TORONTO/CHICAGO (Reuters) - With Target Corp (TGT.N) opening its doors in Canada next spring, Wal-Mart Stores Inc (WMT.N) is likely to do what it does best - slash prices - to protect its share of a multibillion-dollar market it has dominated for nearly two decades.
The world’s largest retailer has already taken the offensive, putting into motion an aggressive expansion plan of its own before Target’s northern incursion.
Wal-Mart is holding an investor meeting in Toronto on Wednesday night and Thursday, and it is expected to trumpet its plan to fend off the challenge by the No. 2 U.S. discounter.
A beefed-up Canadian presence may not be enough, analysts say. Wal-Mart may also need to take a page from its time-tested U.S. playbook by cutting costs and prices.
“Target has the fun factor,” said Natalie Berg, director of global research at Planet Retail. “They will come in and wow Canadian shoppers. Walmart will have no choice but to become even fiercer on price.”
In a recent survey of 1,500 consumers in major Canadian markets, 61 percent said they were somewhat or very interested in shopping at Target.
“Preliminary results say that 73 percent of consumers surveyed expect that Walmart will lose sales due to Target,” said Ed Strapagiel, executive vice president at KubasPrimedia, the Toronto market research firm that conducted the survey.
Recognition is a key to Target’s success, since Canadians can already find the same basic goods at Walmart or elsewhere. One reason for Target’s U.S. popularity is its unique clothing and housewares. It has no need to match prices on such items, and that drives traffic, sales and margins.
“They do tend to have much more of a more fashionable image than Walmart, which is not saying much,” said Strapagiel.
But a price-cutting strategy may not be pain-free. After Walmart’s U.S. stores lowered prices to win back shoppers last year, its profit fell short of expectations in the fourth quarter.
Canada matters to Wal-Mart. While the market is small by the chain’s standards, by all accounts it has been a solid investment. In the fourth quarter, Walmart Canada’s operating income grew at a faster pace than its 4.1 percent sales growth. Wal-Mart’s company-wide operating income grew at a slower pace than sales.
“Canada is typically referenced as one of the most profitable international regions for the company,” Buckingham Research analyst John Zolidis said in a note.
Canada represents roughly an $11 billion business for Bentonville, Arkansas-based Wal-Mart, or about 2 to 2.5 percent of total sales, Zolidis said.
John Williams, a partner with Toronto retail consultants J.C. Williams Group, said Wal-Mart does not have a strong head-to-head competitor in Canada. It entered the country in 1994 and quickly “became the value leader on price” after displacing Zellers, Hudson’s Bay Co’s discount banner, Williams said.
Now, Wal-Mart will have to deal with the “most meaningful disruption to the Canadian retail landscape in a generation,” UBS analyst Robert Carroll wrote in a note to clients this week.
Loblaw Cos Ltd (L.TO), the country’s largest grocer, dominates the overall Canadian retail market with more than $38 billion in sales. Wal-Mart comes next, followed by U.S.-based Costco Wholesale Corp (COST.O), Empire Co’s (EMPa.TO) Sobeys and Shoppers Drug Mart SC.TO, according to UBS, which cited data from Kantar Retail.
Zellers has posed little threat in recent years, and last year Target took over many of its leases. Minneapolis, Minnesota-based Target plans to turn 125 to 135 former Zellers into Target stores, with the first wave of locations opening next March or April.
Wal-Mart is not standing still. It plans to remodel or open 73 Canadian stores this year, including opening outlets at 39 Zellers locations it bought from Target, in its most ambitious Canadian expansion ever.
By the end of January 2013, Wal-Mart expects to have more than 375 outlets in Canada, up from 333 at the end of January 2012 and 325 a year earlier.
The additional store openings should “mitigate some of the impact of Target,” said Alex Arifuzzaman, partner at InterStratics Consultants Inc.
Wal-Mart’s event in Toronto starts with a Wednesday evening discussion about the Canadian retail market. After presentations on Thursday, analysts and investors will tour stores.
Carroll said the event should boost shares of Target and Wal-Mart, as each stands to benefit from the healthy Canadian retail market that Wal-Mart is expected to discuss, along with a growing appetite for discount retailers. He rates Target a “buy” and has a “neutral” rating on Wal-Mart.
Zolidis has a $70 price target on Wal-Mart, which currently trades at around $60, and suggested that investors buy the stock ahead of Wal-Mart’s meeting. He rates Target “neutral.”
Last April, Target said it expected to generate at least C$6 billion in annual sales in Canada in as little as six years, and that many of its Canadian stores were likely to be much more profitable than its average U.S. locations.
It helps that many Canadians know Target from cross-border shopping trips. The brand’s profile was also on display in February, when shoppers lined up around a city block to clean out a temporary or “pop-up” Target store in Toronto.
As Target comes in, other retailers will try to maintain earnings by increasing efficiency, Arifuzzaman said.
Chains such as Loblaw and Canadian Tire (CTC.TO) are working on new loyalty programs, while Wal-Mart’s global mantra is to operate on a low-cost basis and offer low prices every day.
Price-cutting is “pretty well their only tactic. Walmart is not an imaginative retailer. They really are a one-trick pony. It’s a pretty good trick,” said Williams.
Reporting by Allison Martell in Toronto and Jessica Wohl in Chicago; Editing by Frank McGurty and Matthew Lewis