Canada markets open in 9 hours 1 minute
  • S&P/TSX

    +79.43 (+0.40%)
  • S&P 500

    -4.31 (-0.09%)
  • DOW

    +13.44 (+0.04%)

    +0.0007 (+0.10%)

    +0.21 (+0.27%)
  • Bitcoin CAD

    -22.61 (-0.04%)
  • CMC Crypto 200

    -2.48 (-0.32%)

    -3.30 (-0.16%)
  • RUSSELL 2000

    +11.00 (+0.61%)
  • 10-Yr Bond

    -4.2710 (-100.00%)
  • NASDAQ futures

    +35.25 (+0.22%)

    -12.69 (-100.00%)
  • FTSE

    -31.78 (-0.43%)
  • NIKKEI 225

    +75.40 (+0.23%)

    +0.0007 (+0.10%)

They're here, but now what? US retailers prepare to ramp up price wars

Workers install an outdoor sign at the Target store in Dartmouth, N.S., on July 20, 2013. THE CANADIAN PRESS/Andrew Vaughan

By David Friend, The Canadian Press

TORONTO - Now that American retailers have landed in Canada, prepare for the fireworks as stores launch massive promotions and deep discounts in an attempt to draw shoppers.

The arrival of Target and Marshalls — and the expansion of Walmart — hasn't exactly revolutionized shopping, but it has laid the foundation for what industry watchers say will be a bigger fight for marketshare next year.

"We can expect to see some very desperate retailers," said Brynn Winegard, a marketing expert at Winegard and Company.

"A lot of organizations will be vying for the same amount of consumer dollars."

For shoppers, that could mean significant price reductions, "Buy One, Get One Free" offers and similar promotions, while price matching and lax exchange rules set precedents.

And the spectacle won't be limited to the big U.S. chains, as even domestic companies like Canadian Tire (TSX:CTC-A.TO - News), Joe Fresh and Indigo will ramp up the spectacle around their own operations.

Much of this competition was supposed to play out earlier this year when Target first set foot in the country amid a level of hype rarely seen in the industry. But the retailer failed to impress consumers, especially those who had loyally crossed the border to shop at its U.S. Target locations.

A survey released by Level5, a brand strategy adviser, found that consumer sentiment for Target is on level with the struggling operations of Sears Canada.

Some customers likened Canada's version to "Target Lite," with lackluster prices and an atmosphere that, despite renovations, still had the feel of the Zellers outlets that occupied the same spaces for years before.

"First impressions are big, and so Target's not getting off to a great start," said Bobby Hagedorn, a retail industry analyst at Edward Jones, who said the misstep gave competitors a lead.

"All the Canadian companies are now running and seem to be more prepared than they were before. We're in a period of transition."

Despite the time spared, the U.S. challengers are plentiful and diverse, with big names like Microsoft setting up shop while more niche retailers, such as Zara Home, and women's clothing shops Ann Taylor and Black House, White Market, vie to corner their own segments.

In department stores, Hudson's Bay Co. (TSX:HBC.TO - News) struck an agreement to bring Saks Inc. to Canada while next year upscale retailer Nordstrom enters the mix nationwide with locations acquired from Sears Canada (TSX:SCC.TO - News).

One of the most competitive spaces will be grocery stores where intermittent price wars have waged on for years. The recent rollout of competitively-priced produce sections at Walmart supercentres has added to the pressure, while Target also launched a mini-supermarket inside its stores.

Add Inc. to the list after the Internet company opened a virtual supermarket in Canada that ships non-perishable food items directly to consumer's homes.

In response, Canadian grocery chains have ramped up consolidation to grab a stronger market presence and more buying power with manufacturers, which helps keep their prices lower. Earlier this year, Loblaw (TSX:L) agreed to buy Shoppers Drug Mart Corp. (TSX:SC.TO - News) while Sobeys picked up the Canadian assets of U.S. grocer Safeway.

It's debatable how much the heightened activity in Canada has convinced shoppers to stay within the country.

Data from Statistics Canada shows a climb in the number of trips to the United States throughout the year, encouraged by the introduction of higher duty-free allowances and a steady exchange rate.

In September, 2.74 million cross-border daytrips were made by car, a 1.2 per cent increase from the busy August summer travel season when 2.67 million trips were made.

Year by year, the number of same-day trips are rising too. In 2010, Canadians made 26.3 million trips, rising to 31 million the next year, and 32.4 million in 2012.

While it's difficult to determine how many of those were shopping trips, the data is still an indication that Canadians aren't staying home in huge numbers.

Niagara Falls resident Jessica Manning says the U.S. is a more attractive place to shop for anyone who can muster up the time.

"They enjoy Canadians shopping there, and they're willing to help you more, I find, than in Canada," she said. "When I shop here (in Canada) I find there are very few sizes left, while in the states they have better stock."

Other longtime cross-border shoppers have scaled back on the number of trips they make, including Toronto-area resident Anne Yau. She said that she isn't spending more at home, even with the wider selection of U.S. retailers in Canada.

"To be honest, I haven't even gone to the Target since it moved here," she said. "Everyone has said it's still not as good as the states, and they don't carry as many products. The deals are not as good."

Opinions like that are painful for retailers as they're a sign that Canadians, who benefited from widespread sales and a strong loonie during the economic downturn, now expect those rock-bottom prices.

Over several years, that could have a detrimental impact on the retail industry because deep discounts aren't as effective in stimulating the economy, said Winegard.

Retailers also face tepid consumer spending growth, which in recent months has inched ahead only slightly. Economists predict that Canadians will remain cautious about their finances and keep spending low into next year.

In September, home renovations retailer Rona (TSX:RON.TO - News) chief executive officer Robert Sawyer emphasized the negative impact of the U.S. entrants, telling an industry conference that "in Ontario, it’s a bloodbath for every retailer."

"It's difficult, not only for the hardware business," he said.

Executives at Target have assured investors that while they may be knocked down, they're still in the game. Chief executive Gregg Steinhafel said last month that the launch has "fallen well short of expectations" but that he wants to "redefine" the company as a one-stop shop for Canadians.

Already Target has launched advertisements that emphasize its weekly flyer discounts, and its position as the "all in one place" holiday shop.

But Target won't be alone in that quest as other retailers will follow a similar plan to "increase their basket size," an industry term used to track how many items a shopper piles into their cart each visit, said Winegard.

The most effective way to fill carts is through "Buy One, Get One Free," and major discounts. However, Winegard warned that while it has an immediate upside for consumers, it'll have a ripple effect on the industry.

Too many deals typically result in a practice she calls "pantry loading," which is when people stock up on non-perishables, such as mouthwash and clothes, and then visit stores less frequently to spend money — a factor that could knock the wind out of retail sales figures.

Those discount practices will also filter out weaker companies within three to five years, she said. In clothing, that could force smaller label brands and boutiques to shut their doors.

Winegard said that one lesson many U.S. retailers haven't learned is that Canada is a diverse country with buying patterns that vary by region. What works in Toronto won't necessarily catch on in Edmonton or smaller cities in Quebec, for example.

Those factors could drive retailers to get creative with how they sell to consumers.

"It's what capitalism boasts," she said.

"It's a great time for innovation and viable competitors to really sharpen their chops. The ones that don't do that will perish."