TORONTO - The big red Zellers banner -- long a beacon to the frugal Canadian shopper -- will begin to fade from many strip malls and shopping centres across the country next year, to be replaced by the giant red bull's-eye logo of Target, its flashy U.S. cousin.
Target Corp. (NYSE:TGT) announced Thursday it will spend $1.83 billion to take over the leases of as many as 220 Zellers stores of its choosing from the 279 locations currently owned by the storied Hudson's Bay Company.
Minneapolis, Minn.,-based Target plans to have between 100 to 150 revamped stores up and running by 2014.
Target has been eyeing entry into the Canadian market for years and the deal allowing it to choose which Zellers stores it wants provides a platform for growth, Target president and CEO Gregg Steinhafel said in an interview Thursday.
"This really enables us to hit the ground running in all the major metropolitan areas in a meaningful way," he said.
The Zellers brand won't disappear altogether; Zellers will continue to lease the locations from Target and run them as Zellers stores for the next two years. Another 60 locations will remain in the Bay's stable of properties. Store locations Target does not want could be sold to other retail giants like Walmart (NYSE:WMT).
"We will be running all Zellers stores through 2011 and into 2012, where select stores will be closed and then the stores renovated and reopened as Target stores," said Richard Baker, chairman and chief executive of HBC.
The contracts of Zellers' 10,000 full-time employees and 18,000 part-time workers would end when Zellers stores close. However, Steinhafel said the workforce in a typical Target store is about double the size of the average 110 employees per Zellers store, adding that the deal would create a net new 20,000 jobs.
Current Zellers employees would be encouraged to apply for jobs at the Target locations, he said. Target will also give back to communities by donating five per cent of its income to local charities, as it does in the U.S.
"We hope to not only bring the (U.S. Target) experience to Canada but enhance that experience so they feel like it's their Canadian Target with a customized assortment and really localized engagement," Steinhafel said.
About 70 per cent of Canadian consumers are already familiar with the Target brand and 10 per cent have shopped at a Target store in the last 12 months, according to the chain's research.
The retailer plans to spend the next two years working to understand Canadian consumers' unique tastes and needs. For example, it will reach out to Canadian designers for possible collaborations, similar to those it has with recognizable American designers.
Target would likely start its Canadian expansion -- the company's first outside the U.S. -- in metropolitan areas, though it has yet to identify which.
Target tends to have very particular tastes when it comes to setting up shop. It's known for choosing locations that are larger than most big-box stores, central to bustling communities, clean and bright and often architecturally appealing.
The typical Zellers store is much smaller than a Target, where stock volumes average about two or three times higher. But Steinhafel said the company is looking to invest over $1 billion to renovate the locations and grow square footage in some stores.
"Ultimately, we would love to have bigger stores," he said.
Infrastructure investments will be made on a store by store basis, but will average around $10 million per site, he said. Target also plans to build some new stores and expects a total of 200 stores in Canada over the next decade.
Target has long been exploring opportunities north of the border. However, it hit roadblocks running the gamut from unattractive real estate locations for potential stores to the economic slowdown that reined in consumer spending.
Canada's economy has picked up in the meantime -- and despite a stronger loonie Target said last year it was weighing an expansion into Canada, but had also considered Mexico or Latin America.
Baker said the Bay plans to use proceeds from the sale to pay down debt and "spend aggressively" on its other brands, including the Bay and Home Outfitters, as well as Lord & Taylor's in the U.S., adding that an initial public offering of the revamped company is "a very possible scenario."
Target is second in size only to Walmart in the United States, but has marketed itself as more youthful and cutting-edge than its competitors by carrying both discount products and more trendy shopping goods.
Canadians were abuzz on social media sites and in malls about the "discount chic" retailer coming to Canada.
Self-professed Target fan, Elizabeth Hand, 32, said she's excited to see the chain set up shop in Canada.
"I think it's good, actually," she said Thursday outside a Zellers store in Toronto's Gerrard Square mall.
"I think lately Zellers has been slowing down in the market compared to Walmart and stuff like that, so I think that this will definitely bring them higher up into the market."
Target stocks its shelves with essential consumer goods like laundry detergent and toothpaste, alongside clothing from top designers and labels that have included Issac Mizrahi, Mossimo Giannulli and Converse.
It has also hired top photographers like David LaChapelle -- known for shooting Hollywood celebrities such as Pamela Anderson, Angelina Jolie and Lady Gaga for Rolling Stone magazine -- to craft advertising campaigns that have popularized its red-and-white bull's-eye logo.
Target also regularly signs exclusive distribution agreements for some products, including recently carrying a special edition of Taylor Swift's latest album, a deluxe edition of the DVD and Blu-Ray for "The Twilight Sage: Eclipse," and a line of Star Wars toys.
Nearly 20 years ago, Target was part of a rush of American superstores who considered moving across the border and possibly buying up the operations of Woolco. Walmart won that bid and Target scrapped its expansion plans. The first suggestion that Target was interested in Zellers came in 2004, when talks between the two companies were rumoured. Some Canadians voiced concern the expansion was yet another example of the hollowing out of Canadian companies. But federal Industry Minister Tony Clement was quick to point out that Zellers has not been Canadian-owned for some time.
"The fact of the matter is that Zellers is already owned by Hudson's Bay, which in turn is owned by an American company, so there is no loss here if you're looking at the net loss situation," he said referring to a provision that foreign takeovers must provide a net benefit to Canada.
Target's move is part of a decade-long trend that has seen U.S. retailers ramping up their presence in Canada, where the retail market is less saturated than in the U.S., said Willy Kruh, global chairman for consumer markets with KPMG International.
"For these high-profile quality retailers, Canada is an incredible place for them to come," he said.
The trend arguably began with Walmart's entry in the 1990s, but has picked up steam recently as well-known chains like Victoria's Secret, Brooks Brothers and Crate and Barrel make their way north.
"There still is a significant captive audience, the dollar is at parity so the return on their yield is significant, and consumer confidence is higher here than it is in the U.S.," Kruh said.
"I think that's why you see so many U.S. retailers clamouring to come up here. If they thought it was saturated or there wasn't room for competition, trust me they wouldn't be coming up, and Target's not the last."
