Lessons Learned From Target’s Failed Canadian Mission

Last week Target announced that it is closing up shop in Canada after less than two years in operation. The company filed for protection from creditors in a Toronto courtroom under the Companies’ Creditors Arrangement Act (CCAA).

Target opened up in Canada in March 2013 and there are currently 133 stores across the country and approximately 17,600 employees. A Target spokesperson said all outlets are expected to close within 16 to 20 weeks.

The company has been plagued with problems from the very start of its entry into Canada. It lost almost $1 billion in its first year and losses are still mounting.

“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,” said U.S. parent company’s CEO Brian Cornell in a release Thursday.

International consultancy firm Alvarez & Marsal will oversee the liquidation and closing of the process.

Approximately $1.2 billion in debt will be reduced from selling the leases to interested players. Financial advisory firm Lazard Ltd. has been hired to advise the company about selling its real estate.

Target said the decision to close shop in Canada would cost between $500 million and $600 million in cash. A $5.4 billion write-down on the accounting books will occur in the fourth quarter.

So what lessons can be learned from Target’s foray into Canada?

Initial customer feedback revealed that customers were unhappy with higher prices and minimal inventory. Also, many of their favourite products were not imported into the country.

According to a Globe & Mail article last year, goods were coming into the Canadian warehouses faster than they were going out because barcodes on many items did not match what was in the computerized system.  This caused huge delays in getting goods out and ready for sale.

As a result, store shelves remained empty for long periods of time.

In the U.S., Target runs its own warehouses, but it hired Eleven Points Logistics to oversee the Canadian warehouses.

Target executives have been criticized for being overly confident of the Canadian market and not doing enough due diligence in this huge undertaking.

The executives also may have underestimated the fierce competition faced from Wal-Mart, Canadian Tire and Loblaw. These retailers had ample time to revamp their competitive stance in light of the announcement of Target coming to Canada. They pulled out all the stops to win customers with great products and deals.

Target initially acquired its Canadian leases from Zellers and many of the Zellers leases had poor store locations. Toronto-based RioCan Investment Trust owns a number of Target’s locations.

The company also undertook the huge task of opening all the stores at the same time instead of a gradual opening that may have shed light on possible problems.

Target estimates that it has invested more than $7-billion in its Canadian expansion since the start of 2011, when it first announced its plan to purchase Zellers leases for $1.8-billion.

Mr. Cornell told analysts that Target Canada undertook a “massive effort” to recover in the crucial holiday season. “But the harsh reality is that both sales and profits continued to fall short of our expectations,” he said. “And we have not realized the significant improvement in Canadian consumer sentiment that we believe is necessary. Put simply, we have not seen the step change in performance we told you we needed to see.”

Other retailers such as Mexx, Smart Set and Jacob have all announced plans to shut in recent months. Montreal-based Le Chateau has also been having difficulties.

Target demonstrates that it is not always easy to succeed in foreign markets and companies must view the entire process as one in which customers’ needs should be thoroughly analyzed and prioritized.

Target’s shares were down on Friday to close at $74.94 on the NYSE.

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