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Wal-Mart has established a storefront in mid-town Toronto where customers can pick up their orders placed online.

Sharan Bains/Wal-Mart

Wal-Mart Canada Corp. has launched two hubs for distribution of fresh food and other e-commerce orders, an initiative that could be the discount giant's answer to Amazon.com Inc.'s push into selling groceries online.

Wal-Mart's new storefronts, which accommodate pickup and home deliveries of online orders and eventually could be used as physical stores, bring the retailer into densely populated city districts, a departure from its customary suburban haunts, said Daryl Porter, vice-president of online grocery at Wal-Mart Canada.

"This is our first push into the heart of the city," Mr. Porter said in an interview on Friday at one of the first two co-branded Penguin Pick-Up/Wal-Mart locations in midtown Toronto, which is near condominium towers and across from a new supermarket of archrival Loblaw Cos. Ltd.

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"We see it as going to be a big part of our city strategy," added Rick Neuman, executive vice-president of e-commerce at Wal-Mart Canada.

He said he envisions "dozens" of the hubs in the Greater Toronto Area, and others in major cities across the country. "There's lots of potential."

Grocery retailers across Canada have been rushing to ramp up their online selling since e-commerce powerhouse Amazon announced its $13.7-billion (U.S.) takeover of Whole Foods Market Inc. last June.

Loblaw subsequently teamed up with Instacart to introduce online grocery deliveries even as it expands its Click & Collect program, in which customers order online and pick up their groceries at its supermarkets. Sobeys Inc., the country's second-largest grocer after Loblaw, plans to invest in a broader e-commerce roll-out with home deliveries, while Metro Inc. also is bolstering its online shopping capabilities.

But retailers have had trouble finding a cost-effective way to ship items to individual homes, or, as it is called in e-commerce, "the last mile." For grocers, the challenge is even more daunting because they are handling multiple, often low-cost, sometimes bulky items, some of which need to be refrigerated .

While online selling makes up just 0.8 per cent of Canada's estimated $100-billion-plus in annual grocery sales, that proportion is expected to increase to 2.5 per cent in five years, according to Sobeys' research.

Now, Wal-Mart is moving its online selling into densely populated city areas by teaming with its real-estate partner, SmartCentres – which runs Penguin Pick-Up locations across Canada where customers pick up e-commerce orders from an array of retailers. In the past, the discounter has not been able to get a foothold for its superstores in city centres, where retail space is often at a premium.

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The new pickup and delivery centres can help the retailer draw people who probably did not consider Wal-Mart often, said grocery consultant Peter Chapman of GPS Business Solutions. "This opens up a whole new consumer for Wal-Mart."

And while grocers had been developing their e-commerce strategies before Amazon acquired Whole Foods, the takeover "absolutely accelerated the pace of change," Mr. Chapman said.

Food market consultant Kevin Grier said Wal-Mart's latest move is part of an ongoing process of experimentation among retailers to determine a successful business model for online groceries.

"Everyone has predicted online groceries would be successful, but nobody has made a success of it yet," he said. "The mainline grocers can watch and see what works and then copy as both Wal-Mart and Amazon experiment. The danger, of course, is being left behind."

Wal-Mart's latest initiative "shows that the effort and the intensity of the competition is stepping up a notch," Mr. Grier added.

Wal-Mart's Mr. Neuman said he envisions his company's urban pickup/delivery centres eventually selling high-demand food and home staples, such as bread, milk, eggs and baby products, similar to a convenience store. Customers could order the items from their mobile devices before getting to the store.

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Wal-Mart does not charge for pickup orders, and has a $9.97 fee for home deliveries, which are done with two crowd-sourcing services, JoeyCo and Daily Delivery. Wal-Mart's own trucks bring the products to the pickup centres. Wal-Mart started last year to use crowdsourcing services for home deliveries in the Toronto area. And it delivers online grocery orders to a few condo buildings in the city.

Mr. Neuman said the hubs are a cost-effective model for e-commerce delivery, although he did not provide savings estimates.

Duncan Reith, marketing professor at Seneca College and a former grocery executive, said using Penguin Pick-Up as a partner is a great way for Wal-Mart to expand its e-commerce reach, but it may have to share the profits. As Wal-Mart beefs up its online selling, it may want to control the entire customer transaction to ensure consistency, he said. Still, for now, the new initiative "is good for customers and will be good for Wal-Mart," he said.

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