WAL-MART FACES CHALLENGE IN CANADA

BRIAN DUNN

TORONTO - Wal-Mart may be biting off more than it can chew.

As reported last month, the company plans to introduce its supercenter concept to Canada with two or three store openings slated for Ontario in late 2006 or early 2007. One of the stores in London, Ontario, is an existing 130,000-square-foot Wal-Mart which will be expanded by one-third, according to a Wal-Mart spokesman. Another will be built in east-end Toronto.

But one industry analyst thinks it's a bad move for Wal-Mart Canada, based here, which has 256 stores in this country and plans to open an additional 25 in 2006. Most of them already carry groceries. It also has six Sam's Clubs, a number it has been stuck at since launching the first ones in 2003.

In addition to groceries, the supercenters will sell fresh produce, meats, and delicatessen and bakery products.

"It's fine to speculate for Wal-Mart to roll out a more comprehensive food strategy nationally and it's appropriate that Canadian grocers and investors should be concerned," Perry Caicco of CIBC World Markets, Toronto, wrote in a report. "But that doesn't mean it's a good idea for Wal-Mart."

Caicco estimated Wal-Mart spends between $70 million and $90 million (U.S.) a year on store openings and expansions in Canada. A rapid expansion into food would probably double that amount, depending on how aggressive the expansion is. But he said the returns would be "dubious." And he figured it would take at least five years for Wal-Mart to build an image in the grocery business.

And there's another problem for the retailing giant, according to Caicco.

"Unlike the U.S., Canada is particularly well-served by strong grocers, and Canadians are not exactly crying for a new alternative grocer. Therefore, Wal-Mart may find the sales build to be slower than we have forecast and much more expensive than it had planned."

Then there's Loblaw Cos., which has been preparing for supercenters for a number of years. So while Loblaw intends to continue growing its general merchandise in a market that contains several large and weak department stores whose market shares are eroding, Wal-Mart is trying to build its food business in a market containing some of the strongest grocers in the world, Caicco said.

Sobeys and Metro, the No. 2 and No. 3 grocery players in Canada, respectively, will probably feel more pain from the supercenters than Loblaw, which has been expanding its own superstores, according to Rick Pennycooke, president of Lakeshore Group, a Toronto-based retail-development consultant.

"While Loblaw was expanding into general merchandise, both Sobeys and Metro chose to stick to their core grocery business, which is why Loblaw will probably weather the initial storm better," Pennycooke said.

Instead of launching a price war, grocers will offer better services "such as cooking classes and dry cleaning," he suggested.

He said there's a lot of competition in Scarborough, the east-end Toronto area where Wal-Mart plans to build a new supercenter.

"There has to be at least 10 supermarkets in a five-square-mile radius, but it's an extremely densely populated area," he said.

Competition is no less fierce in London, Ontario, with two A&Ps, a Sobeys, a Price Chopper and two Loblaws in a five-mile radius, Pennycooke said.

"Canadian grocers have spent the better part of the past decade preparing for this event," Caicco said, "and it may well occur that Wal-Mart at one point alters, slows or somehow abandons the supercenter program in Canada."