BUSINESS

The hungry giants

Loblaw moves to buy Provigo while Sobeys seeks IGA

PATRICIA CHISHOLM November 9 1998
BUSINESS

The hungry giants

Loblaw moves to buy Provigo while Sobeys seeks IGA

PATRICIA CHISHOLM November 9 1998

The hungry giants

Loblaw moves to buy Provigo while Sobeys seeks IGA

BUSINESS

Before, it was only talk. But by the end of last week, it was clear that Canada’s biggest grocers are intent on melding themselves into much larger— and potentially much more profitable—supermarket giants. After months of speculation, two of the country’s major chains made billiondollar offers to buy their competitors.

In a friendly takeover, Toronto’s Loblaw Cos. Ltd. will likely merge with Provigo Inc. of Montreal. And Nova Scotia’s Sobeys chain is in pursuit of the Oshawa Group Ltd., also of Toronto, which operates under the IGA and Price Chopper banners. But while the buyers are in search of more customers, it is not clear that customers are in search of them. According to industry experts, most shoppers now patronize several different outlets, large and small, and many place speed and convenience well ahead of store size or loyalty.

Some, like Anne-Marie Kaskens, have even grown to dislike very large stores. The Toronto mother has a new daughter and will return to a teaching job early next year. For her, speed is of the essence. “I went to the big new Loblaw’s to shop recently and it took me an hour and a half,” she says. “I prefer a smaller place where I can be in and out in five minutes, even if it costs more.”

Such is the challenge facing Canada’s food retailing industry, now worth an estimated $65 billion in annual sales: how to satisfy customers like Kaskens who have money to spend but shopping habits that are difficult to pin down. With typical profit margins of less than three per cent, grocers must rely on volume. That reality is partially responsible for the merger urge taking hold among the largest chains. The prospect of new competitors is also fuelling the drive. Consolidation has already swept the U.S. industry, with observers suggesting the biggest American chains could soon turn their attention northward. Retailers like Arkansas based Wal-Mart Inc. and Shoppers Drug Mart of Toronto are also grabbing market share away from established food chains, offering a wide variety of groceries, from butter to bagels. “It is incredibly competitive be-

cause everybody is putting stores in the other guy’s backyard,” says George Condon, editor of Canadian Grocer, a trade magazine.

And as with most close contests, even a slight slump in performance can end in elimination. Rumors of a takeover have swirled around Provigo, Quebec’s largest grocery chain with annual sales of $5.9 billion, since last summer. The company’s profits are respectable—$84.9 million last year—but in-

THEY ARE WHAT YOU EAT

The share of Canadian grocery spending by company, for the first six months of 1998

dustry observers say it can do better. It was also seen as a particularly attractive buy for the gigantic Loblaw, which has deep pockets and only a limited presence in Quebec. And while there have sometimes been concerns in Quebec over the sale of businesses to non-Quebecers, Provigo—35.8 per cent owned by the powerful caisse de dépôt et placement du Québec—fully supports the bid. That may be because Loblaw has promised that, as part of the $ 1.45-billion deal, Provigo will remain a separate company based in Montreal with its own board of directors.

Like Provigo, the Oshawa Group has also been the subject of merger talk. While it ranks second in size among Canadian grocers, it is lagging behind its closest competitors in earnings. Oshawa’s profit was down by about $1 million last year, to $54 million on sales of $6.8 billion. Rumors that it might be sold began to circulate in August after the company’s board of directors passed over heir apparent Jonathan Wolfe, the 46year-old scion of the family that owns 100 per cent of Oshawa’s voting shares, and appointed outsider John Lacey as chief executive officer. Lacey’s last two posts, at WIC Western International Communications Ltd. and Scott’s Hospitality Inc., ended with takeovers.

By comparison, Empire Co. Ltd. with its main asset, the Sobeys supermarket chain, gets high marks from industry watchers for a strong performance in its Atlantic Canada base, as well as a slow but steady expansion in Quebec and Ontario. Although it is far smaller than Oshawa, Empire’s balance sheet is strong and it has expertise in running a franchise network, a mainstay of the Oshawa Group. “They are a very, very good, shrewd, smart retailer,” Condon says. “They understand their customers.” But by the end of last week, the status of its $1.4-billion takeover attempt remained unclear.

All in all, this is “a nice time for supermarket chains,” observes Warren Fenton, an analyst at Toronto-based Dundee Securities Corp. This year many companies are experiencing strong earnings growth of 20 to 25 per cent in a business that, by its very nature, is resistant to boom and bust cycles. “People have to eat,” Fenton notes. And while mergers are usually good for shareholders, that does not mean they are bad for consumers, especially with the possibility of more U.S.based competitors entering the fray, Fenton says. “That is going to prevent these guys from doing what the bank mergers are probably going to do to consumers,” Fenton says, “and that is jack up prices.”

PATRICIA CHISHOLM