Byline: Miles Socha

TORONTO — Zellers Inc., Canada’s leading discount department store, is ready for a fight.
Faced with Wal-Mart Stores’ expansion into Canada this year, Zellers has committed itself to an aggressive defense of its market-leading position, even at the risk of hurting its bottom line, Paul Walters, Zellers’ president, said in an interview.
“We’re not letting [Wal-Mart] come in and steamroll us,” he said. “We are very much prepared to take Wal-Mart head on.”
Zellers, which operates about 300 discount stores, has annual sales of $2.3 billion ($3.2 billion Canadian) and holds an estimated 50 percent share of the discount store market in Canada, Walters said. It is owned by Hudson’s Bay Co. here.
Wal-Mart made its first move into Canada last January with the acquisition of 122 Woolco stores from Woolworth Canada. The stores accounted for annual sales of about $1.2 billion at the time.
The Bentonville, Ark.-based retailer spent about $200 million to remodel and convert the 122 units to Wal-Marts. It intends to double stockkeeping units to 70,000 at each store and is striving for sales of $217 per square foot, analysts said.
Following the remodeling, same-store sales at the new Wal-Marts have increased as much as 60 to 80 percent in some instances, according to a Wal-Mart Canada spokesman. Building on this initial success, Wal-Mart will open about 100 new stores in Canada in the next several years, at the rate of 12 to 14 per year, analysts said.
In response to Wal-Mart’s arrival, Zellers has sought to reinforce its position as Canada’s low-price retailer.
“It is not an option to be noncompetitive on price,” Walters said.
For Zellers, this means aggressively following its slogan, “The lowest price is the law.” But the strategy has taken its toll.
Zellers’ operating profits in the second quarter ended July 31 fell 17 percent to $27 million from $32.5 million in the year-ago quarter. This marked the first time since 1992 that Zellers’ quarterly operating profits declined. Many analysts expect Zellers’ operating profits to continue to slide in 1995 and 1996 as a result of a price war with Wal-Mart.
Zellers’ counterattack against Wal-Mart also includes widening product assortments, increasing advertising, enhancing frequent-shopper reward programs and renovating stores, especially units near newly renovated Wal-Marts. The renovations include fixtures, signs, flooring and checkouts.
Like Wal-Mart, Zellers has ambitious expansion plans. It will have rolled out 11 new 100,000-square-foot stores by the time its fiscal year ends in January and expects to add another 20 units before January 1996. Within five years, Zellers expects to have 400 locations, Walters said.
Walters acknowledged that Wal-Mart has a higher sku count, but said Zellers plans to expand its assortment in categories where it competes head-to-head by adding new items and raising shelf heights. He declined to specify the number of sku’s per Zellers store.
In the apparel sector, Walters said Zellers will strive to maintain its hefty edge on Wal-Mart, which is trying to boost apparel sales by adding sku’s. About 40 percent of Zellers’ total sales are from apparel, which compares with about 28 percent at Wal-Mart’s Canadian stores, according to industry estimates. Zellers is particularly strong in children’s wear, with an estimated 30 percent share of the business at all department stores, both discount and traditional, in Canada, Walters said.
In addition, he said, Zellers has moved to strengthen customer loyalty with its frequent-shopper programs. Its “Club Z” program, launched in 1986, rewards shoppers with points they can use to obtain free merchandise. Club Z has 8.3 million cardholder members, or about 80 percent of all Canadian households, according to Walters. Club Z Members collect 100 points for every dollar spent at Zellers and at Club Z partner retailers. Rewards range from furniture and appliances to vacations in Mexico.
Additionally, last May Zellers launched “More Card Dollars.” This promotion gives shoppers $4 toward future purchases every time they charge more than $80 a month on their Zellers credit card.
“It provides for additional loyalty beyond low price — and adds a dimension Wal-Mart doesn’t have,” Walters said of the frequent-shopper programs.
“Most U.S. and Canadian discounters have relative sameness in assortment, pricing and selection,” he said. “Our value promise to consumers goes beyond price and assortment and rewards customers for loyalty.”
Analysts agreed that Zellers is well prepared to match Wal-Mart in a price war even through the crucial Christmas season.
Steve Isenberg, an analyst with Credifinance Securities Ltd. here, said Zellers is well capitalized and should be able to withstand profit erosion for a long time.
“They can show no profitability on merchandising and still be a profitable company,” he said — as long as customers continue to use their Zellers’ credit cards.
Marilyn Brophy, an analyst at Levesque Beaubien Geoffrion Inc. here, estimated that 83 percent of Canadians shop at Zellers and spend an average of $290 per year. In comparison, she estimated that 68 percent of Canadians shop at Wal-Mart and spend $198 annually.
Brophy estimated that Wal-Mart Canada will report sales of $1.4 billion (or about $98 per square foot) and an operating loss of $49.3 million for the year ending Jan. 31, 1995.
Among its strengths, Zellers has more convenient locations, effective advertising, strong loyalty programs, solid management and, at the outset, a lower cost structure than Wal-Mart because of its established distribution channel and a higher volume, Canadian analysts said.
But Zellers falls short on store size, product selection, store appearance, brand-name apparel and service, the analysts said.
Observers warn that Wal-Mart is just beginning to flex its muscles. Competition will intensify as the Canadian Wal-Marts get fully merchandised and distribution becomes more efficient, George Hartman, an analyst at BBN James Capel Inc. here, said in a recent industry report.
“In the long term, Wal-Mart is operating 122 stores and will get more powerful as it opens the estimated 100 additional fill-in stores,” Hartman said. Walters countered that Zellers is building bigger stores, enlarging assortments and proceeding with renovations.
“We feel quite confident in our overall ability to compete,” he said.
— Fairchild News Service

load comments
blog comments powered by Disqus