A combined Leon’s and The Brick should be able to enhance their competitiveness in an increasingly gritty retail environment even though both banners will continue to fly separately, the companies and analysts said Monday.
The friendly purchase of Edmonton-based The Brick by Toronto-based Leon’s for $700 million has less to do with direct competition posed by giant American retailers such as Target or Wal-Mart, they said, than with the need to keep a lid on costs.
“What’s most in the forefront of our minds is: The economy is difficult, generally it’s not growing, and if it is growing, it’s growing very slowly,” said Terry Leon, CEO of Leon’s who will head up the combined entity.
“So the best way to grow and to expand is to, if you can, make a purchase that makes sense.”
The Canadian retail landscape has been shifting in recent years as more American chains in search of growth opportunities make their way north, which has increased competition in retail segments, including furniture.
As well, many Canadian retailers from Loblaw (TSX:L) to Canadian Tire (TSX:CTC.A) have moved to compete by diversifying their offerings, including through furniture sales, to become more of a one-stop shop experience for consumers.
In addition to Wal-Mart and other foreign chains like Ikea, which have been in the Canadian market for years, U.S. retail giant Target is preparing to move into Canada, its first expansion outside the U.S., opening the first of between 125 and 135 stores in March and April at locations once owned by Canadian retailer Zellers.
Leon’s Furniture Ltd. (TSX:LNF), the storied retailer with century-old roots in industrial Ontario, said it would pay a premium $5.40 per share for Brick (TSX:BRK) stock, which closed Friday on the Toronto Stock Exchange at $3.50 per share.
The market seemed to roar its approval, at least as far as The Brick was concerned.
Brick shares shot up 52 per cent, or $1.82, to $5.32 in heavy volume trading Monday, while Leon’s shares added two per cent or 23 cents to $11.80.
The deal comes amid a tough economic climate for furniture retailers with a number of factors, including a softening housing market, taking a toll on sales.
In addition, the influx of American retailers has put upward pressure on land, building and employee costs, making it imperative for others to look for ways to keep costs down.
The companies said they had no plans to close any stores or lay off any employees. Rather, they said, they would try to become more competitive initially by flexing their combined purchasing muscles and by joining distribution channels.
Ken Wong, with the Queen’s School of Business, said the blurring of retail boundaries is having a profound impact on the landscape that goes well beyond new U.S. competition.
For example, Leon’s and The Brick both sell appliances such as fridges and stoves but increasingly, so do other retailers such as Home Depot, Lowe’s and Canadian Tire. Even e-retailer Amazon is thinking of doing the same.
“It’s not just about American versus Canadian — it’s about getting costs down,” Wong said.
“Whoever has the lowest cost wins, provided they know what to do with those low costs.”
Bill Gregson, executive chairman of The Brick board, said the combined entity would be able to offer consumers better value, service and choice than they could do separately.
The store concepts are different, yet complementary, and the two companies should be a good fit, he said.
“We do believe we can do more collectively than we can individually,” Gregson said.
However, both companies said they did not consider Target to be a significant threat given the different merchandise focus.
Wong said it makes sense to keep both banners given their brands are distinct, likening the situation to the merger of Future Shop and Best Buy.
He also said furniture retailers are all chasing the “magic formula” as represented by Ikea, which uses it’s huge buying power to lower its costs.
“Everybody wants to be Ikea. Ikea plays on a global stage,” Wong said.
Even combined, the companies would still have less than 20 per cent of Canada’s furniture market. However, retail analyst John Winter said shoppers should benefit from the deal.
“There’s a larger company which can buy in greater bulk and therefore get greater discounts, and therefore should be able to transmit some of those discounts to the consumer,” Winter said.
Leon’s is slated to report third-quarter results this week. In its second quarter, it saw an almost 20 per cent drop in earnings compared with the previous year as its marketing costs rose.
The Brick also reports third-quarter numbers this week after a net loss of $3.1 million in its second quarter, compared to a net profit of $6.4 million a year earlier.
Leon’s, founded in 1909 in Welland, Ont., has 76 stores with locations in every province except British Columbia.
The Brick, which opened its first store in Edmonton in 1971, has 230 stores operating under The Brick, United Furniture Warehouse, The Brick Mattress Store and Urban Brick banners.
The aim is to close the deal in the first quarter of 2013. While endorsed by both companies’ boards, the sale is still subject to regulatory and Brick shareholder approval.
Mark Leon, chairman on Leon’s board, said the two companies, should be an excellent corporate fit.
“The culture is very similar. Similar dreams. Similar aspirations,” he said.