Sobeys to Supply Target Stores

STELLARTON, Nova Scotia — Sobeys here has struck a deal to distribute food and grocery items for Target’s expansion to Canada.

STELLARTON, Nova Scotia — Sobeys [4] here has struck a deal to distribute food and grocery items for Target’s expansion to Canada.

The deal could help Sobeys realize a benefit from an explosion in square footage that otherwise has Canadian food retailers worried.

Minneapolis-based Target [5] said it would begin opening stores in Canada in early 2013 with plans for up to 135 stores by 2014. The retailer is expanding through the lease purchase and subsequent renovations of the Zellers chain of discount stores. Target has also transferred 39 of the Zellers leases to Wal-Mart Stores [6], helping to fuel that chain’s expansion in Canada.

Sobeys said it would use its existing distribution network to provide Target stores with frozen, dairy and dry grocery products, including national-brand and Target private-label products. The two companies have also agreed to leverage one another’s distribution networks as a means to reduce transportation expenses.

“We are pleased to welcome Target as a valued wholesale customer. The associated increased revenue, and supply chain efficiencies, which will lower our costs, will continue to strengthen our competitive position,” Bill McEwan, chief executive officer of Sobeys, said in a statement.

Target officials have said that their Canada stores would vary by location as to the amount of food they will offer. But any addition of square footage to the market will continue to pressure food retailers there, sources said.

Galen G. Weston, executive chairman of Loblaw Cos., in an investor presentation late last month said that Wal-Mart’s expansion was a “disruptive” force in the Canada food retail market, particularly as chains battle for fresh food sales.

“Even though we’re quite confident about the way we’re competing against them, you don’t open a supermarket with zero sales, no matter how compromised your offer might be,” Weston said in remarks at the Scotia Bank Back to School Conference in Toronto. “And when you’re putting in footage at the rate they are today, it can’t help but improve their share and it can’t help but come at the expense of those of us who have been around for a long time.”

Target also said it finalized its $1.8 billion deal with Hudson’s Bay Co. for the Zellers stores, selecting 84 additional leases and bringing the total number of leases selected to 189. Target in May completed the purchase of 105 Zellers leases, the majority of which will become Target locations.

Target said it would acquire leasehold interests in 29 of the 84 additional leases selected, and would sell the remainder. This group includes the 39 leases Target agreed to transfer to Wal-Mart Stores in June.