Leon’s says ho-ho-hold the competition?

The marriage of two Canadian brands will boost profitability, even if there’s no immediate danger of an American assault
A customer walks though a Leon’s store in Toronto on Monday November 12, 2012. Leon’s Furniture announced that it is to purchase The Brick at an earlier news conference in the store. THE CANADIAN PRESS/Chris Young

The surprise $700 million tie-up between two of Canada’s best-known furniture retailers—Leon’s and The Brick—is being touted as a defensive move in the face of an all-out assault by U.S. big box retailers. They include Target, which is set to begin opening Canadian stores next year. “During these economic times where we have seen multiple American corporations make inroads in our country through acquisitions, it is a pleasure to see two successful Canadian retailers reach such an agreement that will better serve Canadian consumers,” Terry Leon, the CEO of Leon’s, said in a statement announcing the friendly deal.

There is, however,  no “category killer” coming across the border that threatens either Leon’s or The Brick directly—at least not in the near-term. Target, Wal-Mart, Home Depot and Lowe’s all sell furniture or major appliances, but it’s not their core focus. Even Ikea, the ultra-successful Swedish furniture chain, isn’t considered a big competitor by analysts because it caters to a different type of customer who is looking for cheaper, do-it-yourself furniture and storage solutions.

Instead, the marriage of Leon’s and The Brick appears designed to boost the profitability of two entrenched Canadian players. In the case of The Brick, the biggest threat to its business until recently has come from its head office in Edmonton. The company nearly bankrupted itself during the last recession when a sales slump was magnified by bad product decisions and poor inventory management. Founder Bill Comrie had to step back into the picture in 2009 and help organize a turnaround that included installing a new management team. Vi Konkle, who became CEO last January, has spent the past two years painstakingly rebuilding The Brick’s back-end operations so that the chain can better match its product inventory selection with customer demand.

While the Brick posted a $3.1 million loss in the second quarter, the most recent period for which figures are available, it was mostly due to the repayment of debentures leftover from its financial restructuring. Leon’s, meanwhile, recorded a 20 per cent drop in earnings to $9 million during the same period, which was blamed on higher marketing costs. Both companies are facing reduced demand from consumers as the Canadian housing market cools.

Under the purchase agreement, Brick and Leon’s will continue to be run as separate brands. The cost savings—and, therefore, increased profitability—will come mostly from the increased heft that comes from buying on behalf of both banners. Both chains will also get a boost when it comes to selling over the Web, a growing business, since they will be able to rely on each others’ distribution networks to get sofas and coffee tables in the hands of online customers.

While all of that will no doubt leave Leon’s and The Brick better prepared to do battle with U.S. big box stores, the question is whether regulators will see the deal as something that actually benefits consumers, or reduces overall competition in the marketplace. It may not be a slam dunk. Hence, both sides have an incentive to talk up the threat from south of the border—even if it hasn’t fully materialized yet.