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Canada Grocer Under Wal-Mart Pressure Seeks Growth in NY: Retail

Loblaw Cos. (L), Canada’s biggest grocer, opened a flagship store on Manhattan’s Fifth Avenue last week. Shoppers won’t find meat and produce at Joe Fresh, however. They’ll find $29 women’s dresses and $12 men’s polos.

Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT) sold clothes first and then moved into groceries. Loblaw has done the opposite. About seven years ago, the company asked Joe Mimran, who founded Club Monaco Inc., to design a clothing line partly as a way of competing with Wal-Mart, which was expanding in Canada.

The clothes sold well enough that Loblaw decided to open standalone stores and now has 12 in Canada. Last year Loblaw crossed the border, opening five shops in New York and New Jersey. The Fifth Avenue store, which opened March 30, is a block from Hennes & Mauritz AB and Zara locations and 10 blocks from Fast Retailing Co.’s (9983) own Uniqlo flagship.

“We’ve opted to take the brand international, with New York being sort of the window to that expansion,” Mimran said in a telephone interview. “We still think there’s another 20 percent growth available to us, but the real growth now is going to have to come from outside of Canada.”

Loblaw’s Joe Fresh brand is entering the U.S. at a time when Americans continue to spend judiciously even with consumer confidence holding close to a one-year high. While U.S. same-store sales rose 6.5 percent last month, beating the estimate for a 3.5 percent gain, many chains are discounting to woo shoppers. Joe Fresh also will chase the same millennial customers as Uniqlo, which has started its own U.S. expansion.

Shopping Destination

“I don’t think we have confirmation yet that as a standalone shopping destination, that Joe Fresh in New York City will meet the same success it has in Canada,” said Donald Marleau, a Standard & Poor’s credit analyst based in Toronto.

While a grocery chain moving into apparel is unusual, Loblaw’s controlling family, the Westons, have a long history in the rag trade. They also control the luxury clothier Holt Renfrew, Canada’s version of Nordstrom Inc. (JWN), and the U.K department-store chain Selfridges.

Mimran, who splits his time between hometown Toronto and New York, ran Club Monaco before Polo Ralph Lauren Corp. (RL) purchased it for about $80 million in 1999. In 2003, he started doing consulting work on home products for Loblaw and working with the Weston family. At first, the grocer sold women’s and men’s clothing with an average price of $13. Today, Joe Fresh sells everything from kids clothes to jewelry, cosmetics and bath products.

European Influence

Joe Fresh has “a style that we are known for, which is cleaner colors, a little more preppy than some of the other fast-fashion houses, with a little bit of European influence,” Mimran said. The store attracts value-seeking customers who also appreciate style, he said.

The clothes fill a niche between apparel sold by Gap Inc.’s (GPS) Old Navy brand and H&M, according to Marleau.

“Joe Fresh is one of Loblaw’s growth strategies for the future,” said Vishal Shreedhar, a Toronto-based analyst at National Bank Financial, who rates the shares outperform, the equivalent of a buy. “They’re testing it in major markets to see if there’s an appetite,” he said.

Loblaw’s main business, which besides groceries includes in-store banking, mobile-phone plans and financial services, has adapted as Wal-Mart opens stores and pushes into groceries. Net income has risen every year since 2006 and last year Loblaw earned C$769 million ($771 million) on C$31.3 billion in sales.

Wal-Mart Effect

Still, since Wal-Mart started selling food in Canada, the shares have never regained their footing, closing on March 30 at C$34.02, down 55 percent from its April 2005 closing high.

The Canadian grocery business will only get more competitive when Target starts opening stores in Canada next year, in its first expansion outside the U.S.

While Loblaw won’t reveal sales figures for Joe Fresh, the company said in 2007 that it planned to grow the brand into a C$1 billion business.

“Apparel brands that are successful tend to be international brands or multinational brands, so we felt it was critical for us to move outside of our comfort zone and start to look for growth opportunities,” Mimran said. “It’s important for us to not be a concept that’s parachuted into the market, but really make this our home as well.”

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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