Competition Bureau statement regarding METRO Inc.'s acquisition of The Jean Coutu (PJC) Group Inc.

Position statement

OTTAWA, May 16, 2018 — On April 23, 2018 the Commissioner of Competition entered into a Consent Agreement with METRO Inc. (Metro) to remedy competition concerns related to Metro's acquisition of The Jean Coutu Group (PJC) Inc. (Jean Coutu). The Consent Agreement requires that Metro:

  1. sell certain properties or leases to an alternate supplier of distribution and banner services; and
  2. take steps to terminate franchise, distribution and associated agreements related to pharmacies located in eight markets in Quebec.

Following an extensive review of Metro's proposed acquisition of Jean Coutu, including analysis of over 150 local markets where both parties provide distribution and franchise services to independent pharmacists, the Bureau concluded that, in the absence of this agreement, the transaction would have been likely to lead to a substantial lessening of competition in eight local markets. The Consent Agreement ensures that competition is preserved for pharmacy distribution and franchising services in these Quebec markets:

  • Amos;
  • Baie-St-Paul;
  • Berthierville;
  • Carleton-sur-Mer;
  • Coaticook;
  • Disraeli;
  • La Baie; and
  • La Sarre.

Background

As part of its review of the transaction, the Competition Bureau interviewed a variety of stakeholders, including franchisees of the merging parties, competitors, suppliers, and industry experts. The Bureau obtained a significant volume of records and data from a number of these stakeholders, and it analyzed the parties' internal company records and econometric industry and sales data. This statement summarizes the approach taken by the Bureau in its review of the proposed transaction.Footnote 1

The parties

Metro is a Montreal-based food retailer and distributor which operates or supplies over 600 grocery stores in Ontario and Quebec. It also supplies a number of small food and convenience stores in Quebec, Ontario, and New Brunswick. Through its wholly-owned affiliate, McMahon, Metro provides distribution and franchise services to independent pharmacists at approximately 180 locations, operating in Quebec under the Brunet, Brunet Plus, Brunet Clinique and Clini Plus banners.

Jean Coutu provides distribution and franchise services to a network of 419 pharmacies in Quebec, Ontario and New Brunswick under the PJC Jean Coutu, PJC Clinique, PJC Santé and PJC Santé Beauté banners. In Quebec, Jean Coutu provides distribution and franchise services to approximately 380 pharmacies and also owns Pro-Doc, a manufacturer of generic pharmaceuticals.

On October 2, 2017 Metro and Jean Coutu announced that they had reached an agreement whereby Metro would acquire Jean Coutu for $4.5 billion.

Analysis

The Bureau's analysis focused primarily on the horizontal overlap between Metro and Jean Coutu's competing pharmacy distribution and franchise services businesses in Quebec. Both Metro and Jean Coutu supply prescription medication and front-store products (over-the-counter medications, health and beauty aids, cosmetics, and confectionary and food items) to a network of pharmacy franchisees in Quebec operating under franchise agreements. Metro and Jean Coutu also provide a variety of banner services to these franchisees, including branding, retail price suggestions, and access to private-label products, among others. In exchange, the parties receive a variety of payments from franchisees (including, for example, franchise royalties, wholesale prices paid for goods, and distribution fees), which are collectively referred to herein as the "upstream price".

The Bureau's review ultimately focused on whether the merger was likely to substantially lessen competition in local geographic markets where both Metro and Jean Coutu supply a franchise pharmacy under their respective networks. The Bureau considered whether, following the transaction, Metro would have the ability and incentive to increase upstream prices charged to pharmacists, decrease the quality of banner services provided to pharmacists, or otherwise influence retail prices at pharmacies in the relevant markets, including through suggested retail pricing. The Bureau also examined whether such incentives would be likely to lead to higher prices or decreased services for consumers.

In order to evaluate Metro's ability to increase upstream prices, decrease the quality of banner services, or otherwise influence downstream prices, the Bureau reviewed the parties' franchise contracts, examined the parties' internal business records, and interviewed franchisees and industry experts. The Bureau also considered the regulatory framework governing pharmacies in Quebec, including requirements that pharmacies be independently owned and operated by pharmacists, and regulations establishing that the Régie de l'assurance maladie du Québec regulates certain components of the price for prescription drugs. The Bureau concluded that, post-merger, through the parties' franchise contracts, Metro would have the ability to unilaterally modify certain components of upstream pricing and that, even when pricing was specified or regulated, Metro would have the ability to influence downstream price through a number of components of banner service quality, or through suggested pricing.

Subsequent to determining that Metro would have the ability to materially increase prices, the Bureau also concluded that, post-merger, Metro would have an increased incentive to substantially increase upstream prices, decrease the quality of banner services, or otherwise influence downstream prices, in each of the eight markets of concern. The Bureau's analysis found that, pre-merger, a price increase at a Metro pharmacy would have resulted in a significant portion of sales being lost or diverted to a competitor. Post‑merger, the Jean Coutu banner pharmacies would recapture a sufficient portion of these lost or diverted sales at the wholesale level, to make the price increase profitable for Metro.

To evaluate this change in incentive, the Bureau engaged internal economic experts to conduct a horizontal merger simulation using market share and margin information collected from the parties, as well as from competitors. In addition, the Bureau's internal economists conducted regression analyses to examine whether franchisees were likely to pass on upstream price increases, and determined that it was likely that a significant portion of such price increases would be passed on to consumers. This economic modelling is consistent with the Bureau's approach to similar cases involving horizontal overlap at the distribution or wholesale level. Using this approach, the Bureau assessed over 150 potential local markets, and each of these markets were analyzed to predict anti-competitive effects that might result from the merger.

The Bureau's results showed that post-transaction Metro would have had the incentive to materially increase upstream prices and influence downstream prices in eight local markets. In each of these markets, the Bureau concluded that the merger was likely to substantially lessen competition due to the loss of rivalry between Metro and Jean Coutu, and the limited number of remaining pharmacy competitors in each of the eight local markets. The Bureau found that entry into these local markets would not be likely, timely or sufficient to address the probable anti‑competitive effects of the merger.

Remedy and Conclusion

In each of the aforementioned eight markets, the Bureau concluded that without a remedy the transaction would likely have resulted in substantially higher prices or decreases in services for consumers.

In order to remedy the likely substantial lessening of competition, Metro has agreed to sell certain properties or leases to an alternate supplier of distribution and banner services, and to take steps to terminate franchise, distribution and associated agreements related to pharmacies, located in the eight local markets in Quebec. The Commissioner is satisfied that the terms of this remedy, as set out in the Consent Agreement, address the concerns related to the proposed transaction.

This publication is not a legal document. The Bureau's findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau's assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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