Canada's retail revolution
Canadian Tire’s purchase of Forzani is a pre-emptive strike.
When you think of Canadian Tire, it's a pretty safe bet that you probably don't think of trendy, cutting-edge fashion. That said, the recent $770-million deal to acquire sporting-goods retailer Forzani has the look and cut of the latest style from the runways of Wall St. and Bay St.
Investment bankers have been predicting a retail renaissance for 2011, and with its latest acquisition, Canadian Tire seems to be spot on: it's a strategic expansion with a strong defensive undertone. It isn't financed with massive debt and it demonstrates a realistic assessment of its own corporate soft spots — including the imminent onslaught of a second wave of U.S. retail arrivals.
As a retailer that has successfully weathered the recession, Canadian Tire is now moving to attract a younger, more urban customer — one which probably has an early, positive connection with the Canadian Tire brand. Management also laid down the tracks for that earlier this year when it announced that it was reviving an e-commerce strategy that it had put on hold a couple of years ago.
In buying Forzani, which owns Sport Chek and Sports Experts chains, Canadian Tire is doing something else that analysts insist is crucial: using complementary brands to expand market share rather than cannibalizing current sales with overlap and a big bet on achieving synergies.
Furthermore, Canadian Tire is bringing in some auxiliary bench strength — a former executive — to oversee the inevitable hitches that arise in the integration of any new asset. That protects against the risk that existing management will be distracted and lose focus.
With its previous acquisition of Mark's Work Wearhouse, Canadian Tire has already proven that it has the discipline to operate a standalone division, to expand a core demographic and to exploit cross-merchandising opportunities.
The question, of course, is whether all of this careful positioning and calculation will be enough. The pending arrival of an impressive platoon of new American competitors — hungry for growth — is a daunting prospect.
Canadian Tire managed to hold its own against Wal-Mart, but it's now squaring off against Target (which has acquired the leases for more than 200 Zellers stores from HBC), and Dick's Sporting Goods. J. Crew, Kohl's, Marshalls, and Gap Outlets are all waiting in the wings.
The retail market in Canada may be one-tenth the size of that in the U.S., but it's looking pretty plump and juicy by contrast these days. In 2010, retail sales hit $436.5 billion, ahead of pre-recession levels. In the U.S., pre-recession levels are still a distant dream — and not one that's likely to be realized any time soon given the fragility of the economy.
The U.S. retail scene isn't just battered, however, it's saturated and fried: Canada has just 14 square feet per capita of shopping centre space compared to 23 square feet per capita south of the border.
Toss in a strong Canadian currency, stronger consumer confidence and a stronger economic outlook, and the retail conga line at the border is easy to understand. And then there's the brand and product familiarity, cultural comfort level, parallel labour laws, and similar sizing to sweeten the pot even more.
American retailers tend to play a different — and considerably rougher — game. They are more aggressive with pricing and promotion, more innovative (the use of flash sales), and they have used e-commerce to expand sales and brand reach. Canadian retailers, by contrast, have been relatively slow to launch e-commerce websites.
At the same time that Canadian Tire was announcing its Forzani-fuelled re-invention, another Canadian company, Rona, delivered a first quarter financial loss and a 12.6 per cent drop in same store sales, both of which reflect an ongoing struggle — not the least of which lies with the clout of U.S. rival, Home Depot.
As the retail rumble gets rolling over the coming months, there's no question there will be casualties. Consumer choice and pricing, however, will only get healthier. And that never goes out of style.
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