Retailers are preparing for tough competition as Wal-Mart sets out to win Canadian consumers
Invasion of the shoper snatchers
Retailers are preparing for tough competition as Wal-Mart sets out to win Canadian consumers
The question was on everyone’s tips at the meeting. “When is Wal-Mart coming to Canada?” retailers and property developers kept asking at a Toronto conference of the International Council of Shopping Centres. That was nearly two years ago, and Thomas Seay, executive vice-president of Wal-Mart Stores Inc., kept replying that the giant U.S. retailer had no plans to open any of its discount stores north of the border. De spite that, on Jan. 14, Wal-Mart, the world’s largest retailer with sales of $73 billion in 1993, announced that it had bought 120 of the 142 Woolco stores in Canada from Woolworth Corp. of New York City. Wal-Mart executives said that some stores could reopen under their banner by the summer. However, no official price was revealed for the deal. With its enormous buying power and ruthless efficiency, Wal-Mart will introduce to Canada the everyday low prices that have helped to make the chain a runaway hit with U.S. consumers. “North America is going to have no borders, from a trade standpoint,” said David Glass, Wal-Mart’s president. ‘We see Canada as an unbelievably great opportunity.”
In the last few years, the number of foreign retailers in Canada has mushroomed. IKEA, the furniture merchant from Sweden, U.S. wholesale warehouse operators Price Club and Costco and Toys ‘R’ Us Inc., the giant toy distributor based in Paramus, N.J., among others, have all taken big slices of the $60-biltion Canadian retail pie. But none is as dreaded by its competitors—or as eagerly anticipated by consumers and potential landlords—as Wal-Mart of Bentonville, Ark. Its 2,013 outlets are seldom anything special to look at, equipped as they are with such discount-store standards as fluorescent lighting, wide aisles and goods stacked to the ceiling. But Wal-Mart has developed an unparalleled reputation as an aggressive (some critics say overly aggressive) marketer—a retailer that always has what consumers want, when they want it, at consistently low prices. “Everybody knows the Wal-Mart strategy,” says Michael Pearce, an associate business professor at the University of Western Ontario in London. “The difficulty comes in trying to match their execution.”
Wal-Mart’s Canadian competition is promising a good fight, and industry analysts suspect that Canadian shoppers may not be as susceptible as Americans to its aggressive sales tactics. Even so, the Wal-Mart mystique has already proved to be a potent force. The day the
company announced the Woolco acquisition, investors dumped stock in many future Wal-Mart competitors. Shares of Hudson’s Bay Co., which operates The Bay and Zellers, fell furthest, plummeting $4.87 to $35 on the Toronto Stock Exchange (TSE). The slide continued last week: in all, the TSE’s merchandising listings fell 1.5 per cent at a time when the TSE 300 Index was setting record highs.
Wal-Mart’s reputation for being not only non-union but anti-union has also preceded it to Canada. According to John Berrington, Woolco’s marketing manager, the company offered to sell all 142 stores in Canada. WalMart, however, chose not to buy 22 of those stores, including seven (three each in British Columbia and Quebec and one in Ontario) that have union representation. “We believe that that was done deliberately to keep the union from getting a toehold in Wal-Mart in Canada,” said Tom Kukovica, Canadian director of the Washington-based United Food and Commercial Workers Union. ‘The evidence speaks for itself.” But Wal-Mart executives denied that union affiliation played any part in their choice of stores. “It’s coincidental really, and not obvious,” Glass told Maclean’s. He said that Wal-Mart considered about 25 factors for each store, such as the cost of refitting it and its potential
for sales. “We re jected certain stores for one reason or another, but no consistent reason,”
Glass added. He also denied that Wal-Mart is in any way anti-union.
“We have no aversion to unions,” he said.
Whatever challenges unions may confront, Canadian retailers also face a daunting task in coming to terms with the new competition. Pearce cautioned that although discount and department stores apparently have most to lose, few Canadian retailers can afford to be complacent about Wal-Mart. Each Wal-Mart store—usually about the same size as the Woolco stores they will be taking over in Canada—has 36 departments, from clothing to electronics to lawn and garden supplies. In addition, some WalMart stores have pharmacies, automotive supply and service departments and optical centres. “Consumers are in for a terrific experience,” said Stephen Bebis, president of Toronto-based Aikenhead’s Home Improvement Warehouse Inc., which has shaken up the traditional hardware trade in southwestern Ontario with its new huge-volume, low-prices outlets. Bebis, an American citizen who competed against Wal-Mart while working in retailing in Atlanta, Ga„ said: “They are a fantastic retailer and they are going to be formidable competition.”
Wal-Mart is arriving with an enviable record among merchandisers. According to Vancouver retail consultant Ian Thomas, the company earns on average $380 per square foot of retail space, about three times the industry average. By that calculation, he said, Wal-Mart could the oretically triple Woolco’s annual sales in Canada to $4.8 billion from $1.6 billion—making it a far more formidable U.S.-owned threat to de mestic retailers than the sleepy Woolco chain was. Zellers is currently the Canadian industry’s leader, with annual sales of $3.2 billion. “Within three years, Wal-Mart could become the largest retailer in Canada,” Thomas said.
Despite Wal-Mart’s huge size, Bebis says
that the U.S. giant is far from invincible. For one thing, its prices and range of products are often more impressive than its depth of selection. “They attract the kind of consumer who goes to buy back-to-school clothes for the kids, and then picks up light bulbs as well,” said Bebis. “But if the consumer is after something specific like paint, each Aikenhead’s store will always have 5,000 gallons in stock, while a WalMart will have 200 gallons.” Other Canadian retailers agree that they can compete against the U.S. giant. Analysts have suggested that, as Canada’s largest discounter, Zellers stands to lose most to Wal-Mart. But Paul Walters, president of the 290-store Montreal-based chain, argues that Zellers is best equipped to fight the newcomer. He notes that Zellers has built customer loyalty with its Club Z program, in which regular shoppers earn points towards free merchandise. Said Walter: “Club Z has seven million members out of a possible 11 million households.” As well, Zellers has already gone head-to-head with Wal-Mart in several border towns, including Cornwall, Ont. (across the St. Lawrence River from Massena, N.Y.), and Sault Ste. Marie, Ont. (next to the Michigan town of the same name). “Wherever we’ve been in close proximity, we haven’t seen any impact,” Walters said.
Wal-Mart was founded in 1962 by Sam Walton, who died in 1992 at the age of 74 of bone cancer. Walton, who spurred the growth of his empire through equal measures of hard work, penny-pinching and evangelistic zeal, had struck upon a winning formula: concentrate on the small towns that most big retailers tend to ignore. By 1990, Wal-Mart had overtaken the 105-year-old Sears, Roebuck & Co. of Chicago as the world’s largest retailer. Along the way, Wal-Mart spent millions on inventory management,
including a satellite communications system that, besides tracking goods, can transmit suggestions from “associates”—as Wal-Mart calls its employees—to head office. And while many companies have started working more closely with their suppliers, Wal-Mart sometimes goes a step further and works with its suppliers’ suppliers. For instance, Wal-Mart will make sure that an apparel manufacturer has enough fabric on hand to make the garments it has ordered.
The company also has one of retailing’s most sophisticated and efficient distribution systems, a factor that helps keep prices down. But some of its competitors have accused Wal-Mart of selling goods below cost to drive them out of business. Indeed, in October, an Arkansas Supreme Court judge fined Wal-Mart nearly $300,000 for predatory pricing, agreeing with the three pharmacies that took the case to court that Wal-Mart policies had the intent of “injuring competitors.” Wal-Mart—which admitted that it sold some items below cost, but denied that it intended to destroy competition—has appealed the conviction.
It is too early yet to say whether the prices on Wal-Mart’s Canadian shelves will be as attractive as those on its U.S. shelves. But retail analysts say that the higher costs of doing business in Canada, including the tax structure that supports the social safety net, as well as minimum-wage laws and other labor regulations, will inevitably result in higher markups.
Another challenge facing Wal-Mart is in the subtle cultural differences in its new place of business. Wal-Mart said that it plans to hire— and retrain—most of Woolco’s current 16,000 Canadian employees. But Canadians are traditionally much more reserved than Americans. As a result, said Joan Pajunen, a managing director of the Toronto-based consulting firm Service Dimensions Inc., Wal-Mart’s new employees are less likely to buy into the pep-rally culture than their U.S. counterparts. “Can you imagine 50 or 60 Canadian employees standing there every morning with the hands on their chest, singing the national anthem?” said Pajunen. “I sure can’t.” As well, customers in Canada might not be impressed by such standard Wal-Mart techniques as having “associates” greet them at the door, she said. “Canadians want helpful service, but Americans put a much higher premium on enthusiasm,” Pajunen noted. On the other hand, Wal-Mart has become the world’s biggest retailer by catering to what the customer wants. It may be a formula that knows no borders.
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