Why Leon's wants to buy The Brick

The CEO of Leon’s Furniture says its takeover of rival retailer The Brick is motivated by growing competition in Canada’s retail sector.

Terry Leon said Monday the $700-million deal, which has the support of The Brick’s board, is aimed at fending off U.S. competitors making inroads in Canada.

"Our combined team will have access to national buying opportunities in merchandising and marketing, and a national distribution network that will enable us to greatly enhance our online shopping capabilities," he said.

It’s not clear what the move means for the consumer, Ken Wong, a Queen’s University business professor in Kingston, Ont., told CBC News.

"The potential is there to reduce costs," he said.

"However, it takes a while for some of these efficiencies to reach the retail store and sometimes these efficiencies never happen."

An example, Wong said, was the Bay’s purchase of Zellers in 1981, where the two chains "had such different product lines and serviced such a diversity of consumers that there was simply no opportunity to integrate so no cost reduction."

The two chains are facing new competition, chiefly from global heavyweights such as Ikea and American retail giants Target and Wal-Mart.

'All of a sudden everybody seems to be selling everything.' —Ken Wong, Queen's University business professor

Target plans to begin opening up to 135 stores across Canada in the coming year.

Wal-Mart is adding 73 stores across Canada in the coming months, including the 28 Zellers leaseholds that Wal-Mart bought from Target.

But Wong says it’s not just those players.

In the area of major appliances, he said, "we’ve got Lowe’s, we’ve got Home Depot, Future Shop, even Canadian Tire. So what we’re seeing is this blurring of retail boundaries, and all of a sudden everybody seems to be selling everything."

A softening housing market and high unemployment have also taken a toll on retail sales.

Wong sees a minimal likelihood that the two brands will be combined into one.

The Brick, based in Edmonton, and Leon’s, which was founded 103 years ago in Welland, Ont., "have a distinctive flavour, depending on their region, slightly different product lines and slightly different service mentality."

Shares of The Brick surged 52 per cent, or $1.82, to close at $5.32 Monday, the first day of trading after the agreement was announced on the weekend.

Leon's says it will pay $5.40 per share. Its shares gained 23 cents, or two per cent, to $11.80.

Both report earnings this week

Leon will remain CEO of Leon's and become CEO of the combined company. 

The Brick's president and CEO, Vi Konkle, will continue as president of The Brick, the companies said.

For its second quarter, Leon's reported a nearly 20 per cent drop in earnings compared with a year ago as its marketing costs rose.

The retailer is scheduled to report its third-quarter results this week.

The Brick reported a net loss of $3.1 million, or three cents per share, in its second quarter compared to a net profit of $6.4 million or 12 cents per share in the same period last year.

The company said the loss included a one-time payment of $17.1 million related to a debenture redemption.

It also reports its third quarter results this week.

Leon's is one of Canada’s biggest retailers, with 76 stores, and locations in every province except British Columbia, selling furniture, major appliances and home electronics.

The Brick has 230 stores operating under The Brick, United Furniture Warehouse, The Brick Mattress Store and Urban Brick banners.