In Zellers Deal. U.S. retailer to pay $1.8 billion
January 14, 2011 2:02 AM
With the long-awaited announcement that Target Corp. will enter the country through a sweeping acquisition of as many as 200 Zellers store leases, Canada's retail landscape will be forever changed, experts said yesterday.
The $1.8-billion deal, a significant premium over the roughly $1.1 billion Hudson's Bay Co. owner Richard Baker paid for Canada's oldest retailer in 2008 for the entire corporation, will shift Canada even further toward a retail economy dominated by U.S. brands, with the exception of the grocery business. It could also breathe life into some of Canada's sleepier shopping malls at which older Zellers locations reside.
For the time being, Zellers will sublease the sites acquired by Target and continue to operate them under the Zellers banner.
While the entry of Target could ring alarm bells for specialty retailers such as Pier One or The Gap, the biggest threat it poses will likely be to Wal-Mart Canada and other large competitors, including Loblaw, Canadian Tire and Shoppers Drug Mart.
"We will match item-by-item on price with Wal-Mart," where it is the top competitor in any given Canadian trade area, said Gregg Steinhafel, Target's CEO, who added the company envisions opening 200 to 250 locations in Canada eventually.
"We offer a superior value proposition, as a high-quality merchant with a more unique assortment that (also) competes with specialty stores."
More significantly for Canadian retail, which has been steadily outperforming its U.S. counterpart sector since the recession, the deal is a boon for Canadian retail real estate, Baker said.
"Allowing Target into Canada and allowing more retailers both from the U.S. and Canada to expand here will drive up values for retail real estate in Canada."
Target has flourished in spite of Wal-Mart's domination in the U.S. by marketing itself as a more stylish alternative when it comes to such things as home decor and clothing and offering competitive prices on household staples. A frequent destination for cross-border shoppers, about 10 per cent of Canada's population has paid a visit to Target each year in the past five years, its executives said yesterday.
"Tens of thousands" of Canadians already carry Target's loyalty card, the Target Red Card, Steinhafel said. The credit and debit card, introduced in October and a key part of Target's strategy to lure new Canadian customers, offers five per cent off every shopping trip at the retailer.
"Our Canadian visitors don't come down and buy $10 worth of stuff, they come and buy cartloads," says Christos Christou, manager of a Target in Plattsburgh, N.Y., a short drive from Montreal.
"If we had no Canadian visitors, we'd probably not hit any of our sales goals."
While Target has not articulated how many formats it will deploy in Canada -it operates a handful in the U.S., including SuperTarget, which carries a full grocery assortment -the amount of food at each Target Canada store will be a site-by-site decision, Steinhafel said. "The size and the shape will determine the size of the offering. There are some use restrictions that currently exist in those leases and we will respect those guardrails."
Ken Wong, marketing professor at Queen's University School of Business, says the deal will significantly revitalize shopping malls across Canada, which have suffered in the past two decades as consumers drove to the suburbs to shop at big-box malls. It will replace "a bunch of eroding anchor stores with a stronger, more virile brand," he said.
"The landlords must be thrilled. This is going to change (consumer)-shopping patterns but it will also change the scope of competitive offerings at other stores like Walmart. Competition makes everyone else better."
Contrary to popular belief, Baker said, Zellers was not losing money, and has been generating close to triple the level of earnings before interest than it did when he bought it.
"What happened was we got approached at the same time by a number of U.S. and Canadian retailers who offered a substantial amount of money (for Zellers)," he said
"What we found out after speaking with our landlords was that what everybody wanted was Target," Baker said, noting Target expects site renovations will require a more-than-$1-billion investment and create thousands of jobs.
Target, which has 1,752 stores across the U.S., has been looking at entering Canada for more than a decade, CEO Steinhafel confirmed, but he echoed an oft-repeated impediment to such a deal: a very tight Canadian real-estate market with few opportunities for a large-scale rollout of "greenfield" locations, that is, completely new stores opening from the ground up and constructed to Target's specifications.
The Zellers brand itself was perhaps doomed to wither from the moment Wal-Mart, with its deep pockets, ultra-low prices and non-union work culture, came to Canada in 1994 with the acquisition of 122 Woolco stores.
The banner, founded in Ontario in 1931 and acquired by Hudson's Bay in 1981, was at one time the biggest mass merchant in Canada with a booming loyalty program, Club Z.
Now Zellers generates an estimated $4 billion in annual revenue and is dwarfed by its former upstart competitor from Arkansas, which generates more than four times that in annual revenue.
January 14, 2011 2:02 AM
With the long-awaited announcement that Target Corp. will enter the country through a sweeping acquisition of as many as 200 Zellers store leases, Canada's retail landscape will be forever changed, experts said yesterday.
The $1.8-billion deal, a significant premium over the roughly $1.1 billion Hudson's Bay Co. owner Richard Baker paid for Canada's oldest retailer in 2008 for the entire corporation, will shift Canada even further toward a retail economy dominated by U.S. brands, with the exception of the grocery business. It could also breathe life into some of Canada's sleepier shopping malls at which older Zellers locations reside.
For the time being, Zellers will sublease the sites acquired by Target and continue to operate them under the Zellers banner.
While the entry of Target could ring alarm bells for specialty retailers such as Pier One or The Gap, the biggest threat it poses will likely be to Wal-Mart Canada and other large competitors, including Loblaw, Canadian Tire and Shoppers Drug Mart.
"We will match item-by-item on price with Wal-Mart," where it is the top competitor in any given Canadian trade area, said Gregg Steinhafel, Target's CEO, who added the company envisions opening 200 to 250 locations in Canada eventually.
"We offer a superior value proposition, as a high-quality merchant with a more unique assortment that (also) competes with specialty stores."
More significantly for Canadian retail, which has been steadily outperforming its U.S. counterpart sector since the recession, the deal is a boon for Canadian retail real estate, Baker said.
"Allowing Target into Canada and allowing more retailers both from the U.S. and Canada to expand here will drive up values for retail real estate in Canada."
Target has flourished in spite of Wal-Mart's domination in the U.S. by marketing itself as a more stylish alternative when it comes to such things as home decor and clothing and offering competitive prices on household staples. A frequent destination for cross-border shoppers, about 10 per cent of Canada's population has paid a visit to Target each year in the past five years, its executives said yesterday.
"Tens of thousands" of Canadians already carry Target's loyalty card, the Target Red Card, Steinhafel said. The credit and debit card, introduced in October and a key part of Target's strategy to lure new Canadian customers, offers five per cent off every shopping trip at the retailer.
"Our Canadian visitors don't come down and buy $10 worth of stuff, they come and buy cartloads," says Christos Christou, manager of a Target in Plattsburgh, N.Y., a short drive from Montreal.
"If we had no Canadian visitors, we'd probably not hit any of our sales goals."
While Target has not articulated how many formats it will deploy in Canada -it operates a handful in the U.S., including SuperTarget, which carries a full grocery assortment -the amount of food at each Target Canada store will be a site-by-site decision, Steinhafel said. "The size and the shape will determine the size of the offering. There are some use restrictions that currently exist in those leases and we will respect those guardrails."
Ken Wong, marketing professor at Queen's University School of Business, says the deal will significantly revitalize shopping malls across Canada, which have suffered in the past two decades as consumers drove to the suburbs to shop at big-box malls. It will replace "a bunch of eroding anchor stores with a stronger, more virile brand," he said.
"The landlords must be thrilled. This is going to change (consumer)-shopping patterns but it will also change the scope of competitive offerings at other stores like Walmart. Competition makes everyone else better."
Contrary to popular belief, Baker said, Zellers was not losing money, and has been generating close to triple the level of earnings before interest than it did when he bought it.
"What happened was we got approached at the same time by a number of U.S. and Canadian retailers who offered a substantial amount of money (for Zellers)," he said
"What we found out after speaking with our landlords was that what everybody wanted was Target," Baker said, noting Target expects site renovations will require a more-than-$1-billion investment and create thousands of jobs.
Target, which has 1,752 stores across the U.S., has been looking at entering Canada for more than a decade, CEO Steinhafel confirmed, but he echoed an oft-repeated impediment to such a deal: a very tight Canadian real-estate market with few opportunities for a large-scale rollout of "greenfield" locations, that is, completely new stores opening from the ground up and constructed to Target's specifications.
The Zellers brand itself was perhaps doomed to wither from the moment Wal-Mart, with its deep pockets, ultra-low prices and non-union work culture, came to Canada in 1994 with the acquisition of 122 Woolco stores.
The banner, founded in Ontario in 1931 and acquired by Hudson's Bay in 1981, was at one time the biggest mass merchant in Canada with a booming loyalty program, Club Z.
Now Zellers generates an estimated $4 billion in annual revenue and is dwarfed by its former upstart competitor from Arkansas, which generates more than four times that in annual revenue.
