A cool wind is blowing through the discount retail sector, and smaller players are feeling its sting.
Ottawa-based Giant Tiger Stores acknowledged it is up for sale in what it describes as a "stagnant market." Bargain Shop of Mississauga, Ont., and Quebec-based Hart Stores have both gone through bankruptcy protection in the past couple of years, while even larger companies such as Hudson's Bay Co. was forced to sell some of its discount Fields stores and close most of the rest.
The culprits are large U.S. competitors such as Target Corp. and Wal-Mart Canada Corp., which have placed renewed stress on weaker competitors, forcing them to rejig their business plans and in some cases, shut stores. Montreal-based Dollarama Inc. is another burgeoning threat.
Giant Tiger, which says it continues to be profitable and grow, has expanded its food offerings to draw customers to its stores more frequently, trying to entice them to buy higher-margin clothing and other goods at the same time. But that shift put it directly in the cross-hairs of larger no-frills players.
"Everybody wants thrift," said John Crombie, national retail director at real estate specialist Cushman & Wakefield. "But from a retailer's perspective, it's getting very difficult. Retailers are cutting prices and their margins are shrinking, even though sales are going up. "
Discounters such as Giant Tiger, Value Village, XS Cargo, Big Lots, Dollarama and Dollar Tree have asked about nabbing new store leases in the past year, he said. Many of them want "exclusivity clauses" to keep rivals out of a shopping centre, but it "seems to be reaching a saturation point," Mr. Crombie said.
"Industry wide, a lot of players in our space have disappeared," said Eric Claus, chief executive officer of discounter Red Apple Stores, which was previously run by troubled Bargain Shop, and has shut one-third of its outlets. "The better players are niche players."
There has been a small reprieve, as Target has struggled with supply chain and pricing issues, resulting in weaker-than-expected performance.
"We had less pricing activity, competitive intensity from new market entrants – specifically Target," Edward Kennedy, chief executive officer of North West Co. Inc., which runs 31 Giant Tiger stores in Western Canada, said last month. "We've prepared for maybe a heavier dose of encroachment there that hasn't happened yet."
Even so, industry watchers expect that Target will fix its problems and become a more formidable force. "I think they will because they have to," Mr. Kennedy said. "I mean they're too smart and …this isn't brain surgery."
Even Wal-Mart Canada, which is expanding and stealing market share from competitors, saw its second-quarter same-store sales (at outlets open a year or more) slip 0.4 per cent and traffic dip 0.6 per cent while overall sales grew 6.2 per cent as it added and expanded stores.
To fight back, some companies are trying to carve out a niche. Red Apple (formerly called Bargain Shop, which is an heir to the Woolworth's five-and-dime) is sticking to its rural roots and abandoning urban markets, Mr. Claus said. In small towns, Red Apple "is the go-to store," he added. In those locations, it can stay away from Wal-Mart and Target.
North West runs its discount stores in even more remote areas in northern Canada, while Giant Tiger generally is in secondary malls in and around cities, putting it closer to Wal-Mart and Target, observers said. Giant Tiger has been moving more to brand-name products to respond to customer demands.
Andy Gross, CEO of Giant Tiger, said in a statement the privately held company is exploring its options, including a potential sale, "from a position of strength … We do not require external financing and are not under any pressure to sell."
At about 20,000 square feet, Giant Tiger outlets are about twice as big as many dollar stores, which means an acquisition by Dollarama or another rival is unlikely, observers say. But a grocer, such as Metro or Sobeys, may want to acquire the retailer and convert them to one of its discounter Food Basics or Freshco supermarkets.