Wal-Mart Causes a Revolution

Wal-Mart Causes a Revolution

Dashing from aisle to aisle in a newly opened Canadian Tire store in Newmarket, Ont., Stephen Bachand looks like a politician in mid-campaign. The U.S.-born businessman pumps hands with employees, shows off the building's features and passionately preaches about the "New Tire." Suddenly, in the middle of a conversation about the store's layout, the president and chief executive of one of Canada's most powerful retail empires wheels around to confront a befuddled grey-haired man in a hockey jacket.

"Can I help you?" asks Bachand, plainly concerned that none of the store's employees has yet come to the customer's assistance.

"Where do I find the Varsol?"

"In this store, I'm not sure. But don't move - I'll get someone who does," says Bachand, before marching off to find a salesclerk.

For Bachand, a hard-driving veteran of 33 years in the U.S. retail trade, paying close attention to customers is the key to survival in the cutthroat 1990s. Almost two years have passed since the world's largest retailer, Wal-Mart, invaded Canada and changed the retail industry forever. Sharper rivalries have brought aggressive price-cutting, increased choice and demands for better service. Some Canadian chains, including Zellers and K-Mart, have struggled. But others, particularly Canadian Tire, are holding their own - proving that it is possible to take on the American giant and prosper.

When Wal-Mart announced in January, 1994, that it was coming to Canada by purchasing 120 Woolco outlets, the stock market was quick to render its verdict. Shares in Sears Canada, Canadian Tire and Hudson's Bay Co. - which owns Zellers - fell as much as 12 per cent in a single day. Analysts predicted that the arrival of Bentonville, Ark.-based Wal-Mart would force many other stores out of business and drive prices to rock-bottom levels. "Not since Laura Secord brought warning of an American invasion in 1813 has the news of an intruder been met with such hand-wringing," Peter Swain, a Toronto advertising executive, wrote shortly after Wal-Mart's Canadian debut. He added, ominously, that "the shadow of Wal-Mart will touch us all."

The past two years have been undeniably painful for retailers. The three biggest discount chains - Zellers, Wal-Mart and K-Mart - all have new chief executives. And all of the major players in the discount category have experimented with new strategies - launching Blitzkrieg-style advertising campaigns, slashing prices and revamping stores to hold market share and remain profitable. All that has happened against a backdrop of high unemployment, weak consumer confidence and slow sales.

Despite those problems, there have been successes. Profits at Canadian Tire - the folksy store for the do-it-yourselfer, with the flyers and the funny money - jumped 6.1 per cent in 1995 to $121.8 million, while sales rose to $3.8 billion from $3.6 billion in 1994. And far from trying to avoid a fight with Wal-Mart, Canadian Tire this spring is taking direct aim at the U.S. chain's long-standing claim of "everyday low prices" in a new series of television ads. Canadian Tire's new slogan: "Everyday low prices made better."

One obvious difference between Canadian Tire and its competitors is that the vast majority of its 424 stores are independently owned. Two years ago, many observers saw that as a drawback, arguing that the decentralized nature of the company's operations would make it more difficult for head office to introduce new strategies. In hindsight, though, some analysts say that Canadian Tire's system of locally owned stores has been a strength. "You have a group of people who have their entire life savings at risk," says Richard Talbot, managing director of Thomas Consultants International Inc. "That galvanizes people to do something, so they circled the wagons and pulled together as a team. Generally, Canadian Tire has done better than many thought it could."

Canadian Tire has always been somewhat of a retail maverick since brothers Alfred and John Billes opened their first store in 1922. By concentrating on auto parts and hardware rather than competing with department stores such as Eaton's, the company carved out an early niche for itself. That specialized approach is a key element in the mission that Bachand and his team of executives and dealers developed in 1993, shortly after the new CEO arrived in Canada. The strategy aims to improve the level of service, match competitors' prices and cut costs in marketing, distribution and warehousing. "Customers today have limited budgets and tremendous demands on their time," Bachand says. "When they go shopping, they're on a mission." The goal, he adds, is to make it easy for consumers to get into a store, find what they want and get out as quickly as possible. In line with that, Canadian Tire has committed more than $400 million over three years to build 80 new stores, such as the one that opened last month in Newmarket, Ont. The 52,000-square-foot operation features fresh-cut flowers, a doughnut shop and 17 auto service bays. The new store also boasts wider aisles and staff members equipped with portable phones to answer customer inquiries.

At the same time, the company has made several broader changes to attract customers. Since the 1950s, Canadian Tire stores in Central and Eastern Canada have issued bonus coupons - Canadian Tire money - for cash purchases. Last November, the company extended the program nationwide. The chain also introduced a "hassle-free" warranty and a guarantee to match prices from other stores - as a result of which the company no longer publishes prices for many of the items in its catalogues. "Everybody says they're the lowest price, but that's impossible," says Bachand. "One way to deal with it is to say, 'OK, we may be wrong occasionally, but we'll make it right.' "

It is an approach that analysts have been quick to applaud. "They got some enlightened leadership, they went back to their strengths and they were able to marshall their Canadian culture and approach," says retail consultant John Torella of J. C. Williams Group in Toronto. "They got the wake-up call when Wal-Mart arrived, and they rose to the occasion. Contrast that to Zellers and K-Mart - they didn't do as well."

Of the major discount chains, K-Mart is clearly in the worst shape. The company's U.S. parent has posted 11 straight quarters of losses, in part because of problems with a new computerized inventory system. More important, K-Mart has failed to distinguish itself from its two closest U.S. rivals, Wal-Mart and Target Corp. of Minneapolis. The company's Canadian head, Michael Lynch - who replaced Donald Beaumont as president and chief executive officer in January - announced last month that the company has hired a liquidator to dispose of $100 million in old stock. Industry watchers view that as an attempt to clean up the company and make it more attractive to potential purchasers - including, perhaps, Target. Many analysts believe the K-Mart name will disappear from Canada by the end of the year.

Zellers, the traditional leader in the Canadian discount department-store business, has also been stung by Wal-Mart. Heavy spending on advertising has helped Zellers retain its 45-per-cent share of the market, but earnings have dropped precipitously. Last month, the company declared a 72-per-cent plunge in fourth-quarter operating profit to $26.9 million from $95.4 million a year earlier. On the same day, the chain announced the resignation of president Paul Walters; a replacement has yet to be named. In a move to cut costs, Zellers also plans to close its head office in Montreal and shift operations to the Toronto headquarters of The Bay. "Zellers are the big loser in all of this," says Torella. "The arrival of Wal-Mart has had a dramatic impact on their bottom line."

In fact, Wal-Mart itself is finding it tough slogging in the depressed retail business. For the first time since 1970, the company's worldwide operations suffered a quarterly net profit decline in the three months ending Jan. 31, 1996. And some analysts say that Wal-Mart appears disappointed by its performance so far in Canada, noting that the chain recently replaced its Canadian president, Quebec City-born Bruce West, with David Ferguson, a 51-year-old American import who has worked for such giant U.S. retailers as J. C. Penny. Wal-Mart Canada spokesman Ed Gould says the new president is spending his first 90 days in Canada trying to meet employees and learn about the Canadian division. But others speculate that Wal-Mart is preparing to increase its efforts to grab Canadian market share. "Wal-Mart is a hard-driving operation," says Ken Stone, an Iowa State University economics professor and a leading authority on the company. "They demand the best results."

Gould, however, says the company's Canadian operations have exceeded expectations. He adds that Wal-Mart now claims 40 per cent of the discount market, almost double Woolco's share two years ago. And Talbot says the world's largest retailer has done an excellent job: "When you think about all the rocks and problems they could have hit, it is remarkable that they have hit very few."

He and others say Wal-Mart's biggest impact has been to teach Canadian retailers the importance of customer service. In the past, says Ed Strapagiel of Toronto-based Kubas Consultants, Canadian discount chains rarely seemed to care about pleasing consumers. Recent surveys suggest that customer satisfaction with many of the chains has improved - but that many shoppers still believe service is better in the United States.

In some areas, though, consumers still seem to prefer a traditional Canadian approach. Last year, at a time when Wal-Mart was running TV ads indirectly poking fun at Zellers' Club Z points and Canadian Tire money, Canadian Tire's U.S.-born senior vice-president of marketing, Wayne Sales, decided to fight back. He ordered the company's advertising agency to be more aggressive in countering the chain's critics. "The agency developed a 30-second spot I thought was dynamite," Sales says. "The ad really stuck it to the competition, and as someone with over 25 years of marketing experience in the United States, I thought it would be great."

But the new commercial never made it to air. When the agency showed the ad to a select group of customers, they hated it. "You could see a number of people in the room sit bolt upright in their seats," Sales recalls. "After it was over, several of them told us, 'If you run that commercial, we'll never shop at Canadian Tire again.' " Attacking the competition, it seems, just is not the Canadian way.

Maclean's May 6, 1996