The impending departure of U.S. discounter Target Corp. from Canada sets the stage for a new retail era in which top players could emerge stronger while weaker ones lose more ground.
Target’s abrupt decision on Thursday to quit Canada after less than two years will bring short-term pain for rivals as the chain prepares to liquidate inventory at its 133 stores – a boon for consumers that increases pressure on competitors.
In the longer run, retail heavyweights such as Wal-Mart Canada Corp., Loblaw Cos. Ltd., Canadian Tire Corp. and Costco Canada stand to shore up their leading positions. They will likely try to acquire some of Target’s leases.
But underperforming players, already pushed to the brink by e-commerce, the expansion of U.S. powerhouse Amazon.com and a tight market, will need to find new ways to grab business.
In these challenging times, merchants “have to fight and scratch and work hard to both satisfy customers and make a reasonable return,” said Humphrey Kadaner, president of Mastermind Toys, a chain of 36 stores.
Target’s exit is a win for incumbents, among them Canadian Tire and Loblaw, which worked hard to raise their game in preparation for the U.S. chain’s arrival in 2013.
But the heavily competitive retail environment shows few signs of easing as contenders clamour for a slice of the roughly $2-billion of annual sales that Target is leaving behind.
“That’s $2-billion of sales that are up for grabs,” said Brian Yarbrough, an analyst at Edward Jones Investments. “That’s a lot of business.”
On Thursday, Target stunned industry insiders and consumers when its Canadian unit filed for bankruptcy protection, giving up after having sunk $7-billion into building its business here. Since opening its stores in March, 2013, the chain projected it will have racked up $2.5-billion of pretax operating losses by the end of January.
Target’s spectacular failure here is an eye opener for other major foreign retailers that may be considering coming to Canada, Mr. Yarbrough said.
“This is a case study of how not to come to Canada,” said Edward Sonshine, chief executive officer of RioCan Real Estate Investment Trust, which is Target’s largest landlord. The problem “wasn’t Canada – it was Target. Still, it makes people nervous.”
He expects that major incumbent retailers will vie for some of his malls’ 26 Target leases, along with home improvement chains Rona Inc. and Lowe’s Canada. The Target closings are an “aggravation” for RioCan but could result in it attracting more productive retail tenants and higher rents, Mr. Sonshine said. RioCan’s Target leases are generally guaranteed by Target’s parent for their remaining terms, he said.
He doesn’t expect new retail entrants to try to swoop in. U.S. discounter Kohl’s Corp., for instance, has studied the Canadian market but not shown interest recently, industry sources have said.
The sluggish economy, weak Canadian dollar and slumping oil business may also deter U.S. retailers from setting up shop here, Mr. Kadaner said. It was a different situation five years ago when Canada weathered the recession much better than its U.S. neighbour and became an attractive market for American merchants.
“One less player in Canada may ease up some of the pressures on some people,” Mr. Kadaner said. “But there are always other natural and competitive pressures. The good ones will fill the void and pick up more than their fair share of what Target is leaving behind.”
Target’s exit will have an immediate effect on a couple of retailers that have direct business links with the chain. Sobeys Inc. will lose its wholesale contract as Target’s grocery supplier. It sold about $180-million of food to Target in 2014, estimated Perry Caicco, retail analyst at CIBC World Markets. But in the context of Sobeys’ $25-billion of annual grocery sales, “this low-margin wholesale effort is immaterial.”
Metro Inc. teamed up with Target to run its Brunet pharmacies at Target in Quebec, although there were signs the fledgling business was weak. Metro CEO Eric La Fleche said in November the pharmacies were “still a challenge” in attracting customer traffic.
Mr. Caicco said Wal-Mart and Loblaw are likely the only two “material” bidders for Target leases. “Wal-Mart wants and needs these assets,” Mr. Caicco said. “Loblaw needs to stop Wal-Mart from acquiring these assets, since a much more productive ex-Target asset base could put pressure on their sales and reduce their dominance.”
Wal-Mart spokesman Andrew Pelletier said this week it was too early to speculate on whether it would assume any Target locations. A Loblaw spokesman did not respond to an e-mail.
Lowe’s Canada spokeswoman Sandy Indig said the home improvement retailer is “always on the lookout for great real estate” although did not comment directly on the Target leases. With just 37 stores in Canada now, it plans 25 more in the next three years.Report Typo/Error