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The Target at the Square One shopping mall in Mississauga. (Fred Lum/The Globe and Mail)
The Target at the Square One shopping mall in Mississauga. (Fred Lum/The Globe and Mail)

The Target invasion: How pricing will be key to Canadian success Add to ...

Another new initiative in Canada – and a nod to price sensitivities – is a digital screen facing customers at the checkouts to show the price of each item being purchased. Cashiers will also be facing customers – rather than standing with their side to the customer – to help them engage with one another better, Mr. Fisher said.

Flyers will be a key communication tool, not just to promote prices but also to tell Target’s story about, for instance, how it teams up with high-profile designers such as Jason Wu and Missoni, he said.

Already Target has cranked up its marketing machine to trumpet its brand in Canada, ranging from a Jason Wu pop-up shop in Toronto in February to rebranding a boutique hotel to its own name during the Toronto Film Festival and running a cross-country bus plastered with the retailer’s logo in the peak holiday shopping season that became a rolling billboard for the company.

Target has revved up its social media presence, although it doesn’t expect to launch e-commerce in 2013 in Canada. “We don’t have a store open yet and we have 570,000 Facebook fans already,” Mr. Fisher said.

Target has learned from J. Crew’s pricing misstep that a retailer has to be clear how it communicates its “value proposition” to consumers, he said. “They care. They’re price conscious.”

The intensified retail landscape – and lessons from other American chains entering this market – have prompted others to change their ways.

Last fall, Abercrombie lowered its prices by 15 to 25 per cent in its namesake Canadian stores, said George Nahra, senior director of strategic planning at the retailer. The prices now are 5 to 7 per cent higher than those in its U.S. stores, compared with 25 to 30 per cent higher previously.

“We’ve certainly heard from our customers that we should think hard about changing our pricing,” Mr. Nahra said. Already the retailer is starting to see a turnaround in its Abercrombie outlets, although it hasn’t yet adjusted prices in its 12 Hollister stores here, he said.

U.S. fashion chain Ann Taylor opened its first stores in Canada last fall with prices that were at par with those south of the border, so far to a positive response, said president Brian Lynch. “Exchange rates are at parity and we see this as an opportunity to offer our high-quality product at accessible prices.”

A stronger Canadian dollar has helped retailers improve their profit margins, said Michael Burt, director of industrial economic trends at the Conference Board of Canada. The net profit margins improved from 1.9 per cent in 2006 to 2.4 per cent in 2011, when the loonie’s value was close or above par. “It appears that not all of the cost savings from lower prices for imported inputs have been passed on to consumers.”

Kevin Chu, an analyst at Accountability Research, said Target’s higher prices will help it eventually generate stronger margins in Canada than in the U.S. – 11 to 12 per cent on earnings (before interest, taxes, depreciation and amortization) compared with closer to 10 per cent in its U.S. stores.

Target’s mix of products – more high-margin apparel and home goods and less low-margin food initially – should help keep gross margins strong, “along with a less crowded marketplace which allows for more pricing power,” David Strasser, an analyst at Janney Capital Markets in Philadelphia, said in a report this month.

Mr. Fisher said Target’s biggest bottom-line edge in Canada is having picked Zellers’ top locations, such as the one at Square One Shopping Centre in Mississauga. The company predicts the Canadian division will be in the black by the end of this fiscal year.

Kris and Ashley Nicholson of Barrie, Ont., who cross-border shop about once a month, will most likely try out Target in Canada as long as the stores have the same brands that they like in the U.S. stores.

However, they enjoy cross-border shopping enough that if prices are any more than 10 to 15 per cent higher at a local store, they’ll hold off on bigger shopping trips and continue heading across the border.

“We make an event out of it,” he said.

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