Target takes aim at Canadians, but are we too tapped out?

Target Canada will compete head to head with Wal-Mart, a clash sure to ripple across the industry and perhaps lower prices for shoppers.

John Baici is excited about the prospect of a new Target store opening up near his home in eastern Toronto.

The 50-year-old mechanic has been waiting for the store’s arrival since the Zellers was shut down at the same location last year.

“It kinda fills a void,” he said this week, as he perused mugs and other merchandise at Winners.

Baici was making an impromptu stop-in at the discount department store, which sat between the Best Buy electronics shop he was at and the Sport Chek he was headed to.

Despite their different product mixes, all three retail chains are braced for the American giant’s imminent arrival.

In a matter of weeks, scores of rebranded and freshly redesigned Zellers department stores will be re-launched under the new owner’s banner, providing the first real jolt of competition to Canada’s relatively cozy retail market place in two decades.

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Consumers stand to gain as domestic giants like Walmart Canada, Canadian Tire, Loblaw among others are forced to slash prices, beef up loyalty programs and introduce other frills. But are consumers ready to embrace the new retailer?

A cooling economic environment, sharp slowdown in retail spending and a growing chorus of warnings from banks over personal debt levels all strongly suggest Target’s reception could be frostier than what the company was hoping for.

“You pool all that together and you have a very cautious consumer out there who is buying less,” Doug Stephens, president and principal at Retail Prophet Inc. said. “Consumers have been borrowing their brains out, but that is coming to an end now.”

Target, which plans to open roughly 130 stores in Canada, is the first major retailer to shake up the domestic scene since Walmart leapt feet first into Canada in 1994. The world’s biggest retailer made the jump by acquiring 122 Woolco department stores.

Target – a successful and well-liked brand in the United States that appeals to spendthrifts looking for low prices as well as the fashion-for-less demo – is replicating Walmart’s game plan, taking over 220 Zellers leases from Hudson’s Bay Co.

The Minneapolis-based company is hoping to achieve annual sales of between $5- and $7-billion within a year or two, according to analysts.

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To hit that goal, Target is taking dead aim at the company it Xeroxed its launch plans from: Walmart Canada.

Household “essentials” – things like cleaning, healthcare and beauty products – make up the biggest part of Target’s sales mix. But that category only represents 25 per cent of sales. The remaining three-quarters is divided almost evenly between electronics, apparel, home décor and food and pet supplies.

Target is, in short, one of the few who can match Walmart’s breadth.

“There’s no question if there is a head-on competitor, it is definitely Walmart,” Stephens said.

Taking on the country’s biggest purveyor of general merchandise doesn’t come without fireworks, and the average consumer will have front row seats. Experts say the clash will ripple across the marketplace as Walmart seeks to keep customers by doing what it does best: slash prices.

The move, depending on how aggressive Walmart becomes, could provoke a wide group of competitors, from grocers like Loblaw, to Canadian Tire to higher-end retailer HBC into cutting their prices, analysts anticipate.

“We expect this impact to be spread across all the major general merchandisers,” TD Securities said in a note to investors. “Target’s entry in 2013 will be a test.”

To avoid an all-out price war, big retailers are also trying to ramp up the so-called “customer value proposition,” or industry parlance for making stores more pleasant to shop in, whether through better training of staff or dressing the place up.

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“We need to inspire our customers in-store more than ever,” Stephen Wetmore, the chief of Canadian Tire, said on a recent conference call.

Canadian Tire, which also owns Sport Chek and Mark’s Work Warehouse, is outfitting every one of its locations where a Target is expected to be nearby with the latest bells and whistles as well as its best assortment of top-selling products and apparel, management said.

The iconic Canadian retailer is also toying with the idea of launching new ‘”living”-styled stores that may centre around the kitchen, as well as new and smaller “convenience” –style stores for urban areas.

“We’re ready for the competition and we’ve been ready for a while,” Marco Marroni, chief operating officer, said.

Still, the key question is whether consumers are ready. Even before Target arrives, Canadian retailers are seeing spending slump. Last week, Canadian Tire and Loblaw each reported lower sales and earnings for the final three months of 2012.

The dips come on the back of a slew of data that suggests the credit-fueled consumption of the last several years is winding down.

Fresh survey data from Ipsos-Reid shows a pullback in debt levels among those aged between 45 to 64 in 2012 – the first decline since Ipsos-Reid began taking the survey a decade ago.

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Those aged 25-44 slowed their borrowing, as well, while the growth was attributed primarily to mortgage debt, not discretionary spending.

Retail data for December similarly revealed that spending shrank by a sharp 2.1 per cent and marked in the words of TD Economics, “one of the worst holiday shopping seasons on record.”

Led by calls from Bank of Canada chief Mark Carney, big lenders have sounded warnings in recent months about accumulated debt levels.

The calls come as signs have begun pointing to a slowdown in the economy, making folks concerned about their job prospects and thus, their ability to make payments on credit cards or lines of credit.

Outside a Sobeys at the same Toronto stripmall as Winners, Gavin Howe, a 59-year-old management professor said he expects the economy to remain sluggish this year.

Asked whether his spending habits are being affected, he said: “They are,” though he didn’t know how exactly. “We’re just a little more prudent.”

“If you took a camera and panned [across] a busy street corner, you’re going to find debtors ,” Marvin Zweig, senior vice-president of MNP Ltd, a Toronto-based firm that helps people avoid personal bankruptcy.

Zweig says he’s seen a 15 per cent jump in the number of people walking through his door in the last year, which is reflective across the debt-relief industry, he said. “That’s the standard.”

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The sluggish or even downright gloomy prospects taking hold over the Canadian consumer hasn’t dampened Target’s spirits ahead of next month’s launch however.

“We are feeling very good about our entry into the Canadian market,” Lisa Gibson, a spokesperson, said by email last week. “We are very excited to open stores this month and continue to receive overwhelmingly positive feedback from our future guests.”

Retail Prophet’s Stephens is similarly optimistic. “This is a huge upgrade from Zellers,” he said. “I’m anticipating Target to make waves.”

Back at Winners, Baici has moved onto the white dishware beside the mugs. Asked about the consumer debt issue and lackluster economy in general, he said: “I hadn’t really thought about it.”

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