Analysis: Wal-Mart responds to Target's Canada incursion

TORONTO (Reuters) - Wal-Mart's decision to open more supercentres in Canada, including its first in the province of Quebec, may help the world's largest retailer counter Target's long-anticipated debut north of the border.

The opening of 40 more Wal-Mart Supercentres, which feature a wider array of grocery items than the regular stores, could also put pressure on Canada's smaller food retailers, especially those with a big presence in Quebec.

"Target is one of the few retail operations in the world that's been able to take on Wal-Mart successfully," said Ed Strapagiel, executive vice-president at Kubas Consultants.

To counter the threat in Canada, "it would appear that from the Wal-Mart point of view, supercentres and the food and grocery business is the way to go," Strapagiel said.

Wal-Mart Canada (WMT.N) on Wednesday unveiled plans to add to its existing roster of 119 supercentres, a concept introduced in Canada in 2006. The additions will bring Wal-Mart's total Canadian presence to 333 stores -- nearly half of them supercentres -- by the end of January 2012.

Two weeks ago Target (TGT.N) revealed that it was finally entering the Canadian market with as many as 150 stores in the next few years.

"They're just jumping in with both feet. ... That's about a fast as you can get a retail chain of that size established," said Strapagiel.

Wal-Mart had a similar start in Canada 17 years ago when it acquired about 120 Woolco stores from Woolworth Canada.

Don't expect any SuperTargets north of the border any time soon. The format, which features goods ranging from Angus beef to television set, was not mentioned in Target's initial plans.

The No.2 U.S. discount retailer will get started by taking some leases for Zellers discount stores in Canada owned by closely held Hudson's Bay Co and gradually converting them into the Target format.

Strapagiel says the Zellers stores that Target is taking over are probably too small to accommodate the larger superstore format.

"It remains to be seen if Target will be in the food business in this country in any significant way," Strapagiel said.

Wal-Mart's success with its existing superstores have not gone unnoticed by the Canadian competition.

Loblaw Cos Ltd (L.TO), which operates Canada's largest grocery chain, expanded its Loblaw Superstore/Real Canadian Superstore format into Ontario, Canada's most populous, several years ago.

Loblaw also broadened into the merchandise category with the Joe Fresh Style clothing line and recently announced it was expanding the brand with new stand-alone locations not anchored by a grocery store.

Even traditional pharmacy chains like Shoppers Drug Mart (SC.TO) are adding food and grocery to their product line and devoting more floor space to staples like milk and frozen foods.

"There's a lot of category incursion," Strapagiel said. "It's complicated because every retail operation has to make up its mind whether they want to get into what used to be called non-positional categories."

SOONER THAN EXPECTED

Investors have long anticipated that Wal-Mart would put supercentres in Quebec, the country's second most populous province. Even so, the move comes sooner than expected, BMO food retail analyst Peter Sklar said in a research note.

The move could put pressure on Canadian grocers such as Metro Inc MRUa.TO, Sklar added. Canada's No.3 grocer, which operates in Ontario and Quebec, has 59 percent of its stores in the French-speaking province.

"It will have an impact on them and it already has," said Strapagiel.

For Canadian retailers, the heat isn't coming just from Wal-Mart and Target. Marshall's, owned by TJX (TJX.N), the same company that operates Winners and HomeSense, is expected to open its first stores in Toronto soon. Department store Kohl's (KSS.N) has expressed an interest in Canada as well.

"There's a lot of pressure because of Target, but also Kohl's, Marshall's, J Crew," said Strapagiel.

"Now's the time to start planning and understanding and putting strategies in place to deal with it. Don't wait until 2013."

(Reporting by Solarina Ho; Editing by Frank McGurty)