Retail analysts believe large B.C.-based retailers are acquisition targets for large U.S. retailers such as Wal-Mart and Target, which seek to expand by opening urban locations.
The 78-store London Drugs chain and Best Buy Canada, which operates 149 Future Shop and 79 Best Buy stores, are two of the Metro Vancouver-based retailers rumoured to be acquisition targets.
Loblaw Co. Ltd. (TSX:L) used a similar expansion strategy in its attempt to buy Shoppers Drug Mart (SDM) for $12.4 billion to get Joe Fresh and other Loblaw brands into SDM's mostly urban locations. That deal still needs federal Competition Bureau approval.
"Loblaw's move is a sign of what's to come in that once a retailer has exhausted its expansion potential in the markets it's already in, it looks to new markets to go into," said James Smerdon, who is Colliers International's vice-president and director of retail consulting.
Loblaw operates Great Canadian Superstore locations mostly in suburbs. It has little presence in urban areas.
Smerdon said Wal-Mart Stores Inc. (NYSE:WMT) is the most likely suitor for London Drugs or Best Buy because it's large enough to finance such a large deal and intends to expand in Canada.
In late January, Wal-Mart announced that it would spend $500 million in Canada in 2014 on 35 building projects and six new stores.
Target Corp. (NYSE:TGT) is less likely to be making large acquisitions given its struggle to make profitable its 124, mostly suburban stores in Canada. However, Target, which plans to add another nine stores this year, has used the strategy of bulk-buying leases in the past. Target bought leases for 220 Zellers stores from Hudson's Bay Co. in 2011 for $1.82 billion. It then sold 39 of those Zellers leases to Wal-Mart .
But London Drugs CEO Wynne Powell rejected the idea that his company would sell to a larger player. "We're part of a 112-year-old family company that does not wish to sell," said Powell. "We're going to remain an independent, family-owned Canadian company."
Powell said London Drugs is doing well on its own thanks in large part to a doubling of online sales after a substantial investment in e-commerce capacity.
Burnaby-based Best Buy Canada could be a more likely retailer to either be swallowed whole or to sell a bundle of its leases.
Its U.S. parent, Best Buy Co. (NYSE:BBY), is struggling with shrinking margins, profit and revenue while the Canadian subsidiary, which operates Future Shop and Best Buy stores, announced January 30 that it's laying off 950 employees.
"Best Buy is struggling a lot more than London Drugs is, so it might be prudent as a real estate play for Wal-Mart to buy its leases and enter downtown Vancouver that way," said Craig Patterson, who operates the Retail Insider retail analysis website.
"If Wal-Mart were to buy London Drugs, they would probably want to keep the London Drugs name and introduce their own private label products, which I would argue are stronger than what London Drugs currently has."
