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Retailers will feel the pressure through 2014 as Target and other rivals continue their incursion into the Canadian market.

Chris Young/The Globe and Mail

Some of Canada's biggest retailers are warning that a foreign retail invasion signals what one executive calls a "bloodbath" in Ontario that threatens to spill over into the rest of Canada.

Ontario has been ground zero of the retail battle after U.S. discounter Target Corp. opened its first Canadian store in the province in March, before moving on to Western provinces. On Tuesday, Target opened its first outlets in Quebec and Nova Scotia. At the same time, archrival Wal-Mart Canada Corp. has been adding stores with full grocery aisles, while Costco Wholesale Corp. and other low-cost merchants are also expanding.

"In Ontario, it's a bloodbath for every retailer," Robert Sawyer, chief executive officer of home-improvement retailer Rona Inc., said at a conference Tuesday in Toronto, organized by Bank of Nova Scotia. "It's difficult, not only for the hardware business."

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The added stress is felt acutely in Canada's grocery industry, which is the victim of an essentially "zero-sum game," Perry Caicco, retail analyst at CIBC World Markets, said in a recent report. He projects that sales will pick up by about $1.6-billion this year – with little or no inflation – but that sales tied to the expansion of retail floor space "will eat up most of the sales growth." As a result, grocers can expect almost no real sales increases this year or next at stores open a year or more, a critical retail measure, he warned.

"The market is not easy," said Vicente Trius, president of Loblaw Cos. Ltd., which this summer unveiled its massive $12.4-billion deal to acquire Shoppers Drug Mart Corp. to help take on rivals.

"This generates pressure in the market because you have a consumer who spends less," Mr. Trius said.

Retailers will continue to feel this pressure into 2014 as those same operators and new ones continue their incursion into Canada, executives said.

From Rona to grocers Loblaw and Metro Inc., Canadian retailers are being forced to lower prices and find ways to make up for thinner profit margins. Merchants are being compelled to slash costs and forge new alliances, or risk feeling the pinch of more competition.

Marion Chan, a principal at TrendSpotter Consulting, said retailers are racing to broaden their offerings, resulting in more category overlaps. As behemoths such as Target and Wal-Mart expand their store bases, retailers will find little room for growth except by "stealing from Peter to pay Paul," Ms. Chan said.

"The Canadian market is only so big," she said in an interview. "We're a small market of 34 million people and we're trying to slice and dice the pie like we would in the United States. At some point, something is going to give."

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Some retailers, including Metro and Rona, already are closing or shrinking stores, mostly in Ontario. Montreal-based Metro said last month that it's restructuring 15 of its stores in that province, and at least a few of them will close while about six will be converted to its discount banner, Food Basics.

"Clearly the market in Ontario is very challenging, very competitive," Eric La Fleche, chief executive officer of Metro, told participants at the conference. Metro will take a $40-million charge to cover the restructuring operation.

Rona said this summer that it would close 11 unprofitable stores in 2013, eight in Ontario and the rest in British Columbia. Mr. Sawyer used the term "bloodbath" to describe retail in Ontario "to illustrate the environment and the fierce competition in the retail industry in general, especially in Ontario," spokeswoman Valerie Lamarre said in an email later.

Rona is grappling with U.S. heavyweights Home Depot Inc. and Lowe's Cos. Inc., which are both scrambling for market share in Canada.

Retailers are also teaming up with others to gain economies of scale and round out their businesses. About a month before Loblaw announced its deal for Shoppers, Sobeys said it would buy Safeway Canada for $5.8-billion to help bolster its foothold in Western Canada.

Mr. Trius said Loblaw's move comes in an environment of virtually no inflation, or even deflation in some categories. Debt-ridden consumers are tightening their belts while overall grocery square footage is now growing at a rate of 3 to 3.5 per cent annually, compared with a historical rate of close to 1.5 per cent.

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He predicted that the pressure of accelerated square-footage growth, which began last year, will continue in 2013 and the first half of 2014. After that, he expects it to level off at about 1.5 per cent, which equals the pace of population growth, he said.

Metro also is on the hunt for a takeover. "We have the financial track record and the financial capacity to look at acquisitions that may present themselves," Mr. La Fleche said.

Even coffee and doughnut icon Tim Hortons Inc. is feeling the heat from U.S. rivals McDonald's Corp. and Starbucks Corp., the latter being set up in Target stores. In the "new reality" of zero growth and intense competition, the new CEO of Tim Hortons feels a sense of urgency to make changes. "In this new reality, speed becomes a competitive advantage," Marc Caira said in an interview this week.

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