48.72 19.9 15 13.2 11.1 8.9 6.38 13.4 46,161 Jean Coutu Group PJC.A 16.82 16 15 14 9.9 9.6 11.79 23.9 3,605 CVS Caremark Corp CVS 58.03 17.1 14.6 13.1 8.5 8 7.6 11.2 71,052

P/E = Price to Earnings EV/EBITDA = Economic Value to Earnings before interest, taxes, depreciation and amortization EBITDA = Earnings before interest, taxes, depreciation and amortization ROE = Return on equity Mkt Cap = Market Capitalization LTM = Last twelve months CFY = Current fiscal year NFY = Next fiscal year TTM = Trailing twelve months

Source: Keith Howlett and Kane Rao, “Loblaw Companies Limited,” Morning Pulse, Desjardins Capital Markets, May 2, 2013; Keith Howlett and Kane Rao, “Shoppers Drug Mart Corporation,” Morning Pulse, Desjardins Capital Markets, May 13, 2013.