On March 21, 2014, the Competition Bureau (the "Bureau") announced that it had entered into a Consent Agreement (the "Agreement") with Loblaw Companies Limited ("Loblaw") regarding its acquisition of Shoppers Drug Mart Corporation ("Shoppers"). The Agreement requires the divestiture of 27 stores and pharmacy operations. Interestingly, the Agreement imposes certain conditions regarding Loblaw's relationship with suppliers.
Background
On July 14, 2013, Loblaw announced that it would acquire Shoppers for $12.4 billion. The deal combines Canada's largest grocery chain with Canada's largest drugstore chain. The combined operations include approximately 2,738 stores and 1,824 pharmacies across Canada.
Bureau's Analysis
In its Position Statement, the Bureau recognized that post-merger, Loblaw would be the largest purchaser and retailer in Canada for many overlapping products sold in both grocery stores and drugstores (e.g., over-the-counter and behind-the-counter medications, health and beauty aids, drugstore-type food, and cosmetics). As a result, the Bureau's analysis focused on (i) retail sales to consumers, and (ii) purchasing from suppliers as they related to these types of products.
Retail Sales to Consumers
The Bureau concluded that the 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. It also found that it was unlikely that any entry by competitors would be sufficient to address the likely anti-competitive effects of the merger.
To preserve competition in these local markets, the Agreement requires Loblaw to divest 18 retail stores (mostly in smaller communities in Alberta, New Brunswick, and Ontario) and nine pharmacy operations within certain stores (mostly in Ontario) to an independent operator. In both cases, the prospective purchasers must be approved by the Bureau.
Purchasing from Suppliers
The Bureau also considered the impact of the merger on suppliers. It determined that Loblaw could exercise market power (or in some instances would have increased market power), in its dealings with suppliers as a result of increasing its volume of purchases.
The Bureau found that certain Loblaw arrangements with suppliers raised competition concerns as they would, post-merger, likely cause a substantial lessening or prevention of competition. On the purchasing side – in particular arrangements requiring suppliers to compensate Loblaw for a pre-determined profit margin based on a mechanism that referenced the advertised prices of other retailers. The Bureau's view was that, absent a behavioural remedy, allowing Loblaw to apply these programs to the purchases currently made by Shoppers would likely negatively impact the incentives and conduct of suppliers, and the ability of other retailers to compete vigorously with Loblaw, particularly on price and product selection.
To address these concerns, the Agreement imposes restrictions on certain Loblaw programs and agreements for a period of up to five years. Broadly speaking, the restrictions prohibit Loblaw from imposing certain terms on suppliers (in particular those guaranteeing Loblaw a minimum margin and calculated with reference to the promotional pricing of competing retailers) in connection with products purchased on behalf of Shoppers stores.
The Agreement also provides a two-year commitment from Loblaw not to charge penalties related to short deliveries (i.e., "fill rate" penalties) and not to charge new supply chain penalties and fees to suppliers that supply less that $4 million of products to Loblaw.
Bureau Continues to Investigate Loblaw's Relationships With Suppliers
Although the merger was cleared with conditions, the Position Statement is quite clear that, while the Consent Agreement addresses the merger-specific issues, the "Bureau's Civil Matters Branch is continuing to investigate Loblaw policies, agreements, and conduct related to pricing strategies and program with suppliers that reference rivals' prices." This statement clearly signals that the Bureau has potentially significant concerns that supplier trade terms being used by Loblaw may be having a negative impact on competition.
For a copy of the Bureau press release, please click here.
For a copy of the Bureau's Position Statement, please click here.
For a copy of the Consent Agreement, please click here.
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