Canada's New Allure

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Canada's New Allure

By Ann Meyer - 09/15/2013

The heavy competition among retailers is moving north to Canada.

As more U.S. retail channels battle for American consumers' limited grocery dollars, the leading chains are expanding north of the border, where fewer players have served the market. Target, Walmart and Whole Foods Market have announced new Canadian locations this year, and experts say the trend is shaking up the $107 billion Canadian grocery retail marketplace.

"I think that Target's entry into the market–albeit not quite as smooth as Target might have wanted–did create some shake-up certainly for the Canadian companies who recognize the competitive landscape is beginning to change," says Wendy Liebmann, chief executive officer at WSL/Strategic Retail in New York.

As of late September, Target had 82 stores open across Canada, with plans for 124 locations by the end of the year. But an August survey by Forum Research suggested 27 percent of respondents were disappointed at the prices and merchandise availability in Target's new locations. The company said its own surveys indicated continuous improvement, according to The Globe and Mail.

Comparatively, 40 percent of survey respondents said they were very satisfied with Walmart, which saw its Canadian retail sales increase to $5.2 billion in 2011 from $130 million in 2006, according to a U.S. Department of Agriculture report on Canada.

Canada's Retail Sales On the Rise
July retail sales by industry – Seasonally adjusted
 
July 2012
June 2013r
July 2013p
6/13-7/13
7/12-7/13
 
Millions of Canadian dollars
Percent change
Total retail trade (current dollars)
$39,139
$40,058
$40,302
0.6%
3.0%
Food and beverage stores
8,907
8,870
8,845
-0.3
-0.7
Supermarkets and other grocery (except convenience) stores
6,302
6,258
6,219
-0.6
-1.3
Convenience stores
569
539
542
0.6
-4.7
Specialty food stores
439
467
471
0.8
7.4
Beer, wine and liquor stores
1,597
1,606
1,612
0.4
0.9
Health and personal care stores
2,833
2,898
2,914
0.6
2.8
General merchandise stores
4,930
4,979
5,034
1.1
2.1
Department stores
2,264
2,184
2,205
0.9
-2.6
Other general merchandise stores
2,666
2,794
2,829
1.2
6.1
r revised
p preliminary
Source: Statistics Canada, The Daily, Sept. 24, 2013
Retail sales in Canada rose 3.0 percent to $40.3 billion in July from the year ago period, led by a 4.4 percent hike in sales at gasoline stations, the Canadian government reported. Sales at food and beverage stores dipped 0.7 percent in July from a year-ago, while receipts at general merchandise stores excluding department stores rose 6.1 percent.

The Bentonville, Ark.-based retailer announced plans to invest more than $450 million in Supercenter projects and an expanded distribution network in Canada this fiscal year, as it expands the amount of fresh food in all of its locations. The company has 380 stores nationwide, including 220 Supercenters, and plans to add at least 37 superstores in the coming year. It is spending $90 million to renovate and expand Supercenter locations in the Maritime provinces. "The addition of fresh groceries to our stores in the Maritimes is a major milestone for us as it extends our fresh food offering from the Pacific to the Atlantic," Shelley Broader, president and CEO of Walmart Canada, said in a release.

Walmart also has joined the local foods movement, partnering with Aliments du Quebec to provide signage noting the source of local foods in Quebec stores. The new developments from U.S.-based retailers have spurred Canadian retailers to ask, "Who else might come, and what else do we need to do to think about our business model?" Liebmann says.

Amid the intense competition, Montreal-based Metro Inc., which has more than 600 food stores and 250 pharmacies and is a leading food retailer in Ontario and Montreal with more than $11 billion in annual sales, said Aug. 14 it would reorganize its Ontario retail network and convert some Metro locations to its Food Basics discount format. While the company reported a 3.7 percent increase in profit for the third quarter, ended July 6, its sales inched down 0.7 percent to $3.57 billion.

In July, Canadian's largest supermarket chain, Loblaw Companies Limited, agreed to acquire Shoppers Drug Mart Corp. for $12.4 billion in cash and stock. Shoppers Drug Mart has 1,244 locations throughout Canada, as well 57 medical clinic pharmacies and 62 Shoppers Home Health Care stores. Loblaw has more than 1,000 locations in Canada.

The acquisition should allow Loblaw to compete against new entrants by improving product selection and convenience. "There's a tremendous amount they can learn from Shoppers being the convenience store on the corner," Liebmann says.

The acquisition opens the door for Loblaw to expand in a new channel. "If you look at Loblaw, there wasn't much more they could do in the Canadian landscape" without an acquisition, says Mark Jamrozinski, Canadian managing partner in the mergers and acquisitions practice at Deloitte in Toronto.

What's more, Shoppers Drug Mart was becoming a threat in its own right. "Shoppers [Drug Mart] was going to get into grocery and become more of a threat as an urban grocer," Jamrozinski says.


"You're going to start to see the power of Loblaw's white label President's Choice brand start to find its way into Shoppers distribution."

– Mark Jamrozinski,

Deloitte


With the acquisition, Loblaw has the opportunity to add its private label food products to the mix at Shoppers locations. "You're going to start to see the power of Loblaw's white label President's Choice brand start to find its way into Shoppers distribution," says Jamrozinski, who expects to see other supermarket-pharmacy mergers follow Loblaw's lead.

Canada's No. 2 supermarket chain, Sobeys, which is owned by Empire Company Ltd., also is expanding through acquisition. In June it agreed to acquire Canada Safeway Ltd. for $5.8 billion in cash. The transaction included 213 Safeway locations in Western Canada, four distribution centers and 12 manufacturing facilities. Canada Safeway reported sales of $6.7 billion for the 52 weeks ended March 23, and the acquisition was expected to result in pro forma revenue of $24 billion.

"Sobeys expects to benefit from increased economies of scale. We anticipate capturing annual cost synergies of approximately $200 million within three years, through integrating and modernizing distribution networks, reducing cost in procurement, administration and marketing, and leveraging Sobeys' IT infrastructure," President and CEO Marc Poulin said in a release.

Industry experts said Safeway's decision to exit Canada was a result of the company's strategy to focus on its home market and strengthen its balance sheet. Jamrozinski of Deloitte said Canada wasn't core to Safeway's strategy, while the Safeway locations allow Sobeys a way to go national in Canada. "It was a perfect fit," he says.

At the same time that Safeway was exiting the market, many U.S. retailers seeking growth are giving Canada a new look. A Whole Foods Market executive told the Financial Post that Canada generally can sustain about 10 percent of the number of stores a retailer has in the United States. Whole Foods currently has about 340 stores in the U.S. and Canada but has been adding locations.

The Austin, Texas-based healthy foods retailer, which opened its first Canadian location about a decade ago in Toronto, currently has eight stores in the provinces of British Columbia and Ontario, according to the company's website. It plans to expand to 35 to 40 locations over time and generate $1 billion in annual sales, the Financial Post reported.

Besides Whole Foods' expansion, Loblaw plans to open a new healthy eating franchise in downtown Toronto. Nutshell Live Life Well will offer more prepared and fresh foods and natural health and beauty products.

OPEN ECONOMY

As U.S. retailers and CPGs scour the globe looking for new growth opportunities, many are exploring Canada. Unlike overseas emerging markets that often lack infrastructure and present regulatory hurdles, Canada has the benefit of being nearby and open to working with foreign companies.

But U.S. retailers that will perform best in Canada are those that bring something the market doesn't already have. Canadians have embraced Costco, Liebmann says, because it filled a gap. "When Costco went to Canada, there really weren't clubs," Liebmann says. "Costco has been very successful in Canada." The retailer now has 85 Canadian stores.

Canada's proximity to the U.S. can facilitate transportation and communication between the two countries, and the cultures are similar enough to allow for marketing messages in one country to be used in the other.

As a further advantage, the Canadian economy was less impacted by the financial crises of the United States and Europe, experts say. Canada continues to score high marks for economic freedom, making it a desirable country to do business with, economists say.

"Over the long haul, a more free economy in Canada relative to the United States certainly leads to more activity, more economic growth," says Robert Lawson, the Jerome Fullinwider Chair in Economic Freedom at Southern Methodist University's School of Business.

"Canada is a place that has a low and sensible regulation. It has a strong legal system, so you don't have courts saying it's OK to take from one private citizen and give to another. It's open to trade with foreigners. All of that is a recipe for future economic activity," says Joshua Hall, associate professor of economics at West Virginia University.

Lawson and Hall are co-authors of the Economic Freedom of the World 2013 Annual Report, published by the Frasier Institute and the Economic Freedom Network, which assert that economic freedom has been shown to promote prosperity. The annual report suggests the extent of economic freedom in a given country.

"The overall policy mix seems better in Canada" than in most other nations, says Hall. Canada outperforms the U.S. in the areas of judicial independence, protection of property rights and integrity of the legal system, as well as in credit market regulation, labor market regulation and business regulations, such as the cost of compliance.

For example, Canada opposes regulations that restrict trade, such as the stricter country of origin labeling (COOL) requirements that the U.S. Department of Agriculture plans to implement in November to comply with labeling rules mandated by the farm bill. The new regulations stipulate that labels on meat products include where the livestock was born, raised and slaughtered. Canada says the regulations will force meat packers to stop co-mingling animals from different countries and will be costly to implement. As a result, in response to the COOL regulations, Canada has said it would request permission from the World Trade Organization to impose as much as $1 billion in tariffs on U.S. products.

"That's a perfect example of burdensome regulation. Frankly, it doesn't seem to make any sense," Lawson says.


"Where do you go that isn't across the ocean? Canada looks appealing to most people."

– Wendy Liebmann,

WSL/Strategic Retail


Fueling future growth is a strong Canadian economy. Compounding the draw to Canada is the fact that many U.S. retailers are finding it's difficult to grow in the U.S. "Where do you go that isn't across the ocean? Canada looks appealing to most people," Liebmann says.

Understanding Canadian Cultural Differences

For all of the similarities between Canada and the United States, retailers and CPGs expanding to the north need to be aware of the differences as well.

Despite its vast geographic size, including a 3,145-mile shared border with the U.S., Canada's population of 35.16 million is about the same as the state of California. And it is ethnically diverse, with new Canadians comprising one-third of the population of the three largest cities, the USDA says.

"It's not a high-growth market. Canada will not ever be much more than a fairly significant state. But with that comes complexity in the marketplace. We have two languages, logistical challenges and geographic expanse," Deloitte's Mark Jamrozinski says.

Retailers must understand Canada's cultural diversity to be successful, says Wendy Liebmann of WSL/Strategic Retail. "We seem like we all look alike," she says. "[But] there is in a country of much smaller population equally as much diversity, particularly in taste of food."

Canada presents an opportunity for niche retailers who deliver products or value that haven't been available. USDA research points out ethnic food sales are projected to increase 15 percent to 20 percent annually, while Canada's higher fruit and vegetable consumption presents an opportunity for U.S. producers, particularly in the offseason.

Quebec province in particular has different cultural attitudes and aesthetics, as well as competitors distinct to that market, Liebmann says. Loblaw made the decision to rebrand six Quebec stores this year under the Provigo Le Marché banner, after it determined Quebec shoppers weren't embracing the Loblaw name. And Metro's pharmacy subsidiary McMahon Distributeur Pharmaceutique Inc. is partnering with Target to provide inventory and operational support to the U.S. retailer's in-store pharmacies in Quebec. Target reported in an August 14 release that it plans to open about 25 locations in Quebec province this fall.

Because of its French-speaking population, Canada also has bilingual packaging requirements and nutritional content claims that differ from those in the U.S.

Canadians overall are accustomed to having fewer banners to shop at, and that has resulted in differences in the way they shop and spend, says Liebmann, whose firm published a report on "How Canada Shops" in 2012. In general, Canadians are less passionate about shopping.

With fewer retailers operating in Canada until recently, the market has been less competitive. As a result, Canadian retailers have relied less on coupons, promotions and loyalty programs, and Canadian shoppers tend to be less coupon-driven. The WSL/Strategic Retail report indicates 55 percent of Canadian shoppers regularly use coupons, compared with 68 percent of U.S. consumers. And 57 percent of Canadians say they pick up circulars in the store, compared with 71 percent of U.S. consumers. Canadians also are less likely to look online for coupons and promotions.

That means U.S. retailers and food manufacturers doing business in Canada can't count on sending out a batch of coupons to drive consumers into their stores.

Ann Meyer, who serves as senior editor of Retail Leader, also is president and CEO of L3C Chicago L3C, a media services firm in Chicago. Her son currently is a student at McGill University in Montreal.