Discounter Wal-Mart Canada Corp. is pumping up sales at the expense of its bottom line as the company focuses on grabbing business from rivals in an intensely competitive retail field.
The Canadian division of the world’s largest merchant posted a 0.2-per-cent sales gain at stores open a year or more – a key retail measure – and a “triple-digit” jump in e-commerce sales, executives at parent Wal-Mart Stores Inc. said Thursday in releasing second-quarter results. But the Canadian business saw its operating profit fall because of reduced prices and a shift to stocking more low-margin groceries.
Overall, the U.S. parent improved its second-quarter profit by 0.6 per cent, but cut its annual earnings outlook amid mounting investments in the business and disappointing U.S. sales, which were squeezed by dollar stores and online rivals.
“Our enterprise strategy dictates that we move with speed and agility to serve our customers more effectively,” Doug McMillon, chief executive officer at Wal-Mart, told a conference call. “We are pushing to save them time and money, both in-store and online.”
Wal-Mart’s flurry of investments in its digital and physical-store operations is putting pressure on domestic rivals to keep up and offer competitive prices at a critical time in retailing when consumers increasingly are shifting to e-commerce and low-cost alternatives.
The massive changes in the merchandising market give deep-pocketed Wal-Mart an edge to move swiftly, but also threatens to pinch its profits as it pours money into new initiatives.“We know how tough the market is,” said Stewart Samuel, program director at market researcher IGD Canada. “It’s Wal-Mart’s strategy globally – they want to be the lowest-price and lowest-cost leader. The lowest-price leader is going to be in a strong position, if not ultimately win.”
As Wal-Mart’s steps up its efforts, its U.S. discount archrival Target Corp. is racing to recover from a botched Canadian roll out of 130 stores since the spring of 2013. Under new leadership here and south of the border, Target is focused on winning back shoppers with lower prices, an improved supply chain and new merchandise. But even as its business suffers, its stores are pulling customers from incumbents, contributing to the crowded market. And Target still has no e-commerce in Canada.
Online selling “provides Wal-Mart Canada with another advantage over Target,” said Keith Howlett, retail analyst at Desjardins Securities. Wal-Mart is intent, in a broader sense, “on constraining the market space available for sales growth of Target stores in Canada.”
On Thursday, Fitch Ratings predicted Target could consider “strategic alternatives” including divesting its Canadian division if it is unable to “materially turn the business around” in the next 12 to 24 months.
The rough domestic retail market has already taken victims. Last week, three home furnishing chains – Bombay, Bowing and Benix – owned by a member of the prominent Isaac Benitah retail family received court protection from creditors. Earlier this year, fashion retailer Boutique Jacob Inc. filed for bankruptcy. And discount chain XS Cargo filed for bankruptcy protection this summer.
But Wal-Mart still faces hurdles, including at its core U.S. stores, where second-quarter same-store sales were flat after declining for five consecutive quarters – results CEO, Mr. McMillon, said were not satisfactory.
In Canada, where Wal-Mart got a new leader, Dirk Van den Berghe, on Aug. 1, the division “produced solid results in a very competitive environment,” said David Cheesewright, president of Wal-Mart’s international business and a former head of the Canadian operation.
Wal-Mart’s total sales in Canada rose 2.9 per cent, driven by expansions of its supercentres which include full supermarkets. The Canadian division’s share of the country’s food, consumer products and health and wellness market rose 0.5 per cent in the 12 weeks ended July 19, according to figures from researcher Nielsen and provided by Wal-Mart.
And while customer purchase amounts here rose 1.3 per cent in the second quarter, shopper traffic to its stores dipped 1.1 per cent, the company said.
Robin Sherk, director of retail insights at consultancy Kantar Retail in Boston, questioned the long-term sustainability of Wal-Mart Canada’s rapid growth strategy. “Yes, they have a growth story with the addition of supercentres that helps them sell more groceries. But how is their underlying performance?”
Mr. Samuel predicted that the new Wal-Mart Canada CEO, who has headed grocery stores in Europe, will eventually introduce a smaller format in Canada to help shore up business. In the U.S., Wal-Mart has put a big push on expanding its small-format stores, whose second-quarter same-store sales rose a healthy 5.6 per cent. Wal-Mart Canada could benefit from diminutive stores to respond to rising consumer demand for the convenience of smaller outlets, Mr. Samuel said. It would be taking on grocery giant Loblaw Cos. Ltd., which this year acquired Shoppers Drug Mart Corp. partly because of its smaller, easy-to-get-to store locations.