TORONTO - Target's arrival in Canada will take a bite out of the sales of several key rivals, according to a new report, though many of those named have said they're not fazed by new competitive pressure from the American retail giant.
In a report assessing the impact of Target's arrival next year, Barclays Capital said Monday that Wal-Mart, Sears Canada (TSX:SCC), Old Navy, Loblaw's Joe Fresh brand (TSX:L) and Canadian Tire (TSX:CTC.A) are the retailers most at risk.
Target is preparing to move into Canada, its first expansion outside the U.S. It will begin opening the first of between 125 and 135 stores in March and April at locations once owned by Canadian retailer Zellers.
"Target's arrival marks the addition of another best-in-class global operator entering the Canadian market. We expect Target to focus on what they are most known for when they arrive: apparel and house goods," the report said.
"Over time the greatest risk to established retailers is the permanent change in customer traffic patterns that Target could induce," it said.
However, the investment firm also said other retailers that don't overlap in their offerings — like dollar stores and higher-end retail stores — may benefit from the increased traffic generated by the new Target stores.
Sears Canada (TSX:SCC) is the most at risk of the general retailers, with significant overlap in its offerings and 37 per cent of its locations less than a kilometre away from a Target location, the report said.
"Sears' housewares and value priced, mostly private label, apparel offering (#2 in Canada behind Wal-Mart) makes Sears Canada one of the most at risk retailers. Sears Canada's management believes 70 per cent of their categories overlap with Target's offering," it added.
Sears Canada has already been struggling to compete and is revamping many of its locations and slashing prices to contend with lagging sales. The retailer has announced the closure of four prime store locations in three cities — Vancouver, Calgary and Ottawa.
The arrival will also eat into Wal-Mart's business, the report said, noting that Target's chief rival "may implement several 'mitigation and offset' strategies to minimize Target’s net impact on their business."
Wal-Mat Canada (NYSE:WMT), a subsidiary of the world's biggest retailer, has said it is confident it's prepared for Target's arrival. As part of the plan, it will lower the prices of more items to about $1 as it also answers to the expansion by Canadian dollar store operator Dollarama Inc. (TSX:DOL).
The retailer has never competed against Target Corp. (NYSE:TGT) outside its home base in the United States, which means Canadians could react to the new entrant in ways Wal-Mart hasn't anticipated.
Canadian Tire is expected to take a hit, but Barclays analyst Jim Durran notes that when Wal-Mart first launched in Canada, Canadian Tire was able to recover by the following year.
"There is no doubt that Canadian Tire will suffer some sales erosion to Target, particularly in Target's perceived 'go to' categories such as housewares, apparel and seasonal merchandise," the report said.
However Barclays noted that Canadian Tire's most loyal customers generate a majority of its sales and just 30 per cent of the Canadian retailer's stores will be within five kilometres of a Target.
Canadian Tire Corp. (TSX:CTC) is working aggressively to carve out a bigger share of the market before Target arrives. It has unveiled a new automotive-centric store format in a strategy aimed at improving customer experience among those shopping for products that helped make the company a household name.
Meanwhile, the report calls discount retailer Dollarama Inc. (TSX:DOL) a special case among retailers as they offer something different from Target.
Barclays said it believes Dollarama will "benefit when a Target opens nearby."
Dollarama Inc. is expanding faster than initially planned this year by increasing the number of new store openings to take advantage of a mall construction boom in Canada.
Chief executive Larry Rossy has said the chain could be helped by the arrival.
"I'm looking forward to it. I think that they're going to bring traffic where we're situated close to the Target stores,'' he has said.
Rossy added he doesn't believe the U.S. chain, which he said was a notch higher than Wal-Mart, will "trade down'' by selling low-price products that fill Dollarama's shelves.
And although 40 per cent of The Bay stores are within that range, its merchandise — the retailer has been refocusing on higher-end offerings — doesn't overlap as much.
Clothing retailer Old Navy, however, will have 42 per cent of its stores within one kilometre of a Target location and also compete in an area of strength for the chain.
Homesense, Winners and Reitmans (TSX:RET.A) also have significant location exposure.
However, the CEO of Reitmans has said he is not concerned, saying Target will generate traffic that will filter into its stores.
Barclays said it doesn't expect Target to have much impact on the already highly competitive grocery sector in Canada — at least at first — because it does not appear the chain plans to focus on food offerings.
However, Loblaw Companies Ltd. (TSX:L) will see the most impact among supermarket chains as its Joe Fresh clothing line will compete with Target in the discount chic clothing space.
Meanwhile, the Sobeys grocery chain owned by Empire Co. Ltd. (TSX:EMP.A) could benefit after it signed a deal to offer some food in its Canadian stores.
Related on HuffPost:
The Booming Canadian Dollar
The Canadian dollar has risen from around 62 cents U.S. in 2002 to around $1.03 U.S. at present. What this means is that, from the perspective of international retailers, we're spending a lot more in stores. Colliers Canada reports that <a href="http://www.collierscanada.com/en/News/2012/Canada-Still-Magnet-for-Foreign-Retail" target="_hplink">Canadian shopping malls brought in 50 per cent more in sales, per square foot, than their U.S. counterparts</a> in 2011. While U.S. malls earned $400 U.S. in revenue per square foot, at Canadian malls it was around $600 U.S.. That's a powerful magnet for U.S. retailers looking to expand.
Our Existing Stores Are Disappearing
Remember Zellers? How about Eaton's, or <a href="http://en.wikipedia.org/wiki/F._W._Woolworth_Company" target="_hplink">Woolworth's</a> or <a href="http://en.wikipedia.org/wiki/Simpsons_(department_store)" target="_hplink">Simpsons</a>? <a href="http://en.wikipedia.org/wiki/A%26A_Records" target="_hplink">A&A Records</a>, anyone? Those are just a few of the retail names that have disappeared or are disappearing from Canada's street fronts and malls. With traditional retailers fading, U.S. retailers are seeing opportunity left and right. They are also seeing vacant space they can easily convert to their own stores, as <a href="http://www.huffingtonpost.ca/2012/08/22/target-canada-zellers-protest_n_1822223.html" target="_hplink">Target Canada is doing with Zellers locations</a> and <a href="http://www.huffingtonpost.ca/2012/09/11/nordstrom-canada_n_1874734.html" target="_hplink">Nordstrom Canada is doing with Sears stores</a>.
Our Retail Sector Is Growing Fast
Growth in Canada's retail sector was <a href="http://www.nasdaq.com/article/the-promise-of-the-canadian-retail-market-20120914-00599" target="_hplink">34 per cent faster than it was in the U.S. between 2004 and 2008</a>, according to data from the Retail Council of Canada -- and that's before the financial crisis sank the U.S. into an economic no-man's-land. The Council's data also shows that retail grew 96 per cent faster than the Canadian economy as a whole during that period.
There Are Too Many Stores In The U.S., And We Have Room For Growth
In the U.S., retail supports one-quarter of all jobs and accounts for about 18 per cent of the country's economic activity. By comparison, Canadian retail supports only about one-eighth of all jobs in the country, and retail accounts for just more than six per cent of all economic activity, <a href="http://www.nasdaq.com/article/the-promise-of-the-canadian-retail-market-20120914-00599" target="_hplink">according to a report at Nasdaq.com</a>. This would suggest that the U.S.'s retail market is saturated, while there is plenty of potential growth in Canada.
More Of Us Have Disposable Income
The U.S.'s persistently high unemployment rate in recent years has left many Americans with little cash for buying anything beyond the basics. Data from WSL/Strategic Retail shows that <a href="http://www.businesswire.com/news/home/20120914005044/en/Canada-Land-Retail-Opportunity-WSLStrategic-Retail" target="_hplink">only about 50 per cent of Americans have disposable income</a>, but the same is true for 64 per cent of Canadians.
Less Competition From Online Shopping
Canadians often complain that our options for online shopping are more limited than in the U.S., and that seems to show in our shopping habits. Research on women's shopping habits finds that <a href="http://www.businesswire.com/news/home/20120914005044/en/Canada-Land-Retail-Opportunity-WSLStrategic-Retail" target="_hplink">only about half of Canadian women shop online</a>, compared to 75 per cent of American women. That means more opportunity for brick-and-mortar stores planning to move into Canada.
We're Not As Big On Bargain-Hunting
The <a href="http://www.businesswire.com/news/home/20120914005044/en/Canada-Land-Retail-Opportunity-WSLStrategic-Retail" target="_hplink">same study of female shoppers</a> found that, while 68 per cent of American women use coupons when shopping, only 55 per cent of Canadian women do. Half of Canadian women look online for coupon opportunities, compared to 61 per cent of Americans, and 57 per cent of Canadian women pick up in-store circulars, while 71 per cent do so in the U.S. This lack of hunger for bargains translates into bigger profit margins for retailers.
The iconic American upscale retailer is in talks with Hudson's Bay Company to become a "store within a store" at HBC locations in Canada. The move is seen as an attempt by The Bay to fight off the possible arrival of Nordstrom's (see next slide).
One of the most prominent competitors to Bloomingdale's, Nordstrom announced in September, 2012, that it plans to open locations in Cadillac Fairview-owned malls in Calgary, Ottawa and Vancouver. The stores will open in former Sears locations.
Discount retailer Marshalls entered the Canadian market in March, 2011, and recently announced an expansion of six new stores in Ontario. At least a dozen of its 750 stores are now located in Canada.
The home improvement retailer began moving into the Canadian market in 2007, with a store in Hamilton, Ontario. It has since expanded to 31 locations in Ontario and Alberta.
Ritzy fashion chain J. Crew opened its first Canadian location in the summer of 2011, and immediately ran into public anger about the U.S.-Canada price gap. Shoppers complained that J. Crew's Canadian prices were about 15 per cent higher than in the U.S.
The arrival of Target to Canada in 2013 is easily the most hotly-anticipated retail arrival since Walmart came north of the border in 1994. The discount retailer is planning more than 100 stores across the country, having taken over a significant number of Zellers locations. But the store is currently engaged in a labour dispute, as it tries to keep former Zellers employees from unionizing in the new stores.