Canadian Tire's Growth Strategy

8/13/2019 Canadian Tire's Growth Strategy

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Plotting Canadian Tires growth for the next five years

Sri Ve

Decemb


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Executive Summary

Background:The Canadian Tire Group of Companies runs over 1,700 retail stores

home services & sports categories. Its strength comes from its core retail operatsupport services and continued product & store innovation. The total shareholder r

past 10 years is a CAGR of 9.2%.

Complication:As the company grows through acquisition, it has stretched itself too

a dozen brands and the revenues from its heritage brands have started to stagnate.

Question: How can Canadian Tire maintain a growth rate of 3% while keeping its

10% over the next five years?

Recommendation:In order to do so, Canadian Tire has to:

Consolidate retail segment by products.

Improve online sales through better relationships with delivery networks.

Expand financial services & loyalty programs to all businesses.


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BACKGROUND


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Canadian Tire is the largest retailer in Canada

Founded in 1922, Canadian Tire hasretail operations in automotive, homeservices, daily apparel, sportsequipment, gas & financial serviceswith a total of 12 brands in thesecategories.

It runs 1,700 retail stores throughoutCanada including 272 gas stations and73 car washes which are a mix ofcompany owned stores and dealerfranchises.

The companys growth has beenthrough a mix of organic growth andthrough acquisitions, namely Marksin 2001 and Forzani Group Limited in2012. 0

2000

4000

6000

8000

10000

12000

14000

FY 2006 FY2007 FY2008 FY2009 FY2010 FY

Canadian Retailer Revenue ($m


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Canadian Tires revenues & profits have consistentlygrown over the past six years

11,427

10,387

9,213

8,687

9,121

8,606

8,269

FY 2012FY 2011FY 2010FY 2009FY 2008FY 2007FY 2006

Canadian Tire Revenues (CAD $mm)

723

626

666674

634

FY 2010FY 2009FY 2008FY 2007FY 2006

Canadian Tire EBIT (CAD $


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Canadian Tires stock has returned 9.24% CAGR overthe past 10 years compared to 5% for the TSX


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SOURCES OF CANADIAN TIRESLTSCDA


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Canadian Tires LTSCDA comes from its core retailoperations, support services and innovative culture

Strong core retail operations through a good product mixdealer network and strong brand recognition

Excellent support services to the retail operations througfinancial services, real estate management and the use o

traditional and online media

The company has an innovative culture and has pursued aggressive expansion strategy


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Canadian Tire has a diverse retail mix throughautomotive, home services and apparel

Canadian Tire sells products for everyday needs of

Canadians such as home organization, pet care, kitchenand outdoor needs

Marks is the largest retailer of mens apparel footwear inCanada

FGL Sports is the largest sports retailer in Canada and

owns retail banners including Sport Chek, Sports Experts,Atmosphere and National Sports

LTSCDA 1: Strong Core Retail Operations


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Canadian Tire stores are a mix of dealer franchisedand company owned stores

Franchisees understand their local community better and s

to tailor the products that are carried in store The franchise model allows Canadian Tire to have a nationa

while executing locally through the dealers

The real estate team scouts and selects store locations wdealer runs the day-to-day operations.



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Canadian Tires products have strong brandrecognition

The company owns some of the best-in-class private-

labels and carries premier national brands Marks has exclusive, private-label brands, including 60

apparel and footwear products

FGL Sports has access to some of the best sportsbrands in the world



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Canadian Tire has a strong in-house real estatemanagement expertise

Canadian Tires 1,700 store network is located within a

drive for 90% of Canadians The company holds one of the largest commercial re

portfolios in Canada with 30 million retail square feet

In 2013, it setup a REIT valued at $3.6bn to unlock the valueits real estate holdings

LTSCDA 2: Excellent support system to reinforce core retail operations


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Financial Services provides a strong support to theretail brands

Financial services provides in-

store financing equal paymentcapabilities which supports thesale of large ticket items

Retail brands such as Sport Cheknow issue their own credit cards

Strong risk managementpractices and pricing keeps thewrite-off rates at a low 6%where industry average is about11%



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Canadian Tire extensively uses both online andtraditional media for advertising

Canadian Tiresweekly flyers reach

11 million households on a weeklybasis and is one of the most widelyread advertising vehicles in Canada

canadiantire.ca, marks.com andsportchek.ca are high traffic webproperties

Canadian Tires mobile apps topthe Lifestyle categories in the appstore

The iPad app allows customers totrack their automotivemaintenance needs



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Continuous innovation in product & store layouts

Canadian Tire has a strong track ofintroducing new products foreveryday needs of customers in thehome, automotive and apparelcategories

The Concept 20/20 initiative createdSmart stores with racetrack floorplan, improved category adjacencies

and better store signage Better customer interaction through

retail labsfor Sport Chek

Marks stores carry walk-in freezerswhere customers can test coldweather products

LTSCDA 3: Innovative culture & aggressive expansion

l


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Innovative loyalty program that generates customerinsights

Canadian Tire Money was launched

50 years ago as a traffic builder totheir gas stations

Enhanced loyalty managementthrough Canadian Tire MoneyAdvantage MasterCard which onaverage leads to a 30% higherbasket size during checkout

Canadian Tire uses the insightsgenerated to understand shoppingpatterns and tailor a bettercustomer experience


LTSCDA 3 I i l & i i


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Management has always had a keen eye on expansion


Options MasterCard (1995)

Canadian Tire (1922)

Canadian Tire Money (1958)

Saskatchewan (1972)

Hamilton, ON (1934)

New Geographies

FGL Sports (2011)

New Distribution Centers

Sheppard Ave. (1963)

Brampton (1973)

Montreal (2009)

PartSource (1999)

Marks (2011)

Clerks on roller skates (1937)

Gas Bar (1958)

Financial Services (1968)

New class-of store (1993)

Next Generation Stores (2000)

Smart Stores (2008)

Automotive DIY (1999)

Atheletes (2011)

Home services (1934)

Canadian Tire Money Advantage (2012)


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COMPLICATIONS & POTENTIALISSUES

COMPLICATIONS & POTENTIAL ISSUES


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Canadian Tires operations are stretched too thin

Products repeating under retail

brands causing confusion tocustomers, more administrativecosts and lowering bargainingpower

Each retail brand operates as its

own business without manysynergies across brands

Canadian Tires operatingmargins have been shrinking forthe past three years


[VALUE]%

[VALUE] %

FY 2011FY 2010

Operating Margin (%



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Revenues of heritage businesses are stagnating

Legacy businesses are growing at

a much smaller pace at 0.8% The company is facing store

saturation for its legacybusinesses

Retail ROIC is at 6.7% which is

below the companysexpectations of 10%

Canadian Tires website doesallow for online purchases


5,

5,676

5,552

5,669

FY 2FY 2010FY 2009FY 2008

Canadian Tire store sales (CA



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Competition from coalition loyalty programs, newmarket entrants & online retail

Loyalty program rewards arelimited to Canadian Tire

New entrants such as Target havepotential to take away marketshare


Threat of Suppliers: Moderate

> Having few large suppliers bring withthem bargaining power

> Supply chain disruption risk due tofailures or geopolitical issues

Threat o

> High Capital R

> Large economdifficult for sma

> Existing playedistribution cha

Threat of Substitutes: Low

> No pure substitute in retail categories

> Online retail can be considered a threatto the heritage businesses such asCanadian Tire Retail

Threat o

> Low bargainin

> However ther

> Changing lifesthe company

Threat of Competitors: Low

> Industry is generally consolidated

> Competitors such as Rona & HBCare not faring well

> Some players in the Fixingcategory such as Home Depot aregrowing steadily

250

1,700

10,000

4,200

CANADIAN TIRE MONEY

ADVANTAGE

CANADIAN TIRE CREDIT

CARDS

AIR MILES AEROPLAN

Loyalty / Card Program Subscribers in

Canada ('000)


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HOW CAN CANADIAN TIRE BRINBACK OPERATING MARGINS BATO 10% OVER THE NEXT 5 YEAR


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Canadian Tire can grow through consolidation, betteronline sales and by expanding loyalty programs

Horizon 1:

Consolidate retailsegments byproductcategories

Horizon 2:Improve onlinesales through

relationships withdelivery networks

Horizon 3:Expandfinancial & loyaltyprograms into allCanadian Tirebusinesses

Profit

Time


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Consolidate retail segmentsby product categories

Simplifies the brand structure forthe end customer

Lowers administrative costsimproving profitability

Better supply chain managementthrough increased bargaining

power and alignment ofdistribution centers

Increase online sales

through better relationshipswith delivery networks

Current retail footprint is reachingsaturation

Higher revenues for legacybusinesses through increasedproduct categories

Online Canadian sales are lowergiving it better first mover

advantage

Expand financiaprograms into al

Smaller risk profile Services resulting in

offs

Better integration wTires traditional, mmarketing ac

Increased awarenesto all Canadian T

Canadian Tires three pronged strategy will help itimprove its margins


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Consolidate retail brands into four categories andeliminate duplicate products across these categories

Automotive

Apparel

Canadian Tire R

Sport


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Increase online sales through better relationships withpostal services

Selectivity / Earnings

Increasin

g

BusinessStrength

Increasing Industry Attractiveness

Canadian Tire

Retail Stores

Harvest / Divest

C

O

Apparel Retail

Canadian online sales onlyaccounts for 4% of total retailsales compared to 10% in theUS

Canadian Tire should negotiatepreferred online shipping rateswith Canada Post & UPS tocapture the potential growthin this market which iscurrently hampered due tohigh shipping costs


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Convert Financial Services from a product to aplatform

Financial Services will support all of Canadian Tires retail businesses

Canadian Tire Money should be acceptable across all businesses to iloyalty


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FINANCIALS


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Based on our recommendations, we see CTR revenue grow by8% annually overall EBIT growing by CAGR 12%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2013 2014 2015 2016 2017

Canadian Tire Revenue Projection ($mm)


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APPENDIX

Logic SummaryBackground


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Logic Summary

Audience : Board of Directors

Assumptions: Formal; friendly; action biasprimary decision maker;

limited knowledge- need reminding

likely will agreeGoal: Decision to go ahead with 3 pointprogramme

g Canadian Tire is the largest retailer in Canada

Canadian Tires revenues & profits have consistently grown over the past six

years

Canadian Tires stock has returned 9.24% CAGR over the past 10 years

compared to 5% for the TSX

Canadian Tire has three sources of LTSCDA

Strong core retail operations

Excellent support services to reinforce their core retail operations

Continued focus on store & product innovation

Complications: Company is stretching itself too thin. Stagnant revenue in Canadian Tire Retail

Competition from other loyalty programs (Airmiles & Aeroplan)

Question: How can Canadian Tire get back to top line growth of 3% whilekeeping its operating margins above 10% over the next 5 years?

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Canadian Tire must take 3 steps to drive future growth

1. Consolidate retail segments by products

Simplifies product structure for

customers

Lowers SG&A costs improving overall

profitability

Better supply chain relationships

resulting in increased bargaining power

2. Improve online sales through betterrelationships with postal services

Current retail footprint is saturated

Higher revenue for legacy businesses

Current online sales are low in Canada

are low giving it a first mover

advantage

3. Expand financial & loyalty programs intall businesses

Lowers the risk profile for Financial

Services giving it higher margins

Better integration with Canadian Tires

marketing activities

Increased customer loyalty to all

Canadian Tire brands

Canadian Tire's Growth Strategy

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