The grocery store chain Loblaw lost $12 million in the last quarter of 2013 compared to the last quarter of 2012, a decrease of six per cent.

According to the company’s management discussion and analysis for the year, shown below, the loss was because of operating costs. There were many different costs that Loblaw incurred due to expanding its operations, but by far the biggest was its acquisition of Shoppers’ Drug Mart.

That deal cost Loblaw over twelve billion dollars. It closed on March 28th of this year,

But it’s not just the purchase price that will cost them.

Loblaw will have to get rid of nine stand-alone pharmacies and 18 stores.

Despite these losses, revenues are actually up. Revenue increased 2.3 per cent from the fourth quarter of the previous year.

Over the whole year, this pattern has been the same, with an increase in revenue and slight losses due to operating costs.

According to the management discussion and analysis, the impact of the losses were ameliorated by growth in their gas bar sales and growth in their clothing line, Joe Fresh, as driven by online sales. Their financial services segment has also done well.

These increases just weren’t enough to offset the expenses.

But even though the merger with Shoppers will cost Loblaw in the short term, in the long term it could set them up for more success. Ian Lee, a business analyst and professor at Carleton University, says Loblaw’s strategy in purchasing Shoppers was a good one, and tied to changing demographics.

He says the two companies tapped into different portions of the market, and therefore a merger was a win-win for both.

“Loblaws is very strong in the suburbs because land is much cheaper there,” said Lee. “The nature of grocery retailing has always been big box stores in the suburbs.”

But Shoppers’ business model has always been exactly the opposite, said Lee.

They have always had many small stores in downtown, urban areas.

According to Lee, the merger will allow Loblaw to “penetrate the urban core,” which has become home to increasing numbers of young people over the past two decades.

It will also allow Shoppers to move their branded products into the suburbs.

It is crucial for grocery stores to be able to diversify, says Lee, because of the low profit margin involved in selling food.

“Grocery stores make money…because we all have to buy groceries every week,” said Lee. But he said that in order to succeed, the stores need to have things with a better profit margin than food.

That’s another area where the Shoppers merger can help both companies.

“It’s not that they’re trying to take over another industry,” said Lee, “but they need things that will bring up their profit margin.”

But Lee says that despite the success that comes from expanding the pharmacy brand and merging the two companies, he is wary of Loblaw trying to diversify too much.

He is wary of pinning too many hopes on the Joe Fresh clothing line, which offset much of the loss in 2013’s fourth quarter. Although the clothing line helped them in the short term, he is not as optimistic about its long-term success.

“It’s too soon to say,” said Lee. “It may become a niche product.”

Clothing is also more profitable than food, but Lee worries the clothes take too much floor space in stores and distract from Loblaw’s core product.

“I don’t think most people want to go to the grocery store to buy clothes,” said Lee.

Loblaw itself seems to have every confidence in its clothing line. Joe Fresh