Target’s decision to exit Canada can be blamed on inventory challenges and a failure to replicate the U.S. Target shopping experience, according to analysts. But the final nail in the coffin may have been the falling loonie.
“I think with the plummeting Canadian dollar and the fact that they’re reporting in U.S. earnings, any hope or plans of turning the ship was like an iceberg hitting the hull,” marketing consultant Tony Chapman told Marketing. “They probably said we’re better off taking this write-off now and satisfying our shareholders, who have been so frustrated with this move since almost day one. Just put it down as a bad mistake and move forward.”
Minneapolis-based Target will record about US$5.4 billion in pre-tax losses in its fourth quarter, with most of it related to the Canadian operation. The company said it would spend between US$500 million and US$600 million in cash to end its Canadian operations.
Target, which expanded into Canada two years ago, has been plagued by problems from the start, including supply-chain issues that resulted in empty shelves, and complaints that prices were too high compared to U.S. stores. In August 2014, Target announced a detailed turnaround plan, but ultimately decided to pull the plug.
Brian Cornell, who became chairman and CEO last year, said in a statement that when he joined Target, he promised to take a “hard look” at the business and operations in order to improve its performance.
“After a thorough review of our Canadian performance and careful consideration of the implications of all options, we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” he said. “Personally, this was a very difficult decision, but it was the right decision for our company.”
Target, which bought the store leases of discount retail chain Zellers in 2011, was well known to Canadian cross-border shoppers before it expanded here. But with higher prices in Canada and lackluster inventory, the retailer failed to recreate the U.S. Target shopping experience that Canadians had come to love.
“They went from this iconic brand in Canadians’ mind to ‘it looks like Zellers but it’s not even stocked as well as Zellers,’” said Chapman. “They failed to deliver on what I think would be an impossible thing to deliver on, which is what Target stood for with Canadian women. It was the shopping experience, the girls’ getaway. To replicate that in Canada with Zellers stores, and terrible operations and logistics, they failed. They failed to deliver on their brand.”
Toronto retail consultant Ed Strapagiel said Target’s biggest downfall was supply chain management. “They simply couldn’t get the right product in at the right time,” he said. “It took them too long to really address this problem and that turned off the consumer. And once consumers make up their minds about a retailer, it’s very difficult to get them to reconsider.”
Another key mistake was expanding too quickly: in just two years, the company opened 133 stores across the country. “They clearly bit off more than they could chew,” said Chapman. “They would have been better off starting with six flagship stores that were the place to shop and build from there.”
Eric Blais, president of Toronto-based Headspace Marketing, said the decision to expand quickly coast to coast, including Quebec, is unlike most U.S. retailers that enter the Canadian market. “They don’t go to Quebec initially,” said Blais. “Some of the successful entries in Quebec have done it in a very measured way and they’ve been very smart about it… Despite all Target’s best intentions, they didn’t necessarily understand the [Quebec] landscape.”
Target said it would work with an advisor to sell its real estate, and with 133 stores, there’s a lot of space up for grabs. “Probably the biggest beneficiary will be Walmart and they’ll be able to go in and practically cherry-pick locations,” said Strapagiel.
Chapman also said Walmart might pick up a couple of stores, and Loblaws/Shoppers Drug Mart stores could be a potential. “But everybody is trying to move away from the big 80,000 to 100,000 sq. ft footprint to a much smaller footprint,” he said. “It’s not like there’s going to be people climbing all over this.”
On Thursday Andrew Pelletier, VP of corporate affairs and sustainability at Walmart Canada, said it was too early to “speculate on whether we would assume any of the retail locations,” adding he was sorry to see a competitor leave the Canadian marketplace as Walmart believes competition ultimately benefits the consumer.
Target’s Canadian demise serves as a cautionary tale for other U.S. retailers setting their sites on Canada. U.S. luxury retailer Nordstrom expanded into Canada last year, and Saks Fifth Avenue is expected to arrive in 2016.
“Be very careful,” said Strapagiel. “I think Target came in with this expectation that they would just take over… And I think they started to believe their own PR.”
Chapman said the falling Canadian dollar and decline in the popularity of department stores would be a challenge for U.S. retailers like Saks and Nordstorm.
“The only retail that’s succeeding right now is designer discount,” he said. “Anybody that’s investing aggressively in Canada has got to be retooling their plans quite aggressively because I think they’re in a similar roller coaster, which is primarily going down versus going up.”