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Discount stores adjust to shaky economy Add to ...

On the weekend, Wal-Mart Canada ran a one-day sale of a back-to-school staple – a 200-sheet pack of Hilroy paper for a mere 9 cents (regular: $2).

While it’s nothing new for the discount titan to roll back prices, the weekend record drop for paper was a sign of the times: It’s now the new normal for retailers in today’s uncertain economy to trumpet sharp deals or risk losing business.

In an ultra-cautious consumer climate, North America’s two largest discounters – U.S. parent Wal-Mart Stores Inc. and Target Corp. – are betting their low costs will help nab bargain-seeking customers in the important back-to-school season. Worth almost $70-billion (U.S.) in the U.S. alone, it’s the second busiest shopping period after Christmas and something of a test for that crucial selling season.

Still, recent market volatility and a sluggish economy don’t bode well for merchants. “Retailers are adjusting to the new normal, slow, hard-fought gains,” said Sandy Kennedy, president of the Retail Industry Leaders Association, a trade association based in Arlington, Va. “ …Adjusting to unpredictable events as they emerge remains a difficult challenge for retailers to meet.”

Both Wal-Mart and Target are expected to provide a glimpse of how they will grapple with the shaky economy when they report their second-quarter results this week. But the backdrop is gloomy: U.S. consumer confidence reached a three-decade low this month, according to the much-watched Thomson Reuters/University of Michigan index, which fell to 54.9 from 63.7 in July. Unemployment is at a stubborn 9 per cent. Even so, U.S. retail sales in July perked up 0.5 per cent, the Commerce Department said – the biggest gain in four months.

Target, which is preparing to launch its first stores in Canada in 2013, is better positioned for tougher times as it races to remodel stores and add a limited offering of groceries to them, said Matt Arnold, retail analyst at Edward Jones & Co. in St. Louis.

Target’s same-store sales rose almost 4 per cent in the second quarter while those sales at Wal-Mart’s core U.S. stores probably dropped between 0.5 per cent and 1 per cent, Mr. Arnold estimated. Wal-Mart is coming off two years of declines in same-store sales at outlets open a year or more – a key measure in retailing.

Squeezed by dollar stores and their expanded offerings, Wal-Mart has rushed to re-stock its shelves after its misstep of having dropped an array of products in an attempt to simplify its operations.

Target may benefit from better-heeled consumers who shop at its stores and have a bit more cash, while Wal-Mart draws a low income shopper who is having a tough time paying off debts and is more reticent to spend in the choppy economy, he said.

Nevertheless, the wobbly economy may spur some mid-income consumers to trade down to Wal-Mart. And both Wal-Mart and Target are expected to get some relief as gas prices drop, prompting more shoppers to drive to the mall.

Target has its own challenges. It’s no longer alone in offering “cheap chic” fashions and home goods as department stores and other specialty chains jump on the affordably-stylish bandwagon, said Neil Currie, an analyst at Dahlman Rose & Co. in New York.

Target racked up roughly $60-million of pre-tax expenses for its ramp-up of its Canadian division, he said. In the long term, the chain’s business in Canada may serve it well but it won’t help Target in these uncertain times.

Follow on Twitter: @MarinaStrauss

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