Competition Bureau Approves Loblaws’ Acquisition of Shoppers Drug Mart Subject to Divestitures and Restrictions on Contracting Practices With Suppliers
On March 20, 2014, the Commissioner of Competition (Commissioner) and Loblaws entered into a consent agreement, whereby Loblaws agreed to 27 divestitures as well as behavioural remedies vis-à-vis its suppliers in order to address the Commissioner’s concerns that its acquisition of Shoppers would substantially lessen competition.
As is typical for retail mergers, the Commissioner determined that the geographic market is local and conducted a review, utilizing both traditional market share metrics and econometric analysis, to determine the effect of the acquisition on the retail sale of overlapping products. The Commissioner identified competition issues in 27 localities with respect to the sale of (i) pharmacy products (including prescription and non-prescription drugs), (ii) drugstore type merchandise (including food, cosmetics and health & beauty products), or (iii) both.
To address these concerns, Loblaws agreed to divest 18 retail stores (including both Loblaws and Shoppers stores) as well as nine pharmacies located within Loblaws stores. The divestitures are located in Alberta (3), British Columbia (1), New Brunswick (2), Nova Scotia (2), Newfoundland (2), Prince Edward Island (1) and Ontario (16).
After interviewing relevant stakeholders and reviewing Loblaws’ internal documents, the Commissioner also identified vertical concerns with Loblaws’ supply practices that the Commissioner contends would likely negatively impact consumers upon the acquisition of Shoppers. More specifically, the Bureau was concerned with agreements whereby Loblaws seeks financial compensation from suppliers to maintain its profit margin in the face of price competition. Furthermore, the Commissioner was concerned with the treatment of small suppliers.
To address the former concern, Loblaws agreed, for a five year period, not to enter into supplier agreements with such financial compensation; this is a blanket prohibition with respect to Shoppers stores and, with respect to Loblaws stores, a prohibition relating to specified products (including non-prescription drugs, beverages and certain cosmetic and health & beauty products). Additionally, for the same five year time period, Loblaws agreed not to incorporate Shoppers stores into any such supplier agreements, whether by procuring for Shoppers stores or by benefitting from volumes purchased by Shoppers stores. Otherwise, to address the latter concern, Loblaws agreed (for both Loblaws and Shoppers stores) not to penalize small suppliers for failing to meet certain supply chain metrics and not to seek cost reductions except in certain limited circumstances for a two year period.
Finally, Loblaws is obligated to provide written explanation to its suppliers about the applicability of its supply practices in light of the consent agreement in addition to general information about its supply practices.