On January 14, 2015, Target finally pulled the plug on the Canadian operation after two years of losses and struggles.
After two years of disappointing results, Target has finally decided to end its Canadian operations by shutting down 133 stores and laying off over 17,000 employees. This rough ending is not surprising as the company time and again failed to deliver on its promises of low prices and wide variety. Furthermore, it was unable to overcome problems related to the supply chain and bring down prices to compete with other retailers. The company’s CEO, Brian Cornell, mentioned that Target would only realistically become profitable after 2021, a timeframe too long to endure the losses in the interim. That said, let’s see where the company went wrong.
Entry to Canada
Target’s entry to Canada was through the acquisition of Zellers, a once prominent Canadian discount retailer, by purchasing lease agreements of 220 stores for roughly $1.8 billion. Additional investments of $1 billion were put into the stores for renovations and fixture upgrades. However, these investments did not pay off as the company reported a loss of $1 billion in the first year itself. With that in mind, below are the main reasons why Target missed the mark in Canada.
Too big, too fast
Perhaps the biggest reason why Target failed can be attributed to its empty shelves. Since the beginning, Target had problems with its supply chain and consistently failed to gauge demand for its products. Furthermore, customers often complain about not having enough choices and variety. After a long period of no improvements, Canadians simply switch from shopping at Target to shopping at places such as Canadian Tire, Walmart, and Sears, where the shelves are stacked. Slow foot traffic and lower sales eventually became the standard.
Zellers stores that Target acquired were not in ideal locations as many were in rundown shopping centers and not easily accessible. As a result, Target had to spend a lot of money reviving the stores. This was a major oversight as Target should have leased the stores that required little capital outlay and have foreseeable potential in the first place.
When Target opened in Canada, Canadians were excited by the prospect of having another discount retailer where they could go and save money. The expectation of lower prices was not only boosted by Target’s brand image but also by the fact that Canadians have shopped at Target in the US and expect the same or at least similar price points. However, it turns out that goods in the US stores are roughly 20% cheaper than those in Canada (exchange rate accounted). That said, Target had to cut its margins which further affected its profitability.
No e-commerce option
Another factor that contributed to Target’s demise is the fact that it did not have an e-commerce option for people who prefer to shop online. This is crucial as consumers are increasingly choosing to sit at home and wait for the products to arrive at their doorsteps. By ignoring this trend, Target gave up the online customers who then went to order products from Walmart and Amazon instead.
Target will continue to operate the stores in the meantime until it completes the exit. Additionally, a $70 million severance fund will be distributed to employees for 16 week’s worth of compensation and benefits. Target’s total cash costs associated with the departure is estimated to be around $500 – $600 million with expected pre-tax losses on discontinued operations in Q4 2014 of $5.4 billion. The costs are expected to be entirely covered in cash from the US operations.
The retail landscape
With one major player out of the picture, companies such as Loblaws, Shopper’s Drug Mart, Canadian Tire, Walmart, and others will likely experience higher foot traffic and in-store purchases. Walmart, especially, would probably benefit the most from Target’s exist as it is a major competitor. That said, investors interested in the Canadian retail sector may consider Target’s exodus as an opportunity to long some of the names mentioned.
Target’s ambitious plan to expand into Canada is commendable but it is also what caused the company to fail after only two years of operation. The company grew too fast without considering its capabilities. Furthermore, problems with the supply chain coupled with high prices and poor locations also contributed to the company losing its competitive advantage to other retailers. Target’s demise should be something to consider for companies looking for either multinational or domestic expansion.