How Target missed the mark in Canada
Empty shelves and a poor selection disappointed eager fans of the retail chain.
Nadia Yee grew up driving from Ontario to Detroit to shop at Target (TGT). But when the chain finally opened up in Canada, she was deflated.
The new Toronto store was understocked, and the selection of the items from pajamas to jewelry was limited.
Her experience wasn't isolated. Canadians who camped out the first night to shop at Target drifted away after being disappointed by high prices, uninspiring products and bare shelves.
"You'd go sometimes and the racks would be empty," said the mother of two who works for a drug company. "I've been a little bit disappointed."
That, in a nutshell, is how Target Corp.'s first international expansion turned into a first-year flop. The discount chain had told investors that its Canadian business would be profitable by the end of 2013.
Instead, losses are expected to reach $2 billion by the end of this year, according to Tiburon Research.
The botched entry into a market that was hungry for Target's products and where rival Wal-Mart Stores (WMT) is expanding contributed to the company's decision to part ways with Chief Executive Gregg Steinhafel and presents a major challenge for the new management team, headed by interim CEO John Mulligan.
In an interview on Tuesday, Mr. Mulligan said the company is committed to staying in Canada and needs to get to its goal of generating $6 billion in annual sales north of the border by 2017.
"Our focus on Canada is on fixing the Canadian business and getting it back on track where it needs to be," said Mr. Mulligan, who has been Target's chief financial officer since 2012.
Sales, he said, were "far short of our expectations last year." To fix that, he will have to get shelves stocked, prices right and reconnect with a consumer who has been disappointed so far.
When Target embarked on its $4.4 billion expansion into the country, it was banking on finding eager customers among the Canadian shoppers who had been driving across the border to shop in its U.S. stores.
The troubles were apparent from the beginning. When Target bought more than 120 Zellers stores from Canadian department store chain Hudson's Bay Co. in 2011, many were in rundown shopping centers that were hard to access. The locations were smaller than Target's typical U.S. formats and took more money than expected to expand and convert to its trademark red-and-white layout.
Target trained its Canadian employees at its U.S. stores for months. But when they returned home to Canada, they found the technology and systems were different from what they had learned.
Meanwhile, inventory was a problem. At one location, workers didn't even have enough products to fill the shelves on opening day. The manager at the time, who declined to be named, instructed employees to spread out action figures and dolls over multiple racks to try to make the toy aisles look fuller.
Within weeks of the first wave of store openings in 2013, some employees were told their hours would be halved because sales weren't keeping pace. At others, an early surge of buying cleared shelves of products that wouldn't be replenished for another month. The inventory problems got so bad at one store that workers filled half an aisle with Tide detergent because they didn't have enough other products to fill the space, according to a former employee.
The Canadian stores didn't live up to Target's "cheap chic" reputation of trendy goods at affordable prices. The prices were higher than in the U.S. stores, and some shoppers said the Canadian stores lacked distinctive products that Target had been known for in the U.S., such as Cherry Coke and S'mores-flavored Goldfish Crackers snacks.
Target was aware its prices wouldn't be as cheap in Canada, where it has only 124 stores, as in the U.S., where it has roughly 1,800. In August of 2012, half a year before it opened its first store, Target's executive vice president for merchandising and supply chain, Kathryn Tesija, said pricing would be "competitive to the Canadian market, not necessarily the U.S. market."
Target spokeswoman Dustee Jenkins said certain products aren't available because of issues like vendor agreements or regulations. Each store carries a different, tailored assortment, and 90 percent of Target's U.S. apparel and home goods were carried in its Canadian stores, she said. There is more variability with food and products, she said, like Cherry Coke, which isn't available at all in the country.
By the end of last year, Target's fourth-quarter gross margins were just 4.4 percent in Canada, a fraction of the nearly 30 percent margins in the U.S.
More than a year into the expansion, some of the early operational problems are still evident. Marsha Dark, a 45-year-old self-described "devotee and die-hard fan" of Target, said she often can't get the fashion items she wants at the one nearby in the west end of Toronto because the shelves aren't restocked.
This week at the Cloverdale mall location, shoppers were greeted by signs that the women's denim jacket and miniskirt that were advertised in the weekly flier weren't available at that particular location. "We apologize for any inconvenience," the notices read.
—Paul Ziobro contributed to this article.
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