Monday, January 19, 2015

Business Canada: How ‘arrogance’ led to Target’s failure

Hundreds of shoppers wait for the opening of the new Target store in in Guelph, Ont. on Tuesday March 5, 2013. Dave Chidley CP
Torstar News Service
Target Corp. never understood the Canadian marketplace, according to experts reacting to the announcement on Thursday that the discount retailer will close all 133 of its stores in Canada in the next five months, leaving 17,600 people jobless.

“They underestimated the Canadian competition,” said Jamie Tate, of Tate Economic Research Inc., a Toronto firm that has worked with Canadian Tire Corp. and Walmart Canada.

“You might even want to call it arrogance.”

The Minneapolis-based Target began opening stores in Canada in March 2013, and the first ones were swarmed by shoppers who wanted to see what the vaunted chain had to offer.

But Target couldn’t keep the shelves stocked, couldn’t offer the same products it sold at stores in the U.S. and couldn’t match U.S. prices.

Canadians began staying away in droves and despite a massive effort by Target to repair the problem, inventory remained thin over the holiday season and sales failed to meet expectations.

More importantly, according to Brian Cornell, Target Corp. chairman and chief executive officer, Target was unable to change Canadian consumer sentiment about the brand.

The earliest the chain would have been profitable in Canada was 2021.

“This is a difficult day for all of us at Target, but we believe this decision is in the best long-term interest of our business and shareholders,” Cornell said Thursday.

Target now plans to focus on modernizing U.S. stores and building up the company’s online channels.

Target Corp. bought the leaseholds to the Zellers stores from Hudson’s Bay Co. in 2011 for $1.8 billion.

Target Canada is now under court protection from creditors as it seeks to liquidate inventory and sell off the store leases.

“The receiver thinks they’re going to be able to sell the leases, but I can’t for the life of me see who is going to step up and make the same mistake they did and buy everything all at once like they did,” said Don Gregor, Aurora Realty Consultants’ chief operating officer.

Gregor estimated that about two million square feet of retail space will be returned to the market by Target, hurting smaller malls and pensions and real estate investment trusts that invest in malls.

“It will take one year to get rid of the good space and five years to get rid of all the space,” he said.

He named Canadian Tire and Lowe’s Canada as two retailers who may be interested in some of the locations. He also said Primark, an Irish discount apparel retailer operating throughout Europe and the U.K., might be interested, after recently buying up 15 Sears locations in the eastern U.S.

It was a day of bad economic news in Canada. Bombardier announced it is suspending its Learjet 85 program and Sony announced it will close all its stores in Canada.

Doug Porter, chief economist at BMO Capital Markets, said that while the Target store closures are not a blessing for the economy, he expects competing retailers will step in and pick up the loss over time.

He said real consumer spending rose nearly three per cent in 2014.

“It was a brutal retail landscape. With the added competition of online retail, there had to be some losers,” he said.

Although some analysts began predicting that Target might withdraw from Canada in 2015, the fact that the executive team made the decision to do so effective in January took people by surprise.

“I think that we probably were not paying enough attention to the challenges they were facing in the U.S.,” said Diane Brisebois, president and CEO, Retail Council of Canada, pointing to the credit card breach in 2013 and sluggish U.S. store sales.

“Target is the second-largest retailer in the U.S. after Walmart. It’s in the top five in North America. It’s a big player. No one expected them to have supply chain issues in Canada.”

Target expects to report a loss on discontinued operations of approximately $5.4 billion (U.S.) on the Canadian stores. Its cash costs to shut down will be $500 million to $600 million. The stores will remain open during a court-supervised liquidation period.

It also plans to sell its real estate.

Target is seeking the court’s approval to voluntarily make cash contributions of $70 million (U.S.) into an employee trust to provide Canada-based employees with a minimum 16 weeks of compensation, including wages and benefits for those not required to work during the wind-down.

A snapshot of 76 Walmart and Target stores across Canada during a prime shopping weekend in mid-December, retail information gathered by Field Agent Canada, showed that 30 out of 38 Walmart stores were busy or very busy. Among 38 Target stores, 15 locations were busy or very busy.

As recently as last March, Target had planned to expand its presence in Toronto. It announced it would open its first downtown Toronto store in a massive new residential and commercial project under construction south of the Gardiner.

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