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Should You Add 1 of Canada’s Favourite Brands to Your TFSA Portfolio?

Shoppers Drug Mart is an established Canadian staple that’s evolved to become one of Canada’s most cherished companies after Loblaw Companies Ltd. (TSX:L) scooped it up just over four years ago. Through Shoppers Drug Mart, Loblaw was able to cross-sell various grocery staples (and exclusive brands like President’s Choice) using its existing supply chain and was able to offer fairly reasonable prices to consumers in a more convenient fashion.

Shoppers Drug Mart under Loblaw is a prime example of economies of scale. After four years, there still appear to be additional cross-selling opportunities as Loblaw continues to flex its muscles on the private-label brand front.

Shoppers Drug Mart isn’t just a convenient place to grab your prescription drugs and a snack anymore. It’s now evolved into an incredibly convenient location where you can do your grocery mini-hauls rather than getting lost in the company’s massive supermarkets like Superstore.

For millennials, that’s definitely not a pleasant experience if you’re just looking for a few items, especially since grocery shoppers seldom follow the 15 items or fewer rule at select tills!

There’s no question that millennials value convenience above all else, even if it means paying a slight premium on goods. Time is money, after all. Shoppers Drug Mart has realized this, and they’ve found a niche as a pseudo-convenience store, pharmacy and grocery store and is in great shape to capitalize off the millennials’ continued move toward peak consumer spending.

Shoppers Drug Mart has become more than just a pharmacy, convenience store or grocery store. It’s a combination of all three. When combined with a rewarding loyalty program, there’s no question as to why the Shopper’s Drug Mart brand is the second most admired company in Canada according to Leger’s 2018 Corporate Reputation Study that assessed over 2,100 Canadians on over 240 companies.

Also, a recent poll on the BNN Bloomberg website states that Canadians think that its PC Optimum loyalty program is a mile above all other loyalty programs available to Canadians. Sorry, Aeroplan!

So, is Loblaw a buy for Shoppers Drug Mart?

Shoppers Drug Mart is an excellent business that will thrive for many years to come. Unfortunately, only a quarter of overall sales are derived from the chain. Thus, Loblaw is still an old-fashioned retailer at heart, and with less agility, tech expertise, and logistics capabilities versus up-and-coming disruptors, I believe that Loblaw will be in deep trouble once Amazon.com, Inc. (NASDAQ:AMZN) and other grocery delivery players bring their operations online in select Canadian cities.

As such, the Canadian grocery industry, which already has razor-thin margins, could experience even more pricing pressure to go with an increase in R&D expenses as Loblaw is forced to play in the arena of e-commerce against the likes of an Amazon.

Although Loblaw has partnered with Instacart as a provider of grocery delivery, I don’t think it will be competitive with Amazon’s organic delivery platform that may force Loblaw to absorb any additional costs when it comes to the logistics of grocery delivery.

At this time, Loblaw is facing some pretty severe headwinds that will likely cause the cost of goods sold to surge over the next five years.

Foolish takeaway

Shoppers Drug Mart is a beloved brand, but it’s just one piece in a somewhat complicated puzzle. Given the potential technological disruption that the Canadian grocery scene is about to experience, I wouldn’t recommend touching Loblaw until after the Amazon effect takes its toll. Over the next three years, it’s not too far-fetched to expect to see Loblaw stock fall to the $50 levels as it scrambles to adapt.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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