While Canadian Tire Corp. Chief Executive Officer Michael Medline hasn’t had the best of luck with delivery drones, he says home delivery is vital to the 93-year– old retailer’s push into online shopping.
In an interview last week, Medline related an unfortunate experience with the nascent technology while giving speech in 2014. A drone was supposed to deliver a box mini doughnuts to him on stage then fly away. Instead, it crashed before completing its delivery, dropping its precious cargo.
“People thought I crashed it on purpose to make fun of it,” Medline, 52, said with a laugh. “Everyone thought I was making some large statement about drone delivery or competitors, which I was not trying to do.”
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While the drones touted by competitors including Amazon.com Inc. may not be quite ready for prime time, investing in the future is key for a retailer that’s reinvented itself more than once to become one of the largest chains in Canada with a share price at a record high. The Toronto–based retailer has about 1,700 outlets, selling household and sporting goods, gasoline and auto-parts.
So for now, the company is setting its focus on a more mundane goal: rolling out home delivery for its flagship Canadian Tire retail brand to millions of customers across the country, Medline said.
“You don’t try to out-Amazon Amazon or out Wal–Mart Wal-Mart,” Medline said. “We have challenged ourselves to have the best online presence in the world.”
Getting there hasn’t exactly been easy for a store nicknamed “The Tire” by shoppers. The company scrapped online sales in 2008, came back with web sales for tires in 2011 and began to sell general merchandise again in 2013.
Its meandering path online hasn’t deterred investors. Its shares have rallied 120 per cent in the past five years, reaching a record of $145.37 on May 12 — ahead of a 75 per cent increase among its peers in the S&P/TSX Consumer Discretionary Index over the same time frame. The shares closed little changed Tuesday at $140.97 in Toronto for a market value of $10.5 billion.
“Just a few years ago all you could do online was look at their weekly ad,” said Brittany Weissman, a retail analyst at Edward Jones in St. Louis. “When you look at Canadian retailers they’re ahead of the competition.”
Canadian Tire’s success stems from several factors, Weissman said. The retailer has done good work investing in its stores, with Canadian Tire’s sports division, including its 190 Sport Chek stores, posting strong 7.6 per cent same-store sales growth in the most recent quarter. Canadian Tire’s sales of bulky items such as winter tires make the retailer less vulnerable than traditional apparel and department-store retailers to changing consumer habits, even as they work to stay ahead of online innovations, she said.
“There’s also strong loyalty among Canadians to the brand,” she said. “They’ve done a great job managing the experience for the consumer.” Canadian Tire’s marketing plays heavily on the country’s citizens’ love of hockey, weathering the cold or decorating their homes with lights for Christmas.
Delivery is the final link in the online customer experience chain, Medline said. A company can nail every step of the process and still leave a customer with a bad taste in their mouth if they track mud through their home or knock over a lamp during delivery. The company is pilot-testing the service in Ottawa, the nation’s capital, and declined to disclose a timeline for a national roll-out.
Part of the digital focus also means going old school. The company unveiled a “Wow Guide” this spring, its first catalog in almost a decade. It’s designed to interact with a cellphone app, and was delivered to 12 million homes.
“It cost a ton to make, but the return will be good,” Medline said. He said visitors to the website doubled.
While Canadian Tire’s delivery initiative is important, getting it right on a national scale is complicated and risks lower margins, said Weissman, who has a hold rating on the stock, one of five, according to analyst ratings compiled by Bloomberg. It has 9 buys and one sell.
Steve Belisle, a fund manager with Manulife Asset Management based in Montreal, sold his shares of Canadian Tire in the past year and remains uninterested due to headwinds including weak consumer spending in oil rout-stricken Alberta. “We’re more concerned about the impact of oil on their sales eventually,” he said.
There’s also strong loyalty among Canadians to the brand
The slowing Alberta economy is more than offset by a resurgence in other provinces, Medline said.
“We’re seeing strength in B.C. I haven’t seen in my career,” he said, adding Quebec and Ontario are strong too. British Columbia’s economy grew 3 per cent in 2015, the fastest since 2006, propelling the west coast province to the top growth ranking in Canada. Consumer sentiment in the province rose to the highest on record last week buoyed by rising real-estate prices, according to Nanos Research.
Medline sees margins for online delivery ultimately being similar to those at retail and that continued sales growth will lead to more margins. Any growth via potential acquisitions would be geared toward supporting the company’s existing businesses, especially online — a relatively new way of thinking for him.
“Up until about 18 months ago, I was still looking at acquisitions that would make sense in the old world,” he said. “Everybody has to think in the new world. The opportunities in our current business are mammoth. If we expand, it will be in a new-world way.”