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Target's rejected sites in high demand by rival retailers Add to ...

The jockeying for Canadian retail space is heating up as U.S. discounter Target Corp. named the second round of Zellers stores it’s considering for conversion, heightening the race for remaining outlets.

Target also provided another clue to how it will operate in Canada, announcing on Friday that Sobeys Inc., the country’s second-largest grocer, will supply the U.S. chain with groceries.

On the real estate front, Target’s bold foray into Canada has rival retailers scrambling to nab sites rejected by the U.S. chain. The jostling was triggered last January when Target, known for its affordably stylish fashions and home goods, said it would launch in Canada in 2013 by buying the rights to as many as 220 Zellers store leases for $1.8-billion.

Target now plans to open 125 to 135 outlets here – compared to its initial forecast of 100 to 150 outlets – leaving the rest for other merchants to pick up.

With a dearth of attractive retail sites in Canada, Target’s hold on the Zellers leases has become a powerful tool for the U.S. chain, allowing it to gain control of the selection of other retail tenants at many of the sites it declines.

“It’s a chess game,” said retail real estate specialist Alex Arifuzzaman, partner at InterStratics Consultants Inc. in Toronto. “It’s very complex. It has lots of implications.”

Already, archrival Wal-Mart Canada Corp. has sewn up the rights to 39 of the Zellers stores, which it will convert to its own banner. Others, such as Canadian Tire and U.S.-based TJX Cos. Marshalls, are also looking at some of the locations.

Wal-Mart chose sites – mostly in Edmonton, smaller Ontario towns, Quebec and the Maritimes – that fill holes in its network, Mr. Arifuzzaman said. And while Wal-Mart is a competitor for Target, he said it may have been willing to pay more, and take more sites, than other bidders.

On Friday, Target revealed its second tranche of Zellers lease picks – a total of 84, including the 39 being transferred to Wal-Mart. Ultimately, Target will select from just 29 of the locations. In May, it announced 105 Zellers locations that made its first cut – bringing the new total to 134. It will sell the leases it rejects to other Canadian retailers or back to landlords.

It is in Target’s interest to hold on to as many Zellers leases as possible, rather than selling them back to landlords, Mr. Arifuzzaman said. In that way, Target can select retailers it prefers for the leases, minimizing any threat to its own locations.

He said Target didn’t pick as many Zellers leases as initially anticipated possibly because it would have had to spend too much on renovations, or it saw better opportunities to build new sites with landlords such as RioCan Real Estate Investment Trust .

RioCan has plans for a new flagship Target outlet in Toronto, among a handful of new store sites, industry observers said.

The deal with Sobeys is a coup for the grocer, allowing it to use more capacity in its distribution centres, said chief executive Bill McEwan. Under the agreement, Sobeys will provide frozen, dairy and packaged foods, although the companies may look at other supply chain opportunities that could eventually include fresh produce and meat, he said.

The deal could bolster Sobeys’ profit-per-share by 5 per cent, or 25 cents, estimated Peter Sklar, retail analyst at BMO Capital Markets. “Although wholesale grocery margins are relatively slim, the additional contribution from supplying 125 to 135 Target stores could be meaningful as Sobeys’ distribution facilities will be operating at much higher levels of capacity utilization.”

 
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