Leon’s to buy The Brick in effort to stave off U.S. entrants

Misery loves company. On Sunday, Leon's Furniture announced it had launched a friendly C$700-million takeover for its arch-enemy the Brick. The deal, which was mutually embraced by both companies, brings together two furniture chains in the throes of a rocky economic patch, with even tougher times threatening just around the corner.

In March, Target will be open the first of its 127 stores in Canada, all of which will carry the kinds of home furnishings and consumer electronics that Leon's and the Brick feature.

For shoppers, it will mean the end of playing the two big chains against each other when trying to save a few dollars on a mattress, couch or TV set. The companies are planning to follow the Best Buy and Future Shop path of 'competitors' with separate stores, branding and sales strategies, but the same owner and a firm commitment not to undercut each other. Once the deal is finalized, expected early next year, there will be no stomping away from Leon's to get that Sealy Posturepedic for $200 less at the Brick.

Retail sector pain

The merger stems from the hardships both chains have been enduring in recent years. The Brick's stock has been in the doldrums since 2009 when it sunk to C$1, battered by the recession, credit crunch and the near-collapse of discretionary spending.  The Edmonton company has since repaid most of the $110-million it owed bondholders to survive that period, but the months ahead, particularly with the arrival of Target, offered scant prospects for a full rebound.

The deal bolstered investor confidence, sending shares of The Brick up 52.29 per cent, or  $1.83, to $5.33  After an initial dip, Leon's shares were up 0.69 per cent to $11.65 in mid-morning trade.

Indeed, despite having 230 stores under multiple brands, including United Furniture Warehouse of the horrendous jingle, the company opted to be bought out by Leon's, which owns 76 stores.

Leon's has suffered its own set of financial challenges. The Toronto-based retailer experienced a 20 per cent drop in earnings in the last quarter as a result of higher marketing costs.

Those marketing dollars are needed now more than ever as an increasing number of businesses, from Wal-Mart and Target to Ikea, Home Depot, HBC, Jean Coutu and Shopper's Drug Mart, begin to peck away at the furniture and electronics market. In an interview with the Globe and Mail's Marina Strauss, Calgary retail broker Michael Kehoe, called it a "Darwinian Struggle", "It's a brutally competitive landscape and more competition is arriving," says Kehoe, who is with Fairfield Commercial Real Estate.

As Leon's and the Brick seek to shave costs and find efficiencies, both in their back-end operations and purchasing clout, smaller chains like Bad Boy Furniture and Appliances and Furniture Depot can expect the road ahead to get considerably more difficult. Margins, already razor thin in this sector, will be under greater downward pressure, particularly if the housing market continues to remain soft. Where these smaller entities once faced mid-sized competitors, they now must contend with the combined power of this 306-store colossal as well as with all of the other players in the market.

Details of the acquisition are still unknown, but it remains very clear that this is a move primarily to ramp up operations, rather than seeking efficiencies. Few stores are expected to be closed in the months ahead. For Leon's, which has no stores in British Columbia and only six in Alberta, the Brick network significantly boosts its presence in the West.

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