Canadian Retailers Brace For Wal-Mart's Arrival

By , Staff writer of The Christian Science Monitor

CANADIAN retailers have been expecting ``it'' for years. But that did not lessen the shock last week when Wal-Mart, the 500-pound gorilla of discount retailing, said it was coming to Canada.

The stocks of several major Canadian retailers plummeted last Friday as investors reacted to Wal-Mart's announcement that it would purchase 120 Woolco stores from Woolworth Canada Inc.

The price for Woolco's stores is said to be around US$300 million, though no figure has been announced. It gives the world's largest retailer - known for its low prices, smiling employees, and determination to beat competitors - an immediate presence in Canada where it had none.

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The purchase is subject to Canadian regulatory approval and should be finalized in March. Most of the 16,000 Woolco employees will be rehired by Wal-Mart, company officials said in a statement. New Wal-Marts would begin opening rapidly thereafter, company officials said.

One Canadian retail analyst called the announcement the biggest development in mass merchandising in Canada since World War II. Whether or not that is true, Canadian retailers are wary. Many companies have been streamlining operations, bracing for the expected onslaught of large United States retailers since free trade with the US began in 1989.

``Wal-Mart is seen as the godzilla, the bogeyman that everyone's trying to fight,'' says Richard Talbot, managing director at Thomas Consultants International. ``[Canadian retailers] are ready. They're not looking forward to it. But they're ready.''

Wal-Mart's arrival is actually a bonanza for shopping center owners and the smaller stores in those centers previously ``anchored'' by the poorly performing Woolco stores, he says. For them, ``this is like manna from heaven,'' Mr. Talbot says.

Three years of recession have already weeded out many of the weakest Canadian retailers. The economy and Canadian retailers' profitability have been picking up, but Wal-Mart's arrival portends a new level of toe-to-toe price competition.

Directly in the line of fire is the 128-store Canadian division of K mart with C$1.3 billion [US$986 million] in 1992 sales, and Zellers, a 290-store Canadian discount chain with C$3.2 billion in estimated 1993 sales that is owned by the Hudson Bay Co.

Also affected are Canada's two big department store chains: The Bay (also owned by the Hudson Bay Co.) with 89 stores and C$2 billion in sales in 1992 and T. Eaton Co. Ltd., a privately held group of 94 stories with about C$2 billion in sales. Sears Canada's 110 stores (C$4 billion in sales) will be hit along with Canadian Tire, a hardware and household goods retailer, with 424 stores.

Wal-Mart, by comparison, has more than 2,000 stores and 326 Sam's Clubs warehouse outlets in the US, Puerto Rico, and Mexico, generating sales of about US$68 billion in 1993.

The timing of the deal is nearly perfect, analysts say, given that the new North American Free Trade Agreement will soon eliminate any remaining tariffs on goods shipped to Canadian outlets from US suppliers. The locations are also a good fit, they say.

``The stores they are taking over are in the kind of [under served] secondary markets where Wal-Mart previously flourished,'' says Steven Isenberg, merchandising analyst with Credifinance Securities Ltd. of Toronto. ``They'll feel right at home.'' Zoning regulations are generally much stricter in Canada than the US, he says, and building one store at a time would have been difficult.

Facing the greatest risk are the two big department store chains, Bay and Eaton's, several analysts say. ``We could see the loss of one of the two,'' Mr. Isenberg says.

Even though Wal-Mart's direct competition is with Canadian discounters Zellers and K mart, analysts say they are the least vulnerable. K mart is used to scrapping with Wal-Mart in the US, and Zellers has carefully girded for the battle.

``There's not a mass merchandiser that didn't know Wal-Mart was coming sometime, but I don't think many of them thought it would be this quick,'' Isenberg says.

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