Canadian pharmacy chain Shoppers Drug Mart is enjoying steady profits in anticipation of the Competition Bureau approving its merger with the Loblaw grocery chain.

In the third quarter of 2013, Shoppers reported a two per cent increase in gross profit, compared to the same time period in 2012. The merger was proposed in July 2013, near the end of the second quarter, and was approved by shareholders in September.

Alan Middleton, a marketing professor at York University’s Schulich School of Business, says the company’s slightly inflated profits can be attributed to a combination of riding out the wave of positive anticipation of the merger with it simply being a good time to be in the pharmacy business.

Shoppers Drug Mart MD&A 3Q (Text)
“It’s probably accelerated in order to make them look more attractive, but one of the great things about drug stores is the demographics of the population are working for them,” Middleton said, speaking about the company’s better than expected returns.

Shoppers’ one notable loss during the third quarter was a one per cent decrease in their net earnings compared to the same quarter in 2012. The company’s 2013 third quarter Management’s Discussion and Analysis attributes the loss to restructuring costs. Middleton says ‘restructuring costs’ could be anything, including preparations for the merger.

The planned combination of Shoppers and Loblaw, which Middleton says was in part born out of fear of the entry of American chains like Target into Canada, will result in a retail product that is formidable, particularly for small, community convenience stores. Middleton says he suspects that efforts to stock Shoppers’ shelves with President’s Choice (Loblaw’s popular food brand) snacks, beverages and other basic groceries will be regionally focussed. For example, Shoppers Drug Marts in areas where there aren’t large Loblaw stores will carry more Loblaw stock in order to compete with nearby convenience stores.

“The retail sector is moving more and more to analyse local trading areas, rather than just deciding what everyone offers on a national basis,” Middleton said.

Shoppers Drug Mart has already waded into diversifying its retail side—and has been rewarded for it. The Management’s Discussion and Analysis notes that the store is making more money from front-of-store sales than from the pharmacy.

Middleton says the acquisition of a drug store by a grocery chain is reflective of a change in Canada’s population demographic shift. Canada’s aging population means visits to the drug store have become a more regular occurrence.

“With an older population where they have to refill prescriptions more frequently, it can become more of a regular place to visit, with the advantage that as you walk to the back of the store to get prescriptions, you walk past all this other stuff that you might normally have to go to a local convenience store for or to buy them at the grocery store,” Middleton said.

Middleton says the model is indicative of what could become a trend. He predicts the Rexall drug store chain will be snapped up in a similar deal sometime within the next year.

Though major changes and effects on structure and finance will not really be evident until after the merger has gone through, Middleton says that there is probably a lot of collaboration already happening between Shoppers and Loblaw in anticipation of the merger.

“Usually what happens when you get takeovers like this, you get a lot of rethinking about what are the back-offers and capabilities they need, what kind of staffing, and all that will be going on right now, but all that will be behind the scenes until such time as it’s formally approved,” Middleton said.

Whether or not the Competition Bureau approves the merger should be announced soon, as it was anticipated to happen around the same time as the release of Shoppers Drug Mart’s annual report, which is slated for early February.