People walk by a Loblaw grocery store in Toronto in this file photo.Mark Blinch/Reuters
The retreat of U.S. discounter Target Corp. from Canada this spring has done little to ease the competitive pressures on rival retailers.
Loblaw Cos. Ltd., the country's largest retailer, is among merchants feeling the heat amid a weakened Canadian dollar and dramatic shifts in consumer buying habits.
Even with Target gone, retailers "are still fighting hard in different circumstances to grow their sales and deliver market share," Galen G. Weston, Loblaw executive chairman, told an analyst conference call after the company reported improved first-quarter results.
"If you can't pass through [to consumers] 100 per cent of the cost inflation that you're getting from the market, which is the circumstance that exists here, then there continues to be meaningful pressure on your gross margin."
As further evidence of the failed Target's weak footprint in Canada, retailers ranging from Loblaw to generalist Canadian Tire Corp. are seeing little effect of the U.S. chain's exit, even as the merchants battle for business in a fast-changing market.
They're grappling with a weak loonie, which increases many of their purchasing costs because they buy goods in U.S. dollars, as well as dealing with changing consumer tastes – for more fresh fruit rather than cereals, for instance – and shifts to online shopping. The changes are putting pressure on retailers to transform their operations.
Retailers face "incredibly different consumer expectations – and, in some cases, costs to serve consumers – than they would have had three or four years ago," said Bruce Winder, a senior adviser at retail consultancy J.C. Williams Group. "It's a bit of a tough time right now. Retail sales are up and there are signs that retail is coming back in select areas. … But folks are still pretty nervous about job prospects."
In its wake, Target left its 17,600 employees in the lurch while also pinching the hundreds of firms that served Target, forcing them to let go staff, he noted.
But Target never put much heat on retailers, especially among grocers, added Peter Sklar, a retail analyst at BMO Nesbitt Burns. In its grocery aisles, Target generated only an estimated $200-million to $300-million of annual sales, which is less than 1 per cent of the roughly $100-billion total Canadian grocery market, he said.
As Michael Medline, chief executive officer of Canadian Tire, said earlier this year of Target: "They didn't have a material impact before; they are not going to have a material impact coming out."
Mr. Weston noted that domestic retailers "sharpened their pencils when Target came into the market.… Now that they're gone, I don't think it's changing much."
Still, retailers are mulling Target leases, deciding whether they want to buy some.
"We expect somewhere in the range of 50 per cent of them to go to the large retailers in some capacity," Mr. Weston said. "Wal-Mart, we think, will be one and there will be a few others. We are certainly involved in discussions there, although we don't expect it to be meaningful from our perspective."
Canadian Tire said on Wednesday it had a $17.7-million deal to acquire 12 of Target's leases. "We've been tracking certain Target properties for some time and when the opportunity came up, we moved quickly and secured virtually all of them," Mr. Medline said.
Hudson's Bay Co., which is opening its first discount OFF 5th stores in Canada in the spring of 2016, is also considering some Target locations, said Jonathan Greller, president of HBC's outlets division.
In court documents filed on Wednesday, Target said it has a $45-million deal with landlord Cadillac Fairview Corp. to buy back leases of stores at five of its malls as well as an owned Winnipeg store.
At Loblaw, executives continue to see consumers shift to buying higher-margin fresh foods – or fancier foods – from packaged goods, which, in addition to inflation, is helping to shore up sales.
And while Loblaw and other grocers have increased prices of fresh produce and meat, Loblaw is now also beginning to raise prices of its packaged products as global suppliers pass on their cost increases, Mr. Weston said. Loblaw, in turn, is passing on some of the price increases to consumers and monitoring their response, he said.
But in some categories, consumers are changing their purchasing habits, he said. A number of "big traditional categories" of packaged goods, such as soft drinks and cereals, are "under pressure" as customers switch to fresh foods, he said. "We don't see that shifting back in any meaningful way at this point."
In its first quarter, Loblaw's profit rose 21.7 per cent to $146-million while overall revenue jumped 37.8 per cent to $10.05-billion. In early 2014, Loblaw made the transformational move of buying Shoppers Drug Mart Corp. Most of the higher revenue came from Shoppers, the country's largest pharmacy retailer.
Loblaw said its quarterly dividend will rise by 2 per cent to 25 cents per common share, starting in July.