After a two year tryout, Target has decided to pull the plug on its $7-billion Canadian operation. That’s not shocking considering they racked up $1.6 billion in losses to date instead of the 2013 profit their financial model predicted. What is shocking is that Sears Canada is still around. Now their “recalibrated” financial model could not find a realistic scenario by which it would be profitable until at least 2021, that’s another six years in the red under what I would assume a best case scenario. The old CEO got axed because of the botched expansion and the new CEO took note and wants to keep his job for more than six years. Now that Target announced its abandoning its Canadian operations, the stock (TGT) was up 8% in pre-market with market capitalization gain of $3 billion. Since a higher stock price is the good news, the terrible news is 17,600 employees losing their jobs. I expect to see that number being reflected in Canada’s monthly job report (To give you an idea, there was a loss of 4,300 jobs in December 2014, so negative 17,600 jobs is a big number in Canada). Target was supposed to bring hope to the people who lost their jobs with the closure of Zellers (Target bought some of the bankrupt Zellers locations.)
Target’s botched expansion in Canada certainly makes an interesting business school case study. How does such a successful retailer flop so badly? There are a lot of lessons to be learned. I love Target USA and every time me and my wife are in the U.S. me we make a habit to stock up before crossing the border. The goods are cheap and the experience is superior than going to Wal-Mart.
The main lesson here is first impressions. Target Canada got off to a disastrous start that stayed engraved in people’s mind. My wife is the real barometer for a store’s success. I remember how exited she was at the announcement of Target entering Canada. Canadians that were familiar with Target USA were thrilled and the folks that never been to a Target store couldn’t wait to find out what the buzz was about. This was a situation where people were camping out the night before the grand opening. Unfortunately you only get a chance to impress once. After months of making noises Target finally had their grand opening and to put it lightly my wife was ‘’severely disappointed’’. Her experience wasn’t isolated. A lot of people of the Target cheerleaders were totally deflated. While getting a haircut the stranger in the seat next to me was on a rant against Target. He couldn’t understand what the excitement was all about and what’s so great about Target after a lackluster shopping experience.
My wife first she said that prices were much higher. Obviously prices are a huge factor when making decisions. Generally Canadians expect higher prices than U.S. stores, which have been the norm since forever (lower currency, more expensive labor etc…) but in this case prices were higher than other local retailers. My wife’s exercise pants are $10 cheaper at Wal-Mart than Target. Same brand, same good, same color, same everything. Now Target pissed off my wife and the Target “goodwill” took a plunge. Other notable problems are empty shelves due to inventory and operational issues. The empty shelves pictures floating on social media became the unofficial symbol of Target Canada. I never really understood the empty shelves problem that has been plaguing Target since the beginning. It’s terrible for your image. Imagine if you went to a dealership and the cars weren’t painted. Or your hamburger is served with half a bun. It’s not just that it doesn’t feel right, it’s just not right. Is this some kind of catch 22 where Target says “Why stock up the shelves? There’s nobody here.” and the customers says “I’m not going, there’s nothing on the shelves.” Since Target bought some of the old Zellers locations, they inherited some of the bad locations Zellers had like the ones in rundown shopping centers. That part of town where nobody goes.
First impressions are very important (not just in retailing of course). Target Canada did slightly improve after its opening but never enough to recapture the heart of the consumer, or more importantly their wallet. A while back I read a headline that said something along the lines “Canada is not as welcoming” regarding Target’s terrible opening. That headline couldn’t have been any more wrong. It wasn’t like Target was entering a hostile environment. Canadians were hungry for Target’s products. When you compare the situation to Wal-Mart, Target had everything to gain. When a Wal-Mart opens in your town, there’s a protest blocking street and organized groups trying to get it closed. It’s a heated issue. Some people are so anti-Walmart that’s they couldn’t wait for Target to muscle them out. Target was entering a friendly environment with a fan base that was waiting to spend their money but had nothing to spend their money on. Before the expansion, everybody was talking about Target; “Target is great, Target is cheaper, Target is so fun to shop at”. It’s not like Target had to gain their trust and convince customers, they were camping out the night before the opening. When you have a lineup outside before opening, you have achieved the the Pax Romana of retailing. The share of the pie was there for them to grab and Target blew it. Maybe the executives were too arrogant, thinking they could just walk into Canada and have immediate success by taking advantage of their fan club. Consumers have a limited amount of money to spend and there’s plenty of competition for our wallet. Basically Target Canada ended up not being great, wasn’t cheaper, and wasn’t fun to shop at. Now there’s a movement to bring back Zellers.
*Disclosure: I’m not long or short Target (TGT) and I don’t plan on taking a position.
Have a good weekend,