Today's Target-Zellers Deal and 'The Neighbourhood Market'-'P Fresh' Food & Grocery Markets Connection

Analysis/Commentary

Readers of Fresh & Easy Buzz know we frequently report on, write about, and analyze Minnesota-based retailer Target Corp., particular as it pertains to its fairly new fresh food and grocery initiative, "P-Fresh.

"We're avid and aggressive "Target Watchers."

Our coverage of Minneapolis-based Target includes an ongoing research project in which we've been tracking, identifying, reporting on and writing about the growth of the chain's in-store "P-Fresh" food and grocery markets, which the retailer has been adding to many of its 1,500-plus discount format stores in the U.S., beginning in 2009.

Target Corp. has two retail formats: Its discount stores, which are the majority of its units, and its SuperTarget format stores, which are similar in size to a Walmart supercenter and include a full supermarket inside, like Walmart's supecenter format.

Target, which is the second largest retailer in the U.S. after Walmart Stores, Inc., currently has "P-Fresh" fresh food and grocery markets inside about 350 of its U.S. discount format stores, and plans to add the markets to another 400 units this year. And, as we pointed out here in 2010, California is the leading U.S. state in terms of the number of its discount stores, out of the 350, Target has added the "P-Fresh" units inside of over the last nearly two years. Over 100 of the 350 "P-Fresh" units are in California.

Because we're avid and aggressive "Target Watchers" here at Fresh & Easy Buzz, the retailer's announcement today that it's buying leasehold interests in up to 220 Zellers discount store locations in Canada, for $1.85 billion, didn't come as a surprise to us in the least bit.

Zellers is a discount/mass-merchant store format that's similar to Target's discount store format.

Target CEO Gregg Steinhafel said in a statement today the retailer plans to open 100 -to- 150 stores across Canada in 2013 and 2014.

It will renovate some of the Zellers locations, at an estimated cost of more than $1 billion, he said. Other Target stores in Canada will be built from-the-ground-up. Target announced its plans to enter Canada last year. [You can read today's announcement from Target Corp. here. Zellers' parent company, Canada's Hudson's Bay Company (HBC), also issued a statement on the deal today here.]

No surprise

Why weren't we surprised by today's announcement? Because Target Corp.'s interest in Zellers, which is owned by Canada's oldest company, Hudson's Bay Company (HBC), isn't a recent phenomenon. Target looked into acquiring the entire Zellers chain, and had talks with HBC's management at least as far back as 2006-2007.

The discussions between the Target Corp. and HBC/Zellers folks obviously didn't result in a deal back then for a number of reasons. One reason being Target Corp. determined at the time that the timing wasn't right for it to either enter Canada or make such a major acquisition. Target announced its plans to enter Canada last year.

However, the relationships formed at that time continued, right up until now. And although no deal was done back then, Target didn't walk away from its research on and investigation in Zellers empty-handed.

Zellers' 'The Neighbourhood Market'

One of the things Target executives found interesting when they toured Zellers stores, was that the general merchandise retailer was testing a concept in a few of its stores called "The Neighbourhood Market," a fresh food and grocery store-within-a-store.

Zellers, which first tested its in-store markets in 2000-2001, currently has "The Neighborhood Market,"which ranges in size from about 5,000 -to- 10,000 square-feet depending on the particular store its in, in 90 of its discount stores, located in a variety of provinces in Canada. [Click here to see the locations of the Zellers stores with "The Neighbourhood Market".]

The Canadian retailer's policy over the last few years has been to add the food and grocery markets inside every new discount store it builds and every existing store it remodels, which is something is started doing in 2002.

Pictured above: A "P-Fresh" in-store food and grocery market, located in a Target discount store in California. Pictured Below: An in-store "The Neighbourhood Market," in a Winnepeg, Canada Zellers' store. Note: Take a look at the near-identical departmental circular ceiling signs, at the top in both photographs. Kissing cousins.
The in-store markets, which are located in the front of the stores, offer a limited assortment of fresh foods - produce, meats, baked goods, dairy/deli, prepared foods - and shelf-stable packaged food and grocery items, just like Target's "P-Fresh" and Tesco's 10,000 square-foot Fresh & Easy Neighborhood Market stores in the U.S., the first of which opened in November 2007. There are currently 156 Fresh & Easy stores in California, Nevada and Arizona. The Tesco Fresh & Easy stores are freestanding units, however, not stores-within-stores, like Target's and Zellers' concepts are.

Zellers had its "The Neighbourhood Market" concept inside a number of its discount stores in Canada well before 2007 (by 2003-2004), however. In fact, word is Tesco did some scouting around in Canada, as well as the research it did in the U.S., prior to creating Fresh & Easy Neighborhood Market.

Fact: Tesco's original name for the chain was "Fresh & Easy Community Markets." But the United Kingdom-based retailer changed "Community" to "Neighborhood" sometime in 2006-2007.

Observation: If you're wondering why Zellers uses the British spelling and French English-usage spelling of "Neighbourhood," rather than using the North American spelling, "Neighborhood," a little research into the origins of Zellers parent company, Hudson's Bay, which is Canada's oldest company and the largest general merchandise retailer in the country, among other things, will make the choice of spelling clear. Also: Although English is the majority language, Canada officially remains a dual (English-French) language nation.

Kissing cousins

Target opened its first "P-Fresh" in-store markets in mid-to-late 2009.

Zellers has been adding its "The Neighbourhood Market'" to its department stores at a fairly rapid pace over the last few years. It has the markets in 90 of its discount stores so far. [Click here to see a list of Zellers stores that include the fresh food and grocery markets.]

Target executives first saw Zellers' food and grocery concept up-close a few years ago. Also keep in mind that Minnesota, where Target Corp. is headquartered, is really close to Canada.

Target created its "P-Fresh" concept and initiative - a fresh food and grocery store-within-a-store inside their Target discount format stores - in late 2008 and launch it in 2009. The "P-Fresh "stores" are much larger than Zellers' in-store markets, nearly three times the size. Both retailer's markets feature the same product categories. Target though offers a much more extensive number of SKUs than does Zellers. But the model is identical.

Additionally, Target's in-store "P-Fresh" signage and related graphics look very close to what Zellers uses - and it was first, remember - with its "The Neighbourhood Market."

Armed now with the information in this story, If you go visit a Target discount store in the U.S. that has a "P-Fresh" inside, then go visit a Zellers store in Canada, with a "The Neighbourhood Market" inside - we bet you'll see the connection - and perhaps even say: "Kissing cousins, they are."

The deal

Target is a better overall retailer, including in the food and grocery segment - although Target has plenty of room to get better at grocery merchandising - than Zellers is.

Target's format and stores are also much better overall.

Zellers has been remodeling some of its discount stores in Canada over the last couple years. But many consumers in the country feel the retailer has become outdated, both in how the stores look and how they are merchandised. And the rapid growth of Walmart-Canada has taken a toll on Zellers, which before Walmart headed north from the U.S. was the first-choice of many Canadian shoppers. In many parts of Canada, Walmart-Canada has made Zellers the second...or even third choice for many Canadian shoppers.

Under the terms of the deal, Target plans to make payments to HBC/Zellers for the leases through 2011. Zellers will sublease the sites from Target and keep running stores under its own banner "for a period of time," Target and HBC/Zellers said in the statements today. A good translation of "for a period of time" is: Once Target takes over all of the Zeller's stores out of the 220 it intends to in the 2013-2014 time period, the Zeller's chain and banner will cease to exist in Canada or anywhere else.

In our analysis the deal is a good one both for Target and for HBC/Zellers. Canadians travel to the U.S. regularly because of the close proximity of the two countries. After all, you can drive from parts of Canada into parts of the U.S. - like Minnesota - faster than you can fly from the west coast to the east coast. Many are very familiar with Target.

And, of course, we aren't suggesting Target wants Zellers for its in-store food and grocery markets. They are merely part of the package. It's a back story - and a connection not mentioned in any of the many stories being published on the deal.

Kissing Cousins united

Lastly, now that you know about the Target-Zellers in-store fresh food and grocery market connection, we're betting you know what we're going to tell you next?

Well... It's simply that Target's "P-Fresh" fresh food and grocery markets are going to be in all or most of those up to 150 stores it plans to open in Canada in 2013-2014, including the Zellers stores it takes over, along with any stores it builds from scratch.

And now you know...'The rest of the Target Corp.-HBC/Zeller's deal story.' Or at least the back story, as it pertains to food and grocery merchandising and retailing.