Wal-Mart Canada Shops At Target; Gets 13 Stores
As Target (NYSE:TGT) announced its exit from Canada earlier this year, it opened a window of opportunity for its counterpart Wal-Mart (NYSE:WMT) Canada. Not only in the form of reduced competition, but also in the form of easier expansion. A few months back, the retail giant had announced that it is planning to open 29 new Supercenters this year, which will take its store count up to 396 by the end of 2015. [1] With Target’s exit, Wal-Mart has an option of buying the leases for Zellers stores for the purpose of expansion, which Target would gladly sell to pay its creditors. Last week, Wal-Mart’s Canadian division announced that it is buying 13 former Target stores spread across five provinces for $165 million, and will spend another $185 million on renovations. [2]
Target Canada’s closure had left behind a wide network of stores up for sale, but Wal-Mart has shown its interest in only a few. The threat of self-cannibalization would have made Wal-Mart a little reluctant in going after Target stores, but Loblaw (Wal-Mart’s main competitor now) was showing interest in Target’s assets, and Wal-Mart would not have wanted to allow Loblaw that competitive advantage. Trying to find a right balance between the two aspects, Wal-Mart has decided to acquire only a few of Target’s stores, that appear most relevant for its expansion strategy. The company is wary of the fact that over-expansion can easily lead to low profitability.
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Why Wal-Mart Is Not Buying
Target originally bought leases for 189 Zellers stores for C$1.825 billion in 2011, and eventually turned only 133 of them to its iconic format. Meanwhile, it sold leases for remaining stores to other retailers, including 39 to Wal-Mart. With Target’s closure, leases for its 133 locations will be up for sale. The retailer employed 17,600 employees in Canada and hence, potential suitors will have a huge pool of skilled labor to choose from in addition to store assets. By hiring employees of a given store while acquiring its lease, Wal-Mart will be able to increase both operating efficiencies and pace of the conversion process. There appears enough incentive for any retailer to acquire what Target left behind, but incentive for Wal-Mart seems limited.
The world’s largest retailer has a lot of cash on hand and buying the leases for all these stores would not cost it much. However, buying leases for Zellers stores from Target will not do much good for Wal-Mart’s strategy of expanding its Supercenter base. Target stores were on an average 112,000 sq. ft. large, which is significantly smaller than what Wal-Mart would want for its new locations. Also, it is expected that most of Target’s customers will automatically drift towards Wal-Mart, making buying leases a redundant move. Moreover, Wal-Mart effectlively will be limited to the few locations that are not in the vicinity of its existing outlets. It is thus after careful review that the retailer has narrowed the list to these 13 outlets.
How This Small Purchase May Serve An Important Purpose
Wal-Mart has very little to gain from Target’s leftovers, but it can lose more if Loblaw gets its hands on Target’s stores. Loblaw, the largest Canadian grocery chain is a direct competitor to Wal-Mart, as it caters to low-middle income groups across the country. With its “Real Canadian Superstores”, it has successfully positioned itself in the league of retailers such as Wal-Mart and Target. In fact, in the grocery space, Loblaw is the clear leader with 27% (2013) share, compared to Wal-Mart’s 6%. [3] Although Wal-Mart’s market share might have improved substantially in 2014, it would still have been a long way behind Loblaw. If Loblaw acquires a few Target locations, leaving non-lucrative options for Wal-Mart, it can easily sustain its dominance in the Canadian grocery market, making Wal-Mart’s future growth a little strenuous.
Wal-Mart may as well have decided to buy these 13 stores as a preemptive strike against Loblaw, not allowing the latter to go after locations with high tactical importance. However, it seems more likely that Wal-Mart’s strategy was to merely expand its reach in relatively under-penetrated markets, where it now stands a better chance of capturing market share. Either way, Wal-Mart is gaining something from Target’s stores. It is likely that the company may plan to buy more locations later this year, or next year, should they remain available. Being the only American retailer operating in Canada, Wal-Mart now has the freedom to expand with relatively fewer concerns.
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- Walmart says to invest $269 million in Canada, Reuters, Feb 11 2015 [↩]
- Walmart announces further investment in Canadian market, Wal-Mart, May 8 2015 [↩]
- Grocery sales on rise at Walmart Canada – but traffic is falling, Global News, Nov 13 2014 [↩]