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Why Target missed its mark so badly

Chris Sorensen on how its high-speed rollout—and, ironically, our love for the brand—doomed Target’s northern expansion


 
The Target store at Toronto's East York Centre. (Rene Johnston/ Toronto Star/Getty images)

The Target store at Toronto’s East York Centre. (Rene Johnston/ Toronto Star/Getty images)

Target’s decision to wind up its struggling Canadian operations after racking up $2.5 billion in losses in 24 months serves as a warning to other U.S. retailers eyeing growth north of the border.

The Minneapolis-based big-box retailer, known for its “cheap chic” image, said Thursday that it planned to close all of its 133 stores across the country, affecting about 17,600 employees. The retailer’s Canadian subsidiary, Mississauga, Ont.-based Target Canada, has also filed for protection from its creditors in a Toronto court.

The decision to shutter its two-year-old Canadian operation came as a surprise despite Target’s well-publicized struggles in Canada. Many believed Target would be able to recover from a rocky launch and go on to replicate the success it has enjoyed south of the border. However, the retailer’s top brass said they didn’t see enough evidence that the turnaround plan was working, so they pulled the plug.

“The Target Canada team has worked tirelessly to improve the fundamentals, fix operations and build a deeper relationship with our guests,” Target CEO Brian Cornell said in a statement. “We hoped that these efforts in Canada would lead to a successful holiday season, but we did not see the required step-change in our holiday performance.”

Target launched in Canada in March of 2013 after paying $1.8 billion for the leases of hundreds of Zellers locations two years earlier. Plans for a rapid roll-out created instant buzz in the retail sector, with many analysts predicting dire consequences for domestic rivals like Canadian Tire and Loblaws. But it wasn’t long before Target discovered it was the one in trouble.

The chief complaint among shoppers was higher-than-expected prices. Many Canadians, it seemed, were disappointed when they discovered that boxes of cereal and cute area rugs cost more than they did in the United States. While it’s not unusual for retailers operating on both sides of the border to charge more in Canada, including rival Wal-Mart, Target appears to have suffered more than most—ironically, because many Canadians were so enamoured with its brand that they routinely travelled across the border to shop at its U.S. outlets.

At the same time, Target Canada suffered from inventory issues that resulted in many of its Canadian locations routinely being sold out of popular products, and being overstocked with those that weren’t selling. That created a poor first impression from which Target proved unable to recover.

Target also claims in court documents that its rapid roll-out, designed to quickly achieve scale in the Canadian market, had the unintended effect of limiting the impact of new store openings in some cities. The lack of a Canadian online presence may have also hurt the company, Target claims.

The struggling Canadian expansion, and the huge losses associated with it, were among the reasons that Target CEO Gregg Steinhafel resigned earlier this year. As his successor, Cornell initially promised to fix the Canadian operations, but now says “we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021.”

Total cumulative operating losses for the Canadian operation is estimated to be $2.5 billion, or about triple the expected losses for that period, the company said in court filings. Target estimates that it has spent a total of $7 billion on its Canada expansion project since 2011.

Scott Mushkin, an analyst with Wolfe Research in New York, estimates that Target was only averaging about U.S. $140 of sales per square foot in its Canadian stores. By contrast, the company would have needed closer to U.S. $250 a square foot to break even and U.S. $300 a square foot to match the performance of Target’s U.S. outlets. “Exiting Canada frees up management to focus on the company’s U.S. business where we believe there are significant opportunities to improve current store productivity and increase market penetration in core geographies,” Mushkin wrote in a research note.


 

Why Target missed its mark so badly

  1. Target stores in US border towns used to do good business from cross-border shoppers. I have to wonder how the failed Canadian expansion will impact their image and future cross-border income.

  2. They didn’t even have an ecommerce website.
    Who does that nowadays?

  3. Went to the Grand Opening…. nothing really stood out…. not impressed…. rarely went back…. now they’re a business study case.

    Sorry for those who lost their jobs. It’s getting ugly out there.

  4. Target started out on the wrong foot with Canadians when the CEO of the Canada division went on national television when the first store opened,and when asked if we could expect American prices, said rather snottily, “NO! you’ll pay the usual Canadian prices”. THAT was a public relations disaster from the moment he opened his mouth and put his foot in it. The man presented the image of “Canadian customers be damned”,and it’s been all down hill ever since.

    I have shopped a few times at target,which is in the location of the former Zellers store here,and found every one of the mistakes that had caused Zellers to go under,still be continued: prices about 10% over Walmart, poor selection, illogically laid out store,hard to find many items, poor selection, AND last but not least, bad attitude!,bored and lazy employees who never looked you in the eye,smiled, or were the least bit helpful. This is in total contrast to the employees of Walmart who always are polite,friendly,and make the customer “feel like Somebody”. In Target,you felt like an intruder,not a customer.

    I am astounded that a multi-billion dollar international corporation could do SO many things SO wrong, for SO long! Maybe,instead of listening to their highly educated,highly paid experts on business,they should have asked some customers what was wrong with their stores. Just about any shopper could have told them in two minutes what they were doing wrong.

    I’m sorry to see people lose their jobs, but Target deserved to go under. Thankfully,they haven’t asked for a taxpayer/government bailout.

  5. Arrogance! They thought they could take on Wal-Mart head-to-head with higher prices, lower inventory (lots of empty shelves made it look like it was closing from the first day), limited selection (compared to their own brand in the US and wal-mart and Dollarama (!) here, too large a footprint (walking km to see and find nothing u couldn’t get elsewhere, staff, when u could find them, who looked miserable because they had a job at Target and all the time that because they had landed in Canada we would eat up their brand products the way we do south of the 49th. Arrrogance! Sears Canada should learn some lessions from this fiasco before incorporating too many of their personnel before reprogramming them nit to think and behave the wy Target did.

  6. Hey, I’m happy that we never had to go through a visit to this loser. When I first heard about it I didn’t think it would go – not because I have insight but because Wal-mart has got its well-placed foot all over. Even though you might hate Wal-mart, how can you resist it.

    It is part of the competitive story ever since the 1940s when I was an after-school delivery and shelf boy. When the Safeway moved in, all the old grocery stores like the one where I worked died a fast death. Believe it or not in those days the customer phoned in and her order was made up and delivered (often by a kid like me on a bike), or in the store they would say “And a can of beans” and the clerk would go get a can of beans and on and on. My point is that the supermarket self-serve approach with much lower prices and a better turnover of pruduce, and good quality meat won the day in a walk. Other brand name stores following in the same communities often didn’t make it (EG Loblaws in the West,) Like Target, they often did not have the right stuff on the shelves and when they did it was at the wrong price. In this case I suspect Target was not competing with Wal-Mart but with its own record as experienced by cross-border Canadian shoppers. In the long run it boils down to three variables – customer service and employee helpfulness, quality and price and location.

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