Feeling the heat of tough foreign competition in big-box home improvement retailing, Quebec-based Rona Inc. is looking to scale back its array of superstores and focus on smaller outlets, especially in the cutthroat Ontario market.
Rona has circulated a list of 23 of its big-box stores – mostly in Ontario, though two are in Alberta and one is in Nova Scotia – that it aims to either abandon or cut down in size, according to people familiar with the situation.
The chain, which runs about 80 superstores and many smaller outlets, has asked real-estate brokers to pitch for the business of finding retailers to take over the empty or downsized store space.
The list, obtained by The Globe and Mail, includes about 10 stores targeted to be closed and picked up by other retailers, an industry source said. Rona will shrink other stores on the list, aiming to generate better results.
The move underlines the dramatic changes in the increasingly crowded home-improvement segment and the struggles at Rona as it faces more competition from U.S. giants. Lowe’s Cos. arrived in late 2007, while market leader Home Depot Inc. continues to strengthen its leading position. At the same time, Rona and competitors are grappling with a cautious consumer now dealing with a weak economy and high debt levels.
As a result of the increasing pressures, Rona has been viewed by analysts as a prime takeover target, particularly by Lowe’s, which is seeking ways to speed up its Canadian expansion. Meanwhile, Rona’s store locations are appealing to a number of foreign retailers that want to put down roots in Canada. By putting some stores on the market, Rona is raising the stakes for all players.
“What Rona is doing is prompted by strong competition by a network of Lowe’s stores as well as a well established, longstanding network of Home Depot stores,” said James Smerdon, director of retail consulting at Colliers International in Vancouver. “Instead of a single large competitor in Home Depot, now Rona and the other smaller players are facing two real heavyweights in the home-improvement sector.”
A spokeswoman for Rona would not comment on its plans, noting the company will unveil its 2012 strategy on Thursday when it issues its fourth-quarter results. The retailer’s broader blueprint is expected to include beefing up its stores in smaller markets, and possibly even a new store design.
Robert Dutton, Rona’s chief executive officer, has said it will increasingly focus on small and mid-sized markets as consumers’ appetite for big-box stores ebbs. “Regional and small markets is the place that we have more opportunity to grow, recruit dealers or do some acquisition,” Mr. Dutton told analysts in November.
“The future is not in large urban areas, it’s well covered by the existing big-box stores.”
Analysts have muted expectations about Rona’s fourth-quarter performance. Anthony Zicha, an analyst at Scotia Capital, has estimated that the retailer’s fourth-quarter same-store sales dropped 5 per cent. He expects that profit slipped to $20.4-million, or 16 cents a share, from $22.2-million or 17 cents a year earlier.
Mark Petrie, an analyst at CIBC World Markets, said in a note last week, “We expect that the outlook will remain cautious, and efforts will be focused on efficiency and cost controls.”
Last August, Mr. Petrie estimated that each Rona big-box store is worth roughly $10-million.
Rona faces other retail competition, including U.S. discounter Target Corp. , which will open its first stores in Canada early next year. Other foreign rivals include Big Lots, which acquired Liquidation World, Wal-Mart Canada Corp, Crate & Barrel and Bed Bath & Beyond.
Industry watchers predict that retailers such as Target, Wal-Mart and Lowe’s will look at picking up some Rona sites. Most of the stores are leased, so the retailer might prefer to transfer the lease to a retailer other than Lowe’s, which is a direct competitor, analysts say. (Target acquired leases of up to 220 Zellers stores in a $1.8-billion deal last year.)
Lowe’s is “always interested in good real estate sites that meet our needs,” spokeswoman Chris Ahearn said.
With 31 stores in Canada, mostly in Ontario, Lowe’s aims to have about 100 outlets in the long term. A spokeswoman for Target said it’s focused on launching its first 125 to 135 stores in Canada next year.
Rona has remained profitable in recent years, but earnings have been drifting lower and sales have been largely static. The company earned $143.2-million in 2010 on sales of $4.8-billion, down from earnings of $167.5-million (excluding unusual items) on sales of $4.9-billion in 2008.
Rona’s stock price has taken a pounding over the past year, falling to $9.39 at Wednesday's close from nearly $15 a year ago and over $24 in 2007.Report Typo/Error