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.
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.
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
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
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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