Sobeys to Supply Target Canada
Last week’s announcement that Target Canada had chosen Sobeys as its wholesale grocery products supplier is being viewed by analysts familiar with the Canadian market as a positive for both companies, according to a Financial Post report.
Sobeys, with 23 distribution centers across Canada, will begin supplying Target in early 2013. Target has said it plans to open up to 135 stores in Canada, beginning in March 2013.
The deal with Sobeys appears very similar to one Target struck with Supervalu in the U.S. when the retailer decided to place a greater emphasis on grocery products to drive store traffic. During that time, Target has taken over some of its own distribution to some stores, while Supervalu supplies others.
"We plan to have a long-term relationship with Sobeys," Tony Fisher, president of Target Canada, told the Financial Post. "We want to look into what further supply chain opportunities there may be with Sobeys. … I think there could be other opportunities for us to explore an expanded partnership when it comes to food supply chain with Sobeys."
Bill McEwan, president & CEO, Sobeys, welcomed the deal with Target. "The associated increased revenue, and the supply chain efficiencies which will lower our costs, will continue to strengthen our competitive position," he said in a press release.
Discussion Questions
Discussion Questions: What do you think of the Target/Sobeys deal? Are there insights to be gleaned from how Target structured its grocery distribution system in the U.S.?
In my recent article on RetailWire, I said that Canadian consumers wouldn’t see anything new or Target like at Canadian Targets. Having said that, I’m curious to see how Target will rehash Sobeys’ products to fit Target’s branding. Rehash being the keyword here.
I take this as a sign that Target is getting more serious about the grocery business. I have noticed small changes in our local Target that indicate they are doing a better job in grocery. They appear to be working harder to get their product selections right and their perishables also look better. Traffic in their stores also seems to be increasing, all good signs. Store cleanliness is excellent and really makes them stand out compared to Walmart.
Landslide win for Sobeys. ‘Nuff said!
Target wants to sell groceries in its Canadian stores but isn’t ready for self-distribution. If their grocery business grows with the help of Sobeys, Target can decide later whether it would be profitable to be its own “wholesaler.”
It seems Target is patterning their approach like they have in the U.S. which eventually led to some self warehousing. Target is keeping its options open while being served by a good Canadian wholesaler.
This makes good sense. Target really can’t self distribute in Canada because the number of stores are so few and spread too far wide. Plus even if they do a fresh format, the grocery departments will be small and low volume. Sobey’s can take on the account and probably not have to make too big of an adjustment in their warehouses. The USA is completely different. Target has more stores and higher volumes. In the USA, people are learning that Target sells groceries. In Canada they are taking over the failed Zeller’s and it could take years before consumers realize Target sells groceries.
In the short run, I would tend to agree with Mr. Stephens regarding the “win” for Sobeys’ — in essence, that low margin Target sales provides the added benefit of leveraging Sobeys’ distribution network volume throughput and thus achieving incremental profitability.
But Target, in return, gets to go to school for free — not only by studying Canadian supply chain best practices before committing a huge amount of infrastructure capital, but also by learning from one of Canada’s top food retail operators about Canadian food shopper behaviors before scaling their Canadian presence.
It would seem that the odds highly favor Target ultimately pursuing self distribution, however, assuming that Target’s food format resonates with the Canadian shopper. Not only does it make financial sense, but it is also consistent with the recent US P-Fresh self distribution decision, which has left more than a few Supervalu warehouses operating at sub-optimal levels.
Should a future Target decision to self distribute materialize, the “gift” of distribution to Sobeys might look, in retrospect, much like a fabled Homeric horse.