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Workers install an outdoor sign at the new Target store at the Mic Mac Mall in Dartmouth, N.S. on Saturday, July 20, 2013.Andrew Vaughan/The Canadian Press

Target Canada is pushing its suppliers to give it a 2-per-cent cost break to help the U.S. discounter turn around its struggling Canadian operations and win an increasingly tough retail battle.

In a recent letter to its suppliers, obtained by The Globe and Mail, Target Corp. said it is setting up the Target Canada Business Development Fund (BDF) by collecting "an incremental 2 per cent accrual against receipts at cost" from its vendors, starting in March of 2015.

"The BDF will provide incremental funding for the key corporate initiatives, including investment in technology and supply chain, necessary to enhance the effectiveness of our business partnership and expedite our sales growth with you," said the letter from John Butcher, new senior vice-president of merchandising at Target Canada.

The request for what is essentially a 2-per-cent price discount from suppliers will inevitably create tensions between Target and its vendor as the discounter races to bolster its business here. Known as a cheap-chic U.S. retail destination, Target arrived in Canada in early 2013 amid hype and high consumer expectations but grappled with complaints of bare shelves and high prices. In its first year here, it posted an operating loss of almost $1-billion (U.S.).

Target spokeswoman Lisa Gibson declined to comment on Tuesday on supplier discussions. "Like many retailers, Target is working closely with our vendor partners in a variety of ways to drive initiatives focused on delivering a great experience for our guests [customers]."

While other major retailers in past years have also pressed their suppliers for across-the-board price reductions or freezes to help expand their operations, Target will feel the heat to show vendors that contributing to its "fund" can generate better returns.

After grocer Sobeys Inc. closed its $5.8-billion (Canadian) acquisition of Safeway Canada last fall, it angered many suppliers by asking them for a retroactive 1-per-cent price cut as well as no price increases in 2014, with some exceptions. Sobeys argued that vendors stood to gain from the Sobeys-Safeway marriage.

Other retailers sought a similar deal although some suppliers resisted, sources have said. Still, Sobeys CEO Marc Poulin has suggested to analysts that vendors generally are falling in line. He said last month that Sobeys' supplier costs are "now being challenged," forcing vendors to reconsider their pricing.

"I'm sure suppliers won't be happy to see Target following that plan, arbitrarily deducting from them," said Peter Chapman, president of grocery consultancy GPS Business Solutions in Bedford, N.S. which advises food suppliers. "I would tend to anticipate there will be some push back."

Added Martin Gooch, chief executive officer of Value Chain Management International of Oakville, Ont., which advises retailers and suppliers: "I would expect suppliers would respond somewhat negatively … Target isn't giving them the [sales] volume that will allow them to create the numbers to contribute that 2 per cent. So it's a double-barrel hit and a double-barrel shotgun."

Suppliers who received Target's letter declined to comment for the record. One food vendor said the 2-per-cent discount makes up "about 50 per cent of a good distributor's bottom line … There might be a lot of backlash." But another supplier said that 2 per cent is not an overly big hit, in the grand scheme of things. Mr. Chapman predicted that Target's discount rival Wal-Mart Canada Corp. may follow with similar requests of its vendors.

The Food & Consumer Products of Canada group, which represents major suppliers, said in an e-mail: "These types of broad asks by retailers are becoming more common in the Canadian retail marketplace and they are adding unexpected costs onto manufacturers in an already challenging business environment."

In late May, Target Canada launched a 30-day assessment of its operations after naming a new top executive team headed by Mark Schindele, a veteran of the company. At the same time, it started to look for a new CEO to replace Gregg Steinhafel, who left.

Target's Mr. Butcher said in an interview last month that many of its Canadian apparel prices already were on a par with those in the U.S. But he acknowledged the retailer has to improve its "price perception" here, adding it is slowly moving more of its pricing to U.S. levels.

Retail specialist Gary Brodkin of Brodkin Consulting Group in Montreal said he considers Target's supplier fund a "cash grab." He didn't think the initiative was enough to solve Target's problems, including failing to stock appropriate products for a local customer. "It's just a way to increase their bottom line at the expense of their suppliers."

Still, Target finds itself in a difficult situation, Mr. Gooch said. "The retail battle ground is especially competitive in Canada," he said. "We've got an industry that is under fire, highly competitive and focused on price."

In its letter to suppliers, Target said it is focused on strengthening its operations to achieve "mutually beneficial results." It is concentrating on drawing more shoppers to its stores; getting them to spend more; and improving the customer "experience," the letter said. "…We realize that you have numerous opportunities to invest with other business partners, and we greatly appreciate your partnership in driving our business together. We strongly believe that our upside is tremendous, and that these funds will help us realize our mutual potential faster."

Target's rivals have rushed to shore up their operations. Sobeys has pledged its Safeway takeover will result in $200 million of annual cost cuts within three years, while Loblaw Cos. Ltd., the country's largest grocer, has vowed to slash $300 million of expenses in three years as a result of its recent $12.4-billion acquisition of Shoppers Drug Mart Corp.

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