Canada Copes With Foreign Invasion

The debut of Target Canada’s first stores last month is likely just another roadblock for the growth of the major traditional chains, but no larger than the challenges they have grown accustomed to over the years.

Minneapolis-based Target Corp. during the last few weeks had “soft openings” of about two dozen of the former Zellers stores it had previously acquired here, with grand openings planned later this month for the newly converted stores. About 125 Targets are slated to open in Canada in 2013.

“It’s a dynamic and competitive market, and everyone has to work smarter and harder to be able to drive volume and deliver results,” said one Canadian retail analyst, who asked not to be identified. “But it’s a very healthy industry.”

Despite that prognosis, observers on both sides of the border have been speculating more and more lately about the future of food retailing North of the Border. Fueling the talk have been maneuvers by two of Canada’s largest chains — Loblaw and Metro — that could free up cash for acquisitions, and the recent discussion of Safeway Canada as an acquisition Target.

Add to this the relentless expansion of Wal-Mart Supercenters in the market, and now the debut of Target Corp., albeit with a limited grocery offering.

Analysts said the new Target stores are very similar in look and feel to their American counterparts, with a small area dedicated to grocery and a large focus on home goods and apparel.

For the three main traditional operators — Loblaw Cos., Sobeys and Metro — Target will likely be more of an annoyance that siphons off some fill-trips rather than a serious threat to steal their primary shopping trips, analysts said.

“I think, undoubtedly, Target will grow share in food and grocery,” Stewart Samuel, a Vancouver, British Columbia-based senior business analyst with IGD, the U.K. research and consulting firm. “In a market that is fairly stable in terms of population growth, adding market share comes at someone’s expense, and the Target grocery offer was leaps and bounds ahead of what Zellers used to have.

“It’s a lot of new square footage coming on stream.”

Still, he said, traditional operators have become accustomed to the market share battles in Canada, where the discount grocery sector is well established and where Wal-Mart has been converting stores to supercenters.

“It’s kind of just business as normal,” Samuel said. “They are always sort of facing that new food space. The amount of new space that’s been added the last few years has been significant, primarily through the Wal-Mart Supercenter expansion.”

In a report issued last year, Kenrik Tyghe, a Montreal-based analyst at Raymond James, estimated that Loblaw captures about 29.9% of the food retail market in Canada, followed by Sobeys at about 14.4% and Metro at 10.9%. Safeway Canada (6.2%), Costco (5.6%), and Walmart Canada (4.3%) followed, although Walmart has increased its share significantly sine that report came out last January, analysts said.

Ed Strapagiel, a Canadian retail consultant, told SN last wek that he believes supermarkets and grocery stores captured about 80.7% of the food retail market in 2012.

“Only five years earlier, in 2007, grocery stores’ share was 85.6%,” he said.

Samuel of IGD noted that Target’s grocery offering in Canada, while ahead of what shoppers could find at Zellers, still lacks the full array of produce and fresh meats that would make it a weekly destination for grocery shopping.

“I think the primary shop at Target will be top-up, but I think it could be more than just a few items,” he said. “There is a significant amount of space dedicated to food in the store — there is some fresh food, and frozen is very strong, so I think Target will do a great job with their food offering, so far from what I can see.

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“They have really taken the U.S. model, which has been very successful for them, and then sort of made it locally relevant by having the right sort of brands for the Canadian market.”

In an interview with SN, a Target spokeswoman said the chain’s food offering in Canada — while not as extensive as the selection in its P-fresh stores in the U.S. — was still a key piece of the chain’s strategy north of the border.

“Grocery is a very important part of our offering,” said Lisa Gibson, the spokeswoman for Target Canada. “We have a great assortment of grocery, and people are responding very well to the grocery offering.”

Although local reports said the chain was suffering from out-of-stocks in the first few days of its soft opening, Gibson said the company had expected to hit a few glitches in its first few days of operation.

“We are still kind of fine tuning, and gauging best practices and getting guest reactions at the store,” she told SN. “When we opened these first few stores, we really wanted to pressure test all the systems before we had all the stores up and running. We knew it wasn’t 100%.”

The company quickly learned, for example, that milk was flying off the shelves faster than the company could restock it, she noted.

SN Blog: Target Sets Sights on Thrifty Canadians

“It was really one of our best sellers,” Gibson said. “So milk was one of those learnings; we know we have to make more frequent deliveries at our other stores.”

She said that response to the stores so far has been “overwhelmingly positive.”

“The stores are clean, the aisles are wide and clutter free; for Canadians, coming into a clean shopping environment is one of the first things they noticed.”

The buildup for Target to enter Canada has been intense — shoppers there are very familiar with the chain, and have been eagerly anticipating its “cheap chic” ambiance.

Super C is one of Canada's well-entrenched discount banners.

“We had a lot of feedback in the last couple of years from people telling us they want us to give them the true Target experience,” said Gibson. “They have expected us to have a lot of specific brands, in grocery and right across the store. That includes both name brands and our own brands, like Market Pantry and Archer Farms,” she said, referring to the company’s leading grocery private labels.

She said Target adopted much of the design and layout of its Canadian stores directly from the U.S., although without the full P-fresh assortment that Target has deployed in its newest stores and remodels in the U.S.

“I guess the biggest difference is that for day one, we don’t have the kind of fresh market offering that Target has in the U.S. — we have bagged carrots and salads, but it’s not like P-fresh,” Gibson explained.

Many of the Target stores — which rely on Stellarton, Nova Scotia-based Sobeys as their primary distributor — feature local brands not found in the U.S., she noted.

“There are nuances of difference, such as the Asian grocery aisles, because of the ethnic diversity here,” Gibson explained.

Read more: Food Less Essential in Canadian Targets: CFO

She declined to provide an estimate for grocery square footage in the stores, but did note that it varies from location to location, as the acquired Zellers stores came in a range of sizes and shapes.

In some cases, the stores are split on two floors — and in one of the first openings, in Toronto, the grocery area was actually on the second floor. It is co-located there with departments geared for moms and babies, “so everything for mom is on the second floor together,” Gibson explained.

Additional two-level stores will be opening across the country, she noted, although most grocery departments are located on the first floor.

Price Messaging

Samuel of IGD said he noticed that the new Target stores in the Toronto area appear to be heavily promoting their price messaging, and price guarantees, throughout the store.

“It will be interesting to see once those stores are open a while, what their promotional strategy will be to drive traffic, because particularly that market, particularly, it is hugely competitive,” he said.

In a press conference last month with local media that was posted online, Tony Fisher, president of Target Canada, repeatedly stressed the pricing message.

“We want our prices to be competitive with the local marketplace, whether that is Windsor [Ontario], whether that’s the local business in London [Ontario], or whether that’s the greater Toronto area,” he said. “We built this business model so that we would have prices that were incredibly competitive all across this country of Canada.”

In addition, he said that since about 90% of Canadians live “within an hour and a half” of the U.S. border, Target is also focusing on making sure its prices across the store are on par with those in the States.

“Border pricing is not just a Windsor issue, it’s really a Target Canada issue,” Fisher said. “We wanted to make sure that we priced our products competitively in the marketplace, and offered an incredible value.

“That is why we will match our lowest price competitor’s printed flier any day of the week.”

In a research report that compared grocery prices at a new Target in Milton, Ontario, with those at a nearby Walmart Supercentre, Peter Sklar, an analyst with BMO Capital Markets, Toronto, found that Target was competitive on most items.

In a basket of 45 grocery SKUs, 19 items were priced the same (within 3 cents) as those at the Walmart Supercentre, 14 items were priced lower at Target, and 12 items were priced higher.

In addition, he noted, shoppers can use the Target REDCard to obtain an additional 5% discount on their basket, which makes those prices even more competitive. Many more of the items — everything from ketchup to butter, cheese, margarine and orange juice — were less than at the nearby Walmart.

“We believe that at these price points, the Target consumer would be encouraged to add grocery into its basket,” Sklar said in the report.

He concluded, however, that given the lack of a complete grocery assortment at Target, “We believe that the leakage of grocery market share from the Canadian publicly traded grocers will be limited to ‘partial’ grocery runs or ‘top-ups’ as a result of Target’s compelling price points, and straightforward and immediate loyalty program.

“We believe that Walmart Supercentre remains the primary threat to the Canadian publicly traded grocers, and Target represents a much less significant competitive threat.”

Samuel of IGD noted that the discount grocery sector in Canada is fairly well-established, with chains like Loblaw’s No Frills, Sobeys’ FreshCo, and Metro’s Food Basics all pricing competitively and offering a strong presentation. In addition, Canada’s traditonal chains have a strong history of success in grocery private label.

One area where Target appears poised to grab share from both supermarkets and drug stores is in its pharmacy and HBC departments.

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“I thought that part of the store was terrific,” said Samuel. “It looked like they had really invested in that part of the store, with a lot of backlit shelving, and a strong offering.”

Samuel said he sees the biggest opportunity for Target in Canada in nonfood areas such as electronics.

Meanwhile, Mississauga-based Walmart Canada, a division of Bentonville, Ark.-based Wal-Mart stores, recently unveiled plans to invest $450 million in the Canadian market this year for supercenter and warehouse projects. It is planning 37 supercenters — mostly expansions of existing stores — adding 1.4 million square feet of retail space.

“This year, we are ramping up our focus on lowering prices and helping customers lower their cost of living, as we continue to bring our supercentre format to more Canadians,” said U.S. supermarket veteran Shelley Broader, president and chief executive of Walmart Canada, in a statement.

The company said it would open its first supercenters in the Maritimes region of Eastern Canada this year.

“We’re truly delighted to be adding a full grocery section to more locations across the country, including the opening of our first supercentres in the Maritimes,” said Broader. “We look forward to helping our customers coast-to-coast save money on groceries as well as their general merchandise purchases.”

As of the end of its most recent fiscal year in January, Walmart Canada had 379 stores, including 209 supercenters. It expects to have 388 total by the end of the current fiscal year next January.

The company has added 35 to 40 supercenters each year for the past several years. In the recently ended year, it completed 73 such projects, including converting 39 former Zellers locations.

The Safeway Question

Two recent announcements have led some observers to consider the possibility that Safeway’s Canadian division might be for sale.

Loblaw in December said it planned to spin off many of its owned real estate holdings into a REIT (real estate investment trust) that it said could raise a significant amount of funds for the retailer. It said the 35 million square feet of real estate that would be spun off — including stores, shopping centers, warehouses and office properties — have an estimated value of about $7 billion. Loblaw said it intends to maintain an 80% ownership in the REIT, which would be spun off as a publicly traded entity in mid-2013.

Separately, Metro in January raised $479 million through the sale of 10 million shares of Alimentation Couche-Tard, the Canadian convenience-store chain that is parent of the Circle K chain in the U.S.

Both announcements raised speculation about the potential of a bid by either company for Safeway’s 225-store Canada division.

Asked for a comment about the potential for such an acquisition, a Metro spokeswoman told SN that the company does not comment on other companies’ strategies, but “to our knowledge, it is not for sale.”

Sklar of BMO Capital Markets noted that he believes that if Safeway Canada were to come on the market, it would have an enterprise value of about $4.5 billion to $5.5 billion.

He suggested that Loblaw, while potentially having to divest some overlapping stores due to regulatory concerns, could realize some synergies from incorporating the stores into its own Western Canada operations. It could also potentially leverage such an acquisition using its planned REIT, by spinning off some of Safeway-owned assets in Western Canada.

Sklar noted in a separate report that Metro “would be a particularly motivated buyer” because it would give Montreal-based Metro, which currently operates only in Ontario and Quebec, a shot at a national presence.

Another analyst, who asked not to be identified, said speculation about the sale of Safeway Canada has been around for about 10 years, given the chain’s strong position in the market and its prime locations.

“Both Loblaw and Metro were sitting on assets that they could have monetized at any time,” the analyst said. “One has a real estate investment that has yet to be monetized, and the other sold shares in Couche-Tard, but they are in many ways coincidental events and they do not relate directly to any potential sale of Safeway.”

Samuel of IGD agreed. “Safeway always pops up as a potential acquisition.”

He noted that Safeway appears to be seeking to grow its sales in Canada, rather than divest its stores, as it discussed rolling out its Just For U digital loyalty program in Canada at its recent investor conference. That rollout is scheduled for the second half of this year.

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Robert Edwards, president of Pleasanton, Calif.-based Safeway, described a “very strong” asset base in Canada, where the company owns a large number of its stores and the “air rights” above them that could be coveted by developers.

For that reason, he said, Safeway is considering the potential of following Loblaw’s lead and spinning those assets into a REIT, after determining that such a move was not viable in the U.S.

“There are some different tax laws and different structures that can be applied in Canada that are different than the U.S.,” Edwards explained.

“Loblaw has established a REIT, and got a big upsize on their stock price. And so we are currently evaluating that. We’ll look at our Canadian assets to see whether that makes sense for a REIT.”

Samuel of IGD said Safeway occupies what he called an “upmarket mass market” niche in the grocery sector, filling a space between the pervasive discounters and the very high-end stores such as Whole Foods.

Sidebar: Independents Innovate With Fresh Stores

Format diversification and experimentation has long been one of the hallmarks of food retailing in Canada.

The three largest, traditional supermarket chains — Loblaw Cos., Sobeys and Metro — all operate multiple banners in various formats, from hard-discount outlets to ethnic stores to supercenters. Lately some independents have been experimenting with some ideas as well, however.

“I see a lot of format innovation; more and more it is the independent sector that is driving that format innovation in the market,” said Stewart Samuel, senior business analyst in the Vancouver, British Columbia, office of British consulting firm IGD.

He cited in particular a new small-format, fresh-focused store called Fresh St. Market, operated by H.Y. Louie, the Vancouver-based operator of IGA stores in Western Canada.

The store, located in a former Safeway in an affluent area in West Vancouver, offers a mix of about 50% fresh foods, Samuel explained.

“It’s almost a mini Whole Foods-type store,” he said, noting that each of the fresh areas is given its own local ambiance in terms of signs and décor.

“I think there’s a little gap in the market for fresh stores around 20,000 square feet or so,” he said.

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Fresh St. Market, which Samuel said could be eyed as a replacement for some of H.Y. Louie’s IGA Market stores, touts both freshness and wellness. Its website — freshstmarket.com — features two main sections, one listing the latest fresh offerings at the store, from ahi tuna to blueberry pie — and the other offering wellness tips and recipes for healthful dishes.

H.Y. Louie could not be reached for comment on the format.

Another comparable store is Thrifty Foods, a small chain Sobeys acquired in 2007. Now numbering 29 stores around British Columbia, Thrifty also features “a very strong fresh focus with an upmarket décor,” Samuel explained.

The stores measure around 20,000 to 30,000 square feet, he said.

Sidebar: Ontario Honors Retailers for Merchandising

The Ontario government is has recognized 68 grocery retailers through its Foodland Ontario Retailer Awards for showcasing and promoting Ontario food in their stores.

The awards come as the Ontario Ministry of Agriculture last week unveiled plans to reintroduce legislation in the form of The Local Food Act that would seek to promote awareness, marketing and sales of food grown and processed within the province.

The four Foodland Ontario Award of Excellence winners were:

• Hurley’s Your Independent Grocer, Ingersoll;

• Stewart’s Town & Country Market, Mildmay;

• Morello’s Your Independent Grocer, Peterborough; and

• Andrew and Emily’s No Frills, Picton.

SN Blog: Target Sets Sights on Thrifty Canadians

Other awards that were part of the program included awards for excellence in promoting Ontario produce in a display; awards for chain and independent stores in three specific categories: seasonal, creative and cross-merchandised; and awards recognizing merchandising excellence with Ontario-grown commodities through three seasonal groupings: spring, summer and fall/winter. The Foodland Ontario Award of Excellence is presented to the top-scoring Ontario retailers, in each store size category, that have won the latter merchandising award two years in a row.

A new award category — the Vision Award — has also been created this year. The award honors the retail headquarters for their corporate support. The first winners of this award are Longo Brothers Fruit Markets and Metro Ontario for their promotion of Ontario foods and partnering with Foodland Ontario.

Flowers Canada of Ontario is also recognizing two Sobeys stores for a pilot display contest.

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The United Food and Commercial Workers Union, meanwhile, issued a statement supporting the Ontario government’s support of local agriculture, but took the opportunity to call attention to the working conditions of agriculture workers in Canada.

“We certainly support the government’s initiatives to promote a stronger Ontario agriculture sector. It is a vital industry and part of the fabric of Ontario,” said Wayne Hanley, the national president of UFCW Canada. “But at the same time, we are concerned the announcement falls short by not addressing the well-being of the more than 80,000 agriculture workers who are currently denied the same workplace rights and protections that most other Ontario workers take for granted.”

In association with the Agriculture Workers Alliance, UFCW Canada operates four agriculture worker support centers across Ontario.

“We need a strong Ontario agriculture industry, but that can only be built with the participation of all the stakeholders — including agriculture workers,” said Hanley. “We are encouraged that Premier Wynne has set her sights on improving the outlook for the Ontario agriculture community. Moving forward, that should include those who grow and harvest our food by making fairness and meaningful representation a reality for Ontario agriculture workers.”

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