Wal-Mart's Big Window of Opportunity in Canada

We're about to see a U.S. retail battle play out on Canadian soil.

Target's upcoming entry into Canada is big news for the Minneapolis-based retailer, but also for the existing retail powerhouses in that country, especially U.S.-based Wal-Mart Stores.

This follows from last month's deal for Target to purchase leasehold interests in up to 220 sites from Canada's Zellers Inc., a subsidiary of the Hudson's Bay Co., Toronto, for about $1.9 billion (U.S.)

In finally stepping outside the U.S., Target is following in the footsteps of a string of U.S. retailers of all types operating in Canada.

How much should Target's invasion worry potential competitors, which in addition to Wal-Mart also include Loblaw, Sears, The Bay, Canadian Tire, Winners and Great Canadian Superstore?

While it's never good news when a strong competitor enters a market, there's a bright side for these retailers. Target's entry will actually take place in slow motion, giving competitors time to adjust.

Target will choose up to 220 stores and can't rebrand the units until January 2013 because Zellers will continue to operate them, noted Perry Caicco, an analyst with CIBC World Markets, Toronto, in a research report.

“During the two-year transition period, it is probable that Zellers will invest nothing in these stores and, subsequent to Christmas 2011, begin running down the inventory,” Caicco said.

“This transition period creates an immense opportunity for Wal-Mart [and other players] to pick up substantial market share,” including by renovating units nearby expected Target units, he said. That means a possible growth of capital expenditures by Wal-Mart, Loblaw and others.

As if to remind the world of its own determination in Canada, Wal-Mart followed Target's news with an announcement that it will open 40 new supercenters there this fiscal year, which will bring the total to 164 supercenters and 169 discount stores.

But the bigger question is whether Wal-Mart will alter its operating strategies in preparation for Target's arrival.

One possible step involves real estate. Wal-Mart may speed up future new unit growth, including with sites previously considered secondary, and may opt for a wider variety of formats, Caicco said.

Another possible Wal-Mart direction involves food. Target may be very limited in food merchandising because of the small size of the Zellers stores. As a result, Wal-Mart could use food as a differentiator, Caicco noted. That may lead to upgrades of fresh food programs and layouts, and of private labels, he said.

All of this involves speculation, but it makes sense given Wal-Mart's history of competition.

Let's be clear that Target has a big opportunity in Canada, but it may not be on the food side, and it will require Target to quickly adapt to Canadian consumer tastes.

But Wal-Mart has an equally big opportunity that could play out even before a single Zellers store is rebranded.