Wal-Mart Looks To Revamp Its Canada Grocery Business With Increased Investment And A New CEO

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The world’s largest retailer, Wal-Mart (NYSE:WMT), is leaving no stone unturned to solidify its grocery business in Canada. Earlier this year, the retailer announced that it will be spending close to Canadian $500 million (U.S.$452.35 million) in fiscal 2015 (CY 2014), to boost its grocery business and e-commerce operations in the country. Wal-Mart Canada’s chief executive, Shelley Broader, stated that the company is planning to open six new supercenters (which offer complete line of groceries), expand 10 existing stores and add fresh food items to 19 stores. Alongside, the retailer plans to invest C$91 million in its distribution network to reduce the lead times of its food products. [1]

In a much recent move, Wal-Mart appointed Dirk Van den Berghe as CEO and president for its Canadian Business, who has a strong background in the food retail industry. Berghe has previously worked with Belgium based food retailer, Delhaize Group, that has operations in eight countries spreads over three continents. Berghe will report to Shelly Broader, who has been promoted to look after Wal-Mart’s operations in Canada, Europe, the Middle East and Africa. In addition to his time with Delhaize Group, Berghe has been a professor of international business at university level and has held the position of Belgium’s international trade commissioner for more than 10 years. [2] We believe that Berghe’s inclusion in Wal-Mart Canada’s top level management will help the retailer leverage its strong grocery business to vitalize its overall operations in the region.

Our price estimate for Wal-Mart stands at $79.30, which is less than 5% ahead of the market price.

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Grocery Business Has Done Well Despite An Overall Slowdown

Wal-Mart’s comparable stores sales in Canada declined by 1.3%, 0.4%,1.3% and 1.7%, respectively, during the four quarters of fiscal 2014. This is attributable to unfavorable weather conditions and weak consumer spending, apparently constrained by high household debts. However, at the same time, food and consumables registered a strong rise in comparable sales.

Therefore, it makes sense for Wal-Mart to expand its grocery business to ensure better results in the future, irrespective of the economic scenario of the country. When Wal-Mart Canada announced its investment plans earlier this year, chief executive Shelley Broader said that even though the company has existed in Canada for 20 years, its grocery business is still at a nascent stage. Food and consumable products accounted for about 43% of Wal-Mart Canada’s sales in 2013, up from 41.7% in 2011 and 30.6% in 2008. [3] In comparison, the retailer earns close to 55% of its revenues from groceries in the U.S. With the recent push in grocery business in Canada, this figure should go up in the future. This will ultimately have a positive impact on the retailer’s comparable store sales.

Why Is Grocery Business So Important For Wal-Mart?

Consumer spending on groceries can be classified as non-discretionary and is therefore less correlated to macroeconomic factors. During the recession of 2008-2009, consumer spending on food and beverages remained more or less stable, according to economic data from the Bureau of Economic Analysis. [4] This is a favorable product category for retailers because customers that tend to visit a store to buy groceries are 10 times as likely to visit a pharmacy or a general retail store (in the U.S.). This improves cross sell and increases the customers’ overall basket size, which has a positive impact on the retailer’s sales. For example, Target (NYSE:TGT) stores, which does not have a full-line grocery, with only a partial-line of groceries had higher overall sales than stores without groceries. [5]

Moreover, Wal-Mart utilizes its strong negotiating power to squeeze the best possible agreement from its vendors, which enables it to offer products at cheaper prices. Also, the retailer’s private label brands such as Great Value add a greater depth and variety to its product portfolio. These brands are comparable in quality with other well know national brands, and are cheaper and generate higher margins. Typical grocery items at Wal-Mart Canada are about 8%-20% cheaper than other retailers in the region. [3] This clearly indicates that Canadian consumers likely prefer Wal-Mart over other conventional grocers.

Push Towards Groceries Can Help Wal-Mart Sustain In The Highly Developed Canadian Retail Market

Although Canada’s retail market growth has been weak over the past few years due to slow economic recovery, the grocery industry has performed better. This has encouraged retailers such as Wal-Mart to enhance their focus on food and consumables. However, the retail landscape in Canada is highly developed and Target’s entry last year has further intensified the competition. [6] Even though Target wasn’t able to perform well in the initial stages of its expansion, it has started promoting its food items aggressively through weekly circulated discount flyers. [3]

Since the market is somewhat saturated, growth of a new entrant will likely come at the expense of existing retailers’ sales. Hence, Target’s aggressive expansion in Canada could threaten Wal-Mart’s market share. However, Wal-Mart’s prompt response to this situation and its strong grocery business should help it stay a step ahead of Target. Additionally, it should allow the company to fend off competition from Canada’s largest grocer, Loblaw Cos Ltd.

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Notes:
  1. Wal-Mart sets C$500 million Canada expansion, rival shares fall, Reuters, Feb 4 2014 []
  2. Wal-Mart Stores Inc names Delhaize executive Van den Berghe as Canada Chief, Financial Post, Jun 20 2014 []
  3. Wal-Mart’s Canadian expansion adds fuel to grocery wars, The Globe and Mail, Feb 4 2014 [] [] []
  4. U.S. Bureau Of Economic Analysis []
  5. Big Retailers Fill More Isles With Groceries, The New York Times, Jan 16 2011 []
  6. Retailing In Canada, Euromonitor International, Mar 2013 []
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