Canada: New battleground for U.S. retailers

Big box retailers Wal-Mart and Target are no strangers to competition, going head-to-head in the U.S. market for more than four decades. But the latest frontier for these two players lies north of the border in Canada.

Wal-Mart is entrenched in Canada with 379 stores, and the majority are super centers. The Bentonville-based retailer entered Canada in 1994 purchasing the Woolco Canada chain and began unveiling its super center model in 2006.

Last year Wal-Mart spent $750 million with 73 new projects adding 4.6 million square feet of retail space in Canada. At the time David Cheesewright, CEO and president of New Walmart Regional Management, said the retailer held the No. 2 spot in a highly competitive Canadian market.

Minneapolis-based Target was much later entering the Canadian market opening its first 21 stores last month, with plans to have 124 retail stores across the country by the end of 2013.

“Welcoming the first Canadian guests at our pilot stores was a great moment for all team members at Target,” said Tony Fisher, president, Target Canada. “We have learned quickly from the results of our pilot stores and are committed to delivering on Target’s (Expect More Pay Less) brand promise as we approach our grand opening in early April.”

Stewart Samuel, analyst and development manager with IGD Services, North America, said Target has chosen to replicate its successful U.S. model, with similar store layouts, category adjacencies and department features.

“Health and beauty and cosmetics were a particularly strong area of the store,” Samuel noted after visiting the first opening.

He said price and value communication in the food and grocery area was strong, with "Target emphasizing its 5% REDcard discount, and its price match guarantee for competitors’ flyer featured items."

“Within conventional supermarkets, Target’s competitors are emphasizing their points of difference around fresh food and service. Within discount retailers, the price and value communication remains as strong as ever,” Samuel said.

Analysts agree it’s too early to tell who will have the edge in winning Canadian market share but the price comparisons have already begun.

LOW PRICE LEADERSHIP
Kantar Retail released a study last week that examined how “Target’s Pay Less” prices stacked up against the “Every Day Low Price” strategy used at Wal-Mart.

The study assessed a basket of 29 national brands in three categories: edible grocery, non-edible grocery and health & beauty aids. Kantar visited competing stores within three miles of each other within the greater Toronto area for this study.

“We found the price of Target Canada’s overall basket was within 25 cents of Wal-Mart’s, totaling $124.02 at Wal-Mart and $124.23 at Target,” according to Kantar analysts Robin Sherk and Amy Koo.

The analysts said the competitors were discounting certain items to leverage the retailers’ pricing image. For instance five items in Wal-mart’s basket were on price “Rollback”, four of those deals were edible grocery items. Conversely, Target had three items on temporary price cuts, and two of those were in the non-edible category.

Kantar says such tight price comparisons so soon after Target’s initial opening signals that the retailer intends to contest its rival’s price position in this market.

The two retailers use different strategies to keep prices lower for consumers, but analysts say the winner will be the one that consistently provides the best bargains and most enjoyable shopping experience. Aside from ‘Rollbacks” Kantar says Wal-Mart’s strategy also includes promotion of multi-item offers that encourage shoppers to stock up, increasing their overall basket size.

“Nobody loves a bargain like a Canadian,” Shelly Broader, CEO of Walmart Canada, told investors last fall.

Walmart Canada conducts weekly price comparisons on 24,000 products. Kantar expects this will heat up as a national Canadian survey last year indicated that 52% of Walmart Canada shoppers were interested in shopping Target Canada for groceries and health & beauty aids.

In 2012, Walmart Canada also vowed to double its private label penetration by 2015, a move that analysts say could pay off.

“Walmart Canada has been quite successful with private label, including the ‘Great Value’ range. More recently the focus has been on extending its premium-tier ‘Our Finest’ products across a wider range of food categories. The track record of both these brands to date suggest a strong willingness by shoppers to buy into private label. There is significant headroom to grow the penetration level of private label in the Canadian market,” Samuel, with IGD, said.

Long term, Target is expected  to focus on the “Expect More” part of its marketing message cementing its fundamental brand position into the minds of Canadian shoppers.

Kantar says national brands will make or break Target’s price leadership perception in the eyes of Canadian shoppers. But during the honeymoon period Target will not rely on consumables to draw traffic. Instead, it will seek aggressive price points to beat or be on par with competitors so shoppers can identify with the “Pay Less” part of the marketing message.

Over time, analysts say it will be crucial for Target to shift promotional price shoppers into routine visitors. At the end of the day, analysts say these two retailers are still competing for the same consumers.

FERTILE GROUND
Canada is seen as fertile ground for retailers touting bargains as analysts say there is a narrower income distribution compared to the U.S. Kantar also notes, that Canadians don’t have a stigma about where they shop, which is quite different from consumers in the U.S. and Mexico.

“There is continuing interest among U.S. retailers to expand into Canada. For many, it represents a first push at international expansion and provides an opportunity to test processes, systems and internal capabilities, Samuel said.

“Canadian market entry is a relatively easy transition for U.S. retailers, given a common language and a high level of awareness of U.S. retailer brands among Canadian consumers. This is also helped by cross-border shopping and cross-border television networks and advertising.”

He adds that U.S.-based retailers can also utilize existing infrastructure such as supply chains.

Discounter Dollar Tree acquired 86 Dollar Giant stores in Canada in November 2010 and began expansion into this market. After adding 41 new stores last year Dollar Tree ended 2012 with 140 stores. Dollar Tree completed some re-branding efforts last year in Canada and plans to expand by 25% more in 2013. The retailer believes Canada can support up to 1,000 Dollar Tree stores.

Bob Sasser, CEO and president of Dollar Tree, said in February the prospects in Canada are bright and the company is still in investment mode there, planning to add up 35 new store this year. He noted that investment will likely put some pressure to the bottom line in 2013. But says the payoff will come in the next year so as top line sales increase.

POTENTIAL HEADWINDS
Samuel says U.S. retailers are also attracted to Canada because of a relatively resilient economy, but some the outlook is not entirely rosy.

“A range of recent indicators suggest a more challenging time ahead, with a slowing housing market, rising unemployment and increasingly high levels of consumer debt, Samuel said. “This could lead to slower growth in retail sales this year and further intensify competitive pressures. With more retailers entering the sector, the focus will be on value, differentiation and offering a compelling shopping experience.”

The analysts also noted concern that Target initially experienced on-the-shelf issues in the first several store openings last month, not unlike what Wal-Mart routinely faces in the U.S. in high-traffic stores. Target is relying on Sobeyes and McKesson for their logistics expertise in food and over-the-counter drug distribution in its Canadian business. Kantar encourages supplier teams in these categories to work closely with third parties to better align inventory demands on a store-by-store basis.

“In particular, the buyer and the third party provider should work to develop plans to increase inventory flexibility, as these providers likely have additional capacity. While this option may come as a greater cost to serve, establishing reliability for Target among its guests is a significant relationship win,” Sherk notes.

Samuel says the initial openings of Target Canada were quite strong and shopper demand did cause some availability issues as well as supply chain glitches.

He said the replenishment problems were not as bad in the subsequent store openings that followed in late March.