Canadian Tire backing away from food

Canadian Tire backing away from food

MARINA STRAUSS — RETAILING REPORTER

From Thursday's Globe and Mail

Published Wednesday, Feb. 08, 2012 7:25PM EST

Last updated Wednesday, Feb. 08, 2012 7:33PM EST

After more than three years of selling milk and frozen pizzas alongside power drills and patio sets, Canadian Tire Corp. (CTC-T71.250.190.27%) is retreating from its experiment with food.

In the latest and most significant signal yet that it is putting the brakes on expanding into groceries, the retailer has decided against placing pilot food sections in its new prototype stores. Instead, the company is dedicating its focus to pumping up its signature tires and other auto-related products.

The chain’s failure to embrace food more widely underlines the challenges of non-grocers in stepping into the category. And it reflects the pressure on retailers today to bet on their core strengths at a time when U.S. discount titan Target Corp. is gearing up to invade Canada in early 2013.

While food tends to draw shoppers more frequently to stores, its gross margins can be half those of general merchandise. And running food sections can be labour intensive and result in spoiled products that ultimately have to be tossed, pinching profits further. Savvy discount grocers, such as No Frills, provide stiff competition. Even Wal-Mart Canada Corp. struggled to get its food strategy right when it introduced it in a bigger way here in 2006.

“It doesn’t really make sense for Canadian Tire,” said Marion Chan, principal at market researcher TrendSpotter Consulting.

Canadian Tire’s 2008 foray into food was part of its bid to find new ways to rev up customer traffic. Rivals ranging from Shoppers Drug Mart Corp. to Wal-Mart rapidly added eggs and cheese to their aisles. By next year, Target will arrive here with its own food offerings. The appeal is evident: Customers who buy food shell out three times more over all than those who don’t, according to Shoppers’ findings.

But stocking food requires Canadian Tire to set up a costly distribution network and refrigeration for perishable goods, which need to be replenished more frequently than lawnmowers or toasters. What is more, food can take the retailer’s eye off its key initiatives in the battle to fend off Target and other foreign threats.

Even chief executive officer Stephen Wetmore has played down the food strategy. “Obviously, we still have to make a decision on food,” he told analysts in November. “Economics versus traffic-driving on a national scale is the issue. So we are continuing to look at all the options, and we’ll obviously keep you posted.”

Mr. Wetmore may shed more light on his food test on Thursday when Canadian Tire releases its fourth-quarter results, which are expected to be crimped by fewer sales of winter-related merchandise after a mild season. Company officials declined to comment before the results were issued.

Having moved into the corner office in 2009 after the food initiative was rolled out, Mr. Wetmore has since mapped out a clear plan: He’s returning the retailer to its roots in tires and auto products while ramping up housewares and sporting goods following last summer’s acquisition of Forzani Group, the largest retailer in that field, which includes Sport Chek.

With food (beyond snacks and soft drinks) in 17 of its 487 stores, Canadian Tire hasn’t added it to outlets since 2010. Early that year, Mike Arnett, one of its executives, said that food was “the most-shopped category” in stores where it was carried, generating a positive customer response.

Still, Canadian Tire’s four new prototype stores have no food offerings. “This could be a signal that the [food] experiment is over,” said Mark Petrie, an analyst at CIBC World Markets.

The prototype in Bowmanville, Ont., for example, tries to lure more customers with new aisles of party supplies, greeting cards and mobile phones along with a stepped-up offering of items for pets. “Keeping this simple with a low-service [model] with strong margins is Canadian Tire’s bread and butter,” Mr. Petrie said. The store also has bolstered its aisles of kitchen goods, which will be a key retail battleground in 2013 because of Target’s strength in the area, he predicted.

For the store to succeed with food, it would have to cater more to women who still do most of the grocery shopping and tend to head to Wal-Mart or Shoppers over Canadian Tire, Ms. Chan said.

When Wal-Mart Canada beefed up its food offerings in 2006, it grappled with an array of issues, including having to improve its supply chain, said David Marcotte at consultancy Kantar Retail.

It faced gross margins in groceries that can range between 20 and 24 per cent, compared with twice that level for general merchandise, he said. But food margins often shrink to between 3 and 6 per cent after accounting for the cost of labour and damaged and stolen goods, he said. “Simple economies of scale and the labour pool take time to build to profitable processes.”

David Cheesewright, former CEO at Wal-Mart Canada who now heads other regions as well, has acknowledged the tough retail food terrain in this country. “Our ability to get food margins as high as the U.S. is challenged,” he told a conference last June.

Rob McEwen: Mining magnate with a vision

THE LUNCH

Rob McEwen: Mining magnate with a vision

GORDON PITTS

From Saturday's Globe and Mail

Published Friday, Feb. 03, 2012 7:00PM EST

Rob McEwen, the near-billionaire nationalist, philanthropist, libertarian, gold-loving, regulation-hating metals magnate, is as steamed as the plate of tagliatelle pasta sitting in front of him.

“It’s the parentalness of government that pisses me off. Get out! We have to take risks on our own,” he says.

The 61-year-old is reacting to the roadblocks encountered in his new mining venture, the latest chapter in a colourful and wildly successful career highlighted by converting a struggling gold mine in Northern Ontario into a global colossus called Goldcorp. The mining tycoon is merging two junior companies to form what he hopes will be his next – perhaps last – big winner. But the regulatory and governance process has taken three months longer than expected, costing $6-million in legal and advisory fees.

“This is an unnecessary tax on shareholders,” he fumes, his usually soft voice rising above the lunchtime clatter at Canoe, a darling of Bay Street expense accounts sitting 54 floors above downtown Toronto. “Wouldn’t we be better served to, say, cut a cheque to our shareholders as a dividend?”

The biggest of all those cheques would go to Mr. McEwen, who is chief executive officer and controls 25 per cent of the new gold, silver and copper company called McEwen Mining Inc. (MUX-T5.57-0.05-0.89%) And he is already flirting with billionaire status after his hugely profitable ride with Goldcorp.

Now with that massive gold producer in his rear-view mirror, the Croesus-like track record gives him licence to try to build another heavyweight – this time with his own name on the company.

He will be doing so as his sector rides a wave that is both highly profitable and extremely volatile. Gold prices are soaring as currencies falter, feeding off economic instability in the United States and Europe. But gold is also known to tank disastrously, and some analysts predict the roaring bull will turn silent as investors grow wary of its heart-stopping rises and falls. And this time around, Mr. McEwen is also exposed to silver – a lower-cost complement to gold – and to copper, which is sensitive to industrial activity.

But gold is his game, and his affection strikes deeper than short-term business interests. It speaks to another side of Mr. McEwen – libertarian, student of historical cycles, and scourge of debt-laden governments. He is a prophet of profligacy, who predicts, in this age of over-the-top borrowing, that gold will fly through $2,000 (U.S.) an ounce this year – not too ambitious given its recent surge over $1,700 – and to $5,000 in three to four years.

As always, there is constant noise from so-called gold bugs, that kooky fringe that believes the yellow metal is the only haven as the world heads toward cataclysm. Mr. McEwen’s view is much more nuanced – that gold is a currency like Canadian or U.S. dollars or the beleaguered euro. “And here we are seeing the entire Western world debasing its currencies at a frantic pace,” he says.

In this orgy of public spending and debt, gold will get hotter in the near to medium term. But at some point, he says, it will hit a zenith and it will make sense to buy other currencies again. And rather than play the apocalyptic thunderer, he suggests looking at gold as insurance – the percentage held should depend on the bleakness of the individual’s outlook. As for Mr. McEwen, he is 80-per-cent invested in gold and gold stocks, but, after all, that’s his business.

As he sips his glass of malbec, Mr. McEwen explains why he is trying to build another major mining company when he could be sitting at home counting his bullion.

The business case for the merger of US Gold Corp. and Minera Andes Inc. – completed in late January, six months after being proposed – is that mining players today need scale to grab the interest of institutional investors. The mineral world is polarizing between the giants – note merger talks between titans Xstrata and Glencore – and hordes of juniors. The charm of McEwen Mining, he says, is combining one company sporting cash flow and no project pipeline with another that has stuff in the pipeline but no cash.

And the process gets the competitive juices flowing, as he sees a chance to build another monster miner. “At the most optimistic, we could outrun what Goldcorp has become,” he says.

Although he owns little of Goldcorp now, the shadow of that company, his former baby, looms over much of what he is trying to do. A former investment banker, he recognized the untapped potential in a lacklustre mine in Red Lake, Ont., from which he built Goldcorp as a productive, low-cost operator. He merged it with Wheaton River Minerals in 2005, but he left in a messy dispute with senior management.

Even when he is angry, Mr. McEwen speaks gently with a knowing little smile – much like another libertarian, U.S. presidential hopeful Ron Paul, who exudes that same sense that he didn’t create this mess, but he has the inside scoop on why it is happening.

But while Mr. Paul sits on the political fringe, Mr. McEwen stands at the centre of Canadian public life, as a business leader whose vocation is one of the country’s oldest – making money from mines – and whose avocation is giving it away – $50-million so far, largely to fund research in regenerative medicine and stem cell applications.

He and wife Cheryl have joined other blue-chip titans in putting their family name on a research centre in the health care hub of downtown Toronto, and he gives to his alma mater, the York University business school, where fellow gold magnate Seymour Schulich has enlisted his support. He talks of some day donating 50 per cent of his wealth, as Warren Buffett advocates, but his perverse challenge is that he cannot give it away, carefully and strategically, as quickly as he makes it.

He has found that health care and mining have much in common, and he equates medical research with risky exploration. “It’s capital intensive, with low probability of success; it’s highly regulated and the people don’t talk to each other.”

Mr. McEwen was always imaginative in seeking out mining innovation, and he brings that same spirit to funding networks of scientists. He supports projects with a strong chance of reaching the clinical stage at an accelerated rate – and his dollars go to such fields as lung transplants, tracheal repopulation, heart-cell patches, and diabetes.

And there is yet another facet of the complex Mr. McEwen – the arch-nationalist who would use public procurement and tax policy to guide investment in health innovation and advanced manufacturing.

While Canada is very good at spending on research, it is abysmal at product development, he says. He wants to direct a small piece of the many billions spent on health-care procurement – and now handed over to foreign-based giants – toward Canadian products, and, thus, domestic development.

“We’re very good at selling what you can grab – you grab water, you grab trees, you grab crops,” he says. But we don’t have value-added capability, he laments, putting the blame on excessive foreign ownership of our economy.

In that vein, he is a critic of the Keystone XL pipeline because it would ship our oil south, rather than feeding upgraders and refineries in Canada to capture the value-added component. Thus, he argues, we are missing out on the development of entire industries. The solution might be a tax system that encourages long-term holding of Canadian assets, he muses.

“If we don’t do something soon, our children will become tenants in their own country,” he warns.

There are moments like this when Mr. McEwen has to reassert his libertarian credentials. His major complaint, he states, is that too much government puts a cap on human ingenuity, of the kind that would allow Canada to compete. Libertarian rhetoric, perhaps – but in his quest for a strong economic future, Rob McEwen is as conflicted as any mainstream Canadian.

_____________________

CURRICULUM VITAE

Beginnings

* Born in Toronto, April 15, 1950.

* Father, Donald, ran a securities firm with a mining focus. Holds BA from University of Western Ontario, MBA from Schulich School of Business, York University.

Personal

* He and wife Cheryl have two grown sons.

* The couple have given away $50-million, including $20-million toward the McEwen Centre for Regenerative Medicine in Toronto.

Career

* Started off as investment banker.

* In 1993, began restructuring Goldcorp, whose market capitalization over two decades has gone from $50-million to $39-billion In 2005, led merger with Wheaton River, but later broke with management over takeover of Glamis Gold.

* In 2012, merged US Gold and Minera Andes to form McEwen Mining.

Passions

* Cycling: Joined Cheryl and their sons recently for bicycle tour of Southeast Asia.

* Swimming: Every summer morning at his cottage on Ontario’s Stoney Lake, he takes a one-kilometre swim.

* Reading history: Is diving into City of Fortune: How Venice Won and Lost a Naval Empire, by Roger Crowley.

U.K. firm joins race to export gas from B.C.

U.K. firm joins race to export gas from B.C.

NATHAN VANDERKLIPPE

CALGARY— From Wednesday's Globe and Mail

Published Tuesday, Feb. 07, 2012 10:00PM EST

British natural gas giant BG Group PLC has joined the rush of companies swarming Canada’s West Coast in hopes of exporting energy to Asia.

The company, a global liquefied natural gas supplier, is looking to Prince Rupert, B.C., as a potential site for a terminal that could be used to load Western Canadian gas onto ships bound for consumers in Japan, South Korea and China.

“We’ve entered into an agreement with the Prince Rupert Port Authority to consider the feasibility of an LNG development,” said David Byford, a Houston-based spokesman with BG.

BG brings to six the total number of companies and groups publicly pursuing liquefied natural gas (LNG) projects on the British Columbia coast, near prolific fields of shale gas. Faced with gas prices that have plunged to decade lows, North America’s energy industry has looked to LNG as a way to access Asian markets, where gas prices are much higher.

That has created an extraordinary corporate race to the coast, as companies tussle to grab real estate and gas supplies. The entrance of BG, which runs a fleet of LNG ships and is pouring billions into new LNG projects around the world, is further evidence that British Columbia and Canada’s natural gas reserves have attracted the attention of global heavyweights. Indeed, some are now comparing West Coast LNG development to the oil sands, where many of the world’s most important energy companies have secured positions.

In Prince Rupert, BG has secured access to a 200-acre section of land on the Ridley industrial development site, owned by the Prince Rupert Port Authority. The port normally provides companies 12 to 24 months to assess whether they can make a project work.

The British company was chosen from several interested parties because it has “a solid background in LNG and the capacity to see a project through,” said Shaun Stevenson, a vice-president with the port. “They have some capacity and some existing relationships in the marketplace, and had a common user approach where it’s not a single producer looking at a solution, but a gateway capacity for probably a number of producers.”

BG joins an increasingly crowded field. Apart from five other proposals already made public – including partnerships led by Apache Corp., Royal Dutch Shell PLC., BC LNG Export Co-operative LLC, Petronas and Nexen Inc. – a series of other companies have quietly chased projects. One proposed bringing LNG to Prince Rupert by rail. Several sources said Japanese firm Itochu has looked at exporting gas from Kitsault, a once-abandoned molybdenum mine north of Prince Rupert that is being revived. A spokesman with Itochu declined comment.

Sources said Exxon Mobil Corp., which has substantial natural gas reserves in northeastern B.C., has also been examining LNG options. Pius Rolheiser, a spokesman with Imperial Oil Ltd., which is majority-owned by Exxon, said in a statement: “Imperial continuously reviews a variety of opportunities to increase value to our shareholders. As a matter of practice, and for competitive reasons, we do not discuss specific strategies.”

Existing projects are also changing. Kitimat LNG, for example, needs to build a new pipeline called Pacific Trails to feed its project. The project recently applied to expand the size of that pipe, from a diameter of 36 inches to 42 inches. That would add 10 per cent to the construction price tag, but substantially boost the volume of gas it could funnel to the coast.

For other companies, the bid to secure land and pipelines has produced sharp-elbowed competition, as energy giants wrestle for a foothold. Near Kitimat, where Shell and Apache are planning projects, desirable waterfront real estate is limited.

Other major issues loom. It’s unlikely the western labour force, already strapped by a resurgence in the oil sands, will be able to build many LNG terminals, which require some workers with specialized skills. Worker shortages have caused significant problems in Australia, which is also experiencing an LNG boom, and has seen prices spike.

In a recent research report, CIBC World Markets Inc. analyst Andrew Potter pointed out that Australian projects cost a third more or nearly double the current estimates for terminals like Apache-backed Kitimat LNG – suggesting the price of building facilities in B.C. could be dramatically higher than currently expected.

And there simply isn’t enough gas to feed all of the proposals. The combined potential capacity of projects currently being contemplated add up to a possible 10 billion cubic feet a day of gas – a sum it seems unlikely will ever flow to the coast. By comparison, all of Western Canada today produces just over 14 billion cubic feet a day.

That suggests to some that development will be relatively slow. It’s unlikely, for example, that B.C. will see more than two new export terminals built by 2020, said Todd Kepler, an analyst with Cormark Securities.

It also suggests consolidation must happen. Investment bankers said it would make sense for Kitimat LNG, for example, to sell its project to a major international energy company with LNG experience.

“The next move is what happens with [mergers and acquisitions],” Mr. Kepler said. “It’s going to be similar to the oil sands rush. The first guys are there to sew it up, so for outsiders to get in and play this, they’re going to have to buy their way in.”

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THE LNG PLAYERS

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KITIMAT LNG

Companies: Apache Corp., Encana Corp. and EOG Resources Canada Inc.

Description: The project, which was granted a 20-year export licence in October, will be served by Pacific Trail Pipelines LP’s natural gas pipeline with a connection to the Spectra Energy pipeline system and natural gas supplies in northeastern B.C.

Size: Two trains of 700 million cubic feet a day.

SHELL CONSORTIUM

Companies: Royal Dutch Shell PLC, Korea Gas Corp., China National Petroleum Co. and Mitsubishi Corp.

Description: Shell says it is studying LNG options, and recently purchased marine and dock facilities in Kitimat from Cenovus Energy Corp.

Size: 1.8 billion cubic feet a day, with a possible expansion that would double this.

BC LNG CO-OPERATIVE

Company: A co-operative, with 50 per cent ownership by the Haisla First Nation, and co-op shares owned by 16 members, including Talisman Energy Inc. and Tenaska Inc.

Size: 125 million cubic feet a day and a possible second train that would double the size.

PRINCE RUPERT

Company: BG Group PLC

Description: Has secured an agreement with the Prince Rupert Port Authority to study an LNG terminal on port lands.

Size: Undisclosed. Sources suggest new projects, to be economic, must be two billion cubic feet a day and higher.

OTHER POTENTIAL SITES

Locations: Kitimat, Prince Rupert, Stewart, Bella Coola, Port Simpson, Kitsault

Companies: Progress Energy Corp. with Malaysian giant Petronas; Nexen Inc. with Japan’s Inpex Corp.; others not yet public.

Status: Progress is looking at two trains of 600 million cubic feet a day, with a third possible train bringing the total to 1.8 billion cubic feet; Nexen is at early stage evaluation of numerous gas-marketing strategies, including LNG.

Nathan VanderKlippe