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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 ...

The construction crews are finishing their work and the signature red-and-white bull’s-eye has been installed outside two dozen stores. Target Corp. is almost ready for its Canadian debut, the most anticipated arrival of a foreign retailer in a generation.

Within weeks, the U.S. discounter will fling open the doors on its first Canadian outlets. By year-end, it will have taken over and fully remodelled 124 former Zellers stores, in some cases bringing new life to drab shopping centres. The company’s marketing machine is gearing up: This week, it used Facebook to give Target fans a sneak peek inside a test store in Guelph, Ont. In the retailing business and in social media, there is growing buzz about the chain that goes by the promotional slogan, “Expect more. Pay less.”

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But that tagline speaks to a big risk for Target in this country. “Expect more” is accurate: Shoppers’ expectations are already sky-high. But “pay less”? Not in Canada.

Target faces a unique problem for a U.S. retailer entering Canada: Customers here are almost too familiar with its stores, thanks to the popularity of cross-border shopping at a time of dollar parity. When the company announced the Zellers deal two years ago, 70 per cent of Canadians were already aware of Target, according to its research; today, it’s 92 per cent. A significant number of them have actually shopped in a U.S. Target store and seen its low-cost, stylish merchandise.

When those people set foot in the first outlets here, they’ll notice the look will be similar, but not all the price tags will be.

“We’ve built our business model to be incredibly competitive with the lowest-priced leaders in Canada,” Tony Fisher, president of Target Canada, said in an interview this week. “We’re not building our business model as compared to the U.S.” when it comes to prices.

The sheer scale and high profile of Target’s launch makes it a potential focal point for consumers angry with U.S. retailers’ higher prices in Canada. A survey last year by Bank of Montreal on a basket of goods found that domestic retail prices are about 14 per cent higher than those in the U.S.

But with the loonie close to par with the U.S. dollar, the issue has become a sensitive one. Finance Minister Jim Flaherty has raised concerns about retail price disparities and called on a Senate committee to study the matter. Its report is due in March – just as Target will be rolling out its first stores.

Other U.S. retailers, including clothiers J. Crew and Abercrombie & Fitch, have felt the public’s wrath when they have charged Canadian customers higher prices. J. Crew, with five stores in Canada now, was forced in 2011 to drop some online fees amid a public outcry (although its pricing is still about 15 per cent higher here). Abercrombie, with seven stores in Canada, in mid-October quietly lowered its prices to levels that are closer to its U.S. rates amid weak Canadian sales.

Target’s challenge is to manage consumers’ high expectations about its low-price model, to ensure its first international foray is a success.

“Target is going to have to work to develop its position if it really wants to be that ‘pay less’ retailer in Canada,” said Robin Sherk, director of market insights at consultancy Kantar Retail of Cambridge, Mass.

Target’s arrival comes as Wal-Mart Canada sharpens its pricing after having started several years ago to run weekly price checks with rivals on thousands of products, lowering prices to match those of competitors. “We try to evaluate where we’re being beaten and we adjust prices accordingly so we can maintain that competitive advantage,” said Lori Vaughn, vice-president of pricing at the Canadian division.

Even so, Wal-Mart’s prices in Canada on a basket of commonly used household and beauty goods are almost 23 per cent higher than the prices of the same products at one of its U.S. stores, shows a survey done this week by mobile research firm Field Agent Canada for The Globe and Mail.

At the same time, in its U.S. market, prices at Wal-Mart and Target are almost at price parity for the some for those items, with Wal-Mart’s prices just 0.5 per cent lower, the survey found.

Retailers here argue that their prices are steeper than those in the U.S. because of higher tariffs, suppliers’ “country” charges and fewer economies of scales in a more scattered and smaller population.

Richard Baker, chief executive officer of Hudson’s Bay Co., said his costs, including labour, are about 35 per cent higher in Canada than in the U.S., where he runs the Lord & Taylor department store chain.

“People understand it’s more expensive to shop in Canada because of the tax situation and cost structure and the way the market is set up,” he said.

Higher prices may be acceptable for the Bay. But they are likely to test the loyalties of Target customers.

Jodi Moss, a Toronto resident and Target fan who came to its store near Buffalo with her daughter on Friday, said she would not tolerate much of a price hike at Target stores at home. She plans to head to Target once it opens in Canada, but would pay just $2 or $3 more for an item than in the U.S. “Maybe,” she said. “But that’s it.”

Pricing expert Augustin Manchon of consultancy Manchon & Co. predicted Target will be able to get away with some higher prices in Canada than in the U.S. Most consumers aren’t constantly rushing south of the border to shop for the types of things they buy regularly at a discounter, such as toothpaste and t-shirts.

“The price doesn’t have to be the U.S. price – it will not be,” he said. “They only have to be reasonable prices.”

Still, even though some costs are higher in this country, many retailers have been complacent about upgrading their systems to be able to improve their price-monitoring tools. “A lot of Canadian retailers still believe they can get away with limited investments.”

Jeff Doucette, general manager of researcher Field Agent, said he expects Target’s pricing to be similar on both sides of the border on its own label products such as Michael Graves. “Margins are already very healthy in these product lines and boosting them up in Canada takes an unnecessary risk in irking the Canadian consumer as did J. Crew.”

Mr. Fisher said Target is banking on its own weekly price checks to ensure it remains at par with the lowest-cost retailers in Canada such as Wal-Mart – although not necessarily at par with its U.S. stores.

It is also counting on its popular REDcard rewards program that provides a flat 5 per cent discount for customers using the retailer’s debit or credit card, he said.

“We’re very keenly focused on price,” Mr. Fisher said. “We’ve learned a lot on why there might be cost differentials compared to what we’ve seen in the U.S. ...

“Yes, it’s ‘pay less,’ which is all about those competitive prices. You can also expect a brighter store, a cleaner store, wide aisles, trend-right merchandise, unique designer partnerships you can’t get anywhere else ... That’s why we think we can differentiate ourselves, because that experience doesn’t currently exist in Canada.”

Target’s research has found that Canadians’ biggest fear is that the retailer is going to change its strategy for this country – dumb it down, so to speak. “People are concerned about Target Canada Lite. I think of it as Target Canada Plus ... We want to bring the exact same brand to Canada and the expectations are quite high.”

He thinks the stores here will draw customers beyond their first curiosity trip partly because they will have the best features of the U.S. stores, such as white – rather than almond – display gondolas for food that give the products a brighter and fresher look, he said.

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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