Wal-Mart To Invest $450 Million To Ramp Up Its Grocery Business In Canada

February 6th, 2014 by Trefis Team
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Quick Take

  • Wal-Mart recently unveiled plans to invest $450 billion in fiscal 2015 to expand its grocery business in Canada, encouraged by the fact that its groceries have performed better than other product categories.
  • The retailer will be opening six new supercenters, adding fresh food to 19 stores and expanding 10 existing outlets.
  • This move should allow Wal-Mart to remain competitive in the highly developed Canadian retail market, where competition has intensified due to Target’s entry.
  • However, an improvement in the Canadian business is unlikely to have any noticeable impact on Wal-Mart’s price estimate since it constitutes a small part of the retailer’s international operations.

Amid its struggling business in the U.S., Mexico, Brazil and China, retail giant Wal-Mart (NYSE:WMT) has decided to strengthen its operations in Canada. Recently, Wal-Mart Canada’s chief executive announced that the company will be spending close to C$500 million (U.S.$452.35 million) in fiscal 2015 (CY 2014) to boost its grocery business and e-commerce operations. [1] [2] It is planning to open six new supercenters (which offer a full line of groceries), expand 10 existing stores, and add fresh food items to 19 stores. [3] Alongside, the company will be investing close to C$91 million in its distribution network to reduce the lead times of its food products.

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Although Wal-Mart’s comparable sales in Canada have declined consistently over the last three quarters, its food and consumables have performed very well. In line with this success, the retailer has decided to enhance its focus on groceries. Moreover, since the retail market in Canada is highly developed and competitive, it makes sense for Wal-Mart to leverage the strongest aspect of its business. The retailer offers its groceries at the lowest prices in the market, and this non-discretionary product category is somewhat resilient to the weak economic environment.

Out of its 6,000 international stores, Wal-Mart operates only 389 stores in Canada. [1] Moreover, its international business accounts for just 35% of its value. Therefore, we do not expect any upside in the retailer’s price estimate even if its Canadian results improve in the future. However, this move will allow Wal-Mart to strengthen its footing in a market where a number of players have struggled for survival. [3]

Our price estimate for Wal-Mart stands at $81, implying a premium of about 10% to the market price.

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Wal-Mart’s Grocery Business Is Doing Well Despite An Overall Slowdown In Canada

Wal-Mart’s comparable stores sales in Canada declined by 1.3%, 0.4% and 1.3%, respectively, in the first three quarters of fiscal 2014. This is attributable to unfavorable weather conditions and weak consumer spending, apparently constrained by high household debts. [4] However, at the same time, food and consumables registered a strong rise in comparable sales. [5]

Therefore, it makes sense for Wal-Mart to expand its grocery business to ensure better results in the future, irrespective of the economic scenario of the country. Wal-Mart Canada’s chief executive Shelley Broader feels that even though the company has existed in Canada for close to 20 years, its grocery business is still at a nascent stage. [3] Food and consumable products accounted for about 43% of Wal-Mart Canada’s sales in 2013, up from 41.7% in 2011 and 30.6% in 2008. [3] In comparison, the retailer earns close to 55% of its revenues from groceries in the U.S. With the recent push in grocery business in Canada, this figure should go up in the future. This will ultimately have a positive impact on the retailer’s comparable store sales.

How Do Groceries Help Wal-Mart?

Consumer spending on groceries can be classified as non-discretionary and is therefore less correlated to macroeconomic factors. During the recession of 2008-2009, consumer spending on food and beverages remained more or less stable, according to economic data from the Bureau of Economic Analysis. [6] This is a favorable product category for retailers because customers that tend to visit a store to buy groceries are 10 times as likely to visit a pharmacy or a general retail store (in the U.S.). This improves cross sell and increases the customers’ overall basket size, which has a positive impact on the retailer’s sales. For example, at Target (NYSE:TGT), which does not have a full-line grocery, stores with a partial-line of groceries in them had higher overall sales than stores without groceries. [7]

Moreover, Wal-Mart utilizes its strong negotiating power to squeeze the best possible agreement from its vendors, which enables it to offer products at cheaper prices. Also, the retailer’s private label brands such as Great Value add a greater depth and variety to its product portfolio. These brands are comparable in quality with other well know national brands, and are cheaper and generate higher margins. Typical grocery items at Wal-Mart Canada are about 8%-20% cheaper than other retailers in the region. [3] This clearly indicates that Canadian consumers likely prefer Wal-Mart over other conventional grocers.

This Move Can Help Wal-Mart Sustain Market Share In Canada

Although Canada’s retail market growth has been weak over the past few years due to slow economic recovery, the grocery industry has performed better. [8] This has encouraged retailers such as Wal-Mart to enhance their focus on food and consumables. However, the retail landscape in Canada is highly developed and Target’s entry last year has further intensified the competition. [8] Even though Target wasn’t able to perform well in the initial stages of its expansion, it has started promoting its food items aggressively through weekly circulated discount flyers. [3]

Since the market is somewhat saturated, growth of a new entrant will likely come at the expense of existing retailers’ sales. Hence, Target’s aggressive expansion in Canada could threaten Wal-Mart’s market share. However, Wal-Mart’s prompt response to this situation and its strong grocery business should help it stay a step ahead of Target. Additionally, it should allow the company to fend off competition from Canada’s largest grocer, Loblaw Cos Ltd. [1]

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Notes:
  1. Wal-Mart sets C$500 million Canada expansion, rival shares fall, Reuters, Feb 4 2014 [↩] [↩] [↩]
  2. Wal-Mart Stores to invest $500-million in Canada, create 7,500 jobs, Financial Post, Feb 4 2014 [↩]
  3. Wal-Mart’s Canadian expansion adds fuel to grocery wars, The Globe and Mail, Feb 4 2014 [↩] [↩] [↩] [↩] [↩] [↩]
  4. Wal-Mart’s Q1 fiscal 2014 earnings transcript, May 16 2013 [↩]
  5. Wal-Mart’s Q3 fiscal 2014 earnings transcript, Nov 14 2013 [↩]
  6. U.S. Bureau Of Economic Analysis [↩]
  7. Big Retailers Fill More Isles With Groceries, The New York Times, Jan 16 2011 [↩]
  8. Retailing In Canada, Euromonitor International, Mar 2013 [↩] [↩]