Target says it's 'thrilled' by Canadian response to store openings

Employees welcome the first shoppers who lined up for the new Target store in in Guelph, Ont. on Tuesday March 5, 2013. The company is expected to open between 125 and 135 locations in Canada. (THE CANADIAN PRESS / Dave Chidley)

Target's U.S. executives say they are blown away with consumer response to the opening of the chain's first 24 stores in Canada and expect the foray will be profitable next year.

Chief financial officer John Mulligan told CIBC's retail conference on Thursday that reaction has been like Black Friday and Boxing Day, two key shopping days that traditionally drive high spending.

"It's like having that every single day, all day long, so it's been quite remarkable the response," Mulligan said of the openings in the Toronto area.

Target has been criticized during its unofficial "soft openings" for running out of some products in the frenzy to keep up with demand. Milk has been a big seller, which Mulligan said is a very important sign because groceries drive how frequently shoppers visit stores and encourage important midweek purchases.

Minnesota-based Target (NYSE:TGT) plans to open an addition 100 stores in Canada this year, reaching 150 locations by 2017 when its Canadian operations are expected to generation 10 per cent of systemwide earnings.

"We have seen overwhelming response as Canadian consumers have come into the stores and we're thrilled by that, that's a great problem to have, more people than we expected," Mulligan said.

While Canada's retail environment is less competitive than the U.S. with lower per capita square footage, Target said it is entering a market with very, very strong local operators, particularly grocery chains and Canadian Tire, along with U.S. stalwarts like Walmart and Costco.

"So when we look across, we recognize that this is an area with very strong competition and we need to do the things we do well, extremely well," Mulligan said.

That means competing with local rivals on price, even if they are higher than in the United States and differentiating itself on assortment and style.

One way the company says it has set itself apart has been to work with musicians such as Justin Timberlake and Taylor Swift to offer extra tracks on their CDs sold in Target stores.

Mulligan said Target's research has found that consumer behaviour is similar in Canada and the U.S. He said the top thing the chain has heard is Canadians want the same retail experience as in the U.S., not "Target Light" or "Target Canada."

However, the novelty of entering Quebec in a new language has prompted Target to purposefully delay store openings in the French-speaking province.

"There's a reason that Quebec comes late in the opening cycles. There's a lot for us to learn and we spent a lot of time trying to learn everything we're going to need to do to enter there appropriately."

While Target's first Canadian store openings have generated buzz, several of the country's leading retailers say the arrival of the U.S. giant has so far had a limited impact on them.

Supermarket chains Metro Inc. (TSX:MRU) and Empire Co. (TSX:EMP.A) said Target's food offerings so far have mainly been in dry groceries and that prices are similar to the discounted levels already seen in Ontario's highly competitive market.

"The pricing is at or about the discount pricing in the market so we didn't see price disruption coming from Target so far but it's early," Metro CEO Eric La Fleche told the Toronto conference.

Just weeks after the first Target stores opened, some Metro stores have seen traffic increase while others have lost some grocery sales. However, La Fleche said it was too early to tell what the impact of Target has been.

Mulligan said that driving traffic to Target stores from food sales is less important than in the U.S. because of the prime locations of the former Zeller's stores in Canada.

Empire, which operates Sobey's and the Freshco discount banner and is a wholesaler of some products for Target, said the competitor's arrival has actually increased consumer traffic to its nearby locations.

"We believe our differentiated food offering will allow us to continue to convince customers that although there are opportunities to serve parts of their grocery needs at other players, that if you are looking to do a full grocery shop in this country we are still the best full-service provider in order to meet those customer needs," chief financial officer Paul Jewer told the conference.

Canadian Tire (TSX:CTC) said it has been preparing for heightened competition by renovating stores, adding new formats, introducing new technology and preparing to launch online shopping later this year.

Two years ago it reviewed its outdoor living category and made changes to appeal to consumers. A similar opportunity exists in hunting, fishing and tools.

"We believe we can improve our execution and our offering to our consumers to keep us the top of mind," said Marco Marrone, chief operating officer.

CIBC World Markets said discount department stores are poised to take more market share in the coming year as debt-conscious consumers and relatively stagnant wage growth weighs on retail spending.

"Canadians have heard the message from Ottawa: be careful what you borrow for. But turning more prudent on debt accumulation has meant leaner times for retail spending growth over the last year," chief economist Avery Shenfeld wrote in a report published for the conference.

Retail sales grew just 2.5 per cent last year marking the second year of decrease from the 5.6 per cent growth in 2010 when Canadians were more eager to borrow at low rates to finance their shopping sprees.

Disposable income gains will likely remain modest this year.

"In that climate, discount stores will continue to grab market share, particularly given the entry of a major U.S.-based player this year," Shenfeld said.

After a peaceful and prosperous decade for Canadian retailers, large U.S. retailers including Target, Nordstrom and international specialty retailers are beginning to offer some competitive disruption, added CIBC analyst Perry Caicco.

These developments "will test the resolve and resiliency of Canadian retailers, large and small" for the next few years, he said. However, he said the competition will "make it a good time to be a consumer as choices will continue to expand and prices will come down."