Target’s plan to achieve $6 billion in Canadian sales by 2017 is doable, according to Bernstein Research analyst Colin McGranahan, who notes the company’s goal is dependent on achieving sales productivity levels higher than the United States.
He has an outperform rating on shares of Target and believes the market is discounting what he believe is a high likelihood of success in Canada where the company expects to open as many as 135 stores by 2014. By 2017, a total of approximately 150 stores will be in operation. Expectations of a rational pricing environment, market share gains and sales per square foot productivity levels that will eventually rise above the company’s U.S. levels underpin McGranahan’s favorable view.
“Target’s long-term Canadian ambitions represent a fairly high bar, as the company seeks to become one of the nation’s largest retailers. Despite the potential for initial volatility around the initial launches, we expect the stores to ramp up quickly, aided by Target’s decision to enter the market with immediate scale,” according to McGranahan. “In addition, we believe Target is well positioned to succeed in Canada, given a fairly similar market to the United States, already high awareness among potential shoppers, and a more open competitive landscape versus the United States.”
Some of McGranahan’s most interesting thoughts relate to the awaiting pricing environment and the response from competitors in advance of Target’s arrival. He contends most pre-emptive efforts will focus on the area of differentiation and store experience rather than price.
“As Target begins to open stores, we do expect some intensification in the pricing and promotional environment as incumbent retailers attempt to hold share,” according to McGranhan. “However, based on our discussions in-market, it seems likely that the major vendors will be reluctant to fund promotional spending. Logically, this makes sense as a major vendor like a P&G or Kraft sees Canada as a zero-sum game and already counts Target as a very important customer. As such, these vendors would likely see little benefit in helping to fund promotional activity from the incumbent retailers like a Loblaw's when it is inevitable that Target will end up with a substantial share of the market.”
He goes on to make the case that incumbe