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Canada braces for Target entry

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TORONTO — In a sampling of Canadian consumers, a majority seemed to react favorably to the news that Target Corp. would soon be assuming control of most of the existing Zellers Inc. stores.

In a sampling of Canadian consumers, a majority seemed to react favorably to the news that Target Corp. would soon be assuming control of most of the existing Zellers Inc. stores.

At least that was the most common response of shoppers buttonholed for on-air interviews by television journalists immediately after the news of Target’s move was announced on January 13.

There were, however, some dissenting views. Canadians have had a long relationship with Zellers. Walter Zeller founded the company that bears his name in 1932. The recent transaction is a mirror image of how he started the chain by buying up the 14 Canadian locations of a troubled American retailer. He closed three of them and began the chain’s national expansion from the base of the remaining 11.

For many Canadian customers Target is no stranger. They go to the stores on their U.S. visits. Many of them have Target credit cards, and they are well aware of the “cheap chic” Target promises its customers.

The consequences of the entry of Target for Canadian competitors are also likely to be mixed — though in this case the division is between short-term and medium-term effects.
Zellers’ current major competitors — which will occupy the same position for Target — are Walmart Canada, Sears Canada, Canadian Tire (including its Mark’s Work Warehouse clothing subsidiary) and Loblaw Cos., the last mentioned because of its now significant Joe Fresh, inexpensive but fashionable apparel, business.

Under the deal Target has the opportunity of selecting and, after the end of 2012, converting and operating up to 220 stores. It will clearly opt to select some mix of the larger, high-volume and newer stores, along with those that, though they are smaller than the Zellers median size of 100,000 square feet, are capable of expansion.

Zellers, which is to continue operating the chain until the hand-over date, is unlikely to be investing much or anything in the selected stores before their ownership changes. Target will likely begin renovations to bring the acquired stores up to its standards early in 2012.
The identity of the chosen stores is to be known by September this year. Competitors after that date will likely do all they can to impress customers and build up market share during the changeover period.

In the medium and longer term, however, competitors will be faced with a more formidable competition than that presented by Zellers.

Walmart Canada, whose U.S. parent has a deep understanding of the type of competition that Target offers, will probably have to do the least adaptation in Canada. There will possibly be one major difference in the way it competes with the new arrival.

Zellers stores are smaller than the U.S. Target stores, so Target may not attempt to cram a food operation into these smaller footprints. If that is so, Walmart may elect to make its Canadian food operations more of a distinguishing feature by increasing the emphasis on these departments and enlarging and improving the selection.

Possibly the most vulnerable of the main competitors is Sears Canada. In recent years Sears has lost some of its formerly acute focus on the middle-income, suburban family. Target is likely to offer the most difficult competition in the apparel sector.

Canadian Tire also is an important player in housewares, home decor, kitchen and bath, sporting goods, electronics and, through its Mark’s division, casual and work apparel. There will be a significant overlap in the offerings of Target and Canadian Tire.

Provided Target does not enter the full-line grocery business, Loblaws will be the supermarket chain most directly affected by the new competition because of the importance of its Joe Fresh line of apparel, bath and beauty now offered in stand-alone units as well as in the supermarkets. It is believed that Loblaws’ volume in that category is now at, or approaching, $1 billion. With Target and Joe Fresh both aiming to attract the customer with a “cheap chic” image, the rivalry will be clear.


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