News

Target announces it will close all 133 Canadian stores

U.S. retailer seeks “fair and orderly exit”; 17,600 employees to be laid off

By Graham F. Scott January 15, 2015

A Target location in Toronto. (Rene Johnston/Toronto Star/Getty)

U.S. retailer Target has announced it is going to close all 133 of its Canadian locations.

“When I joined Target, I promised our team and shareholders that I would take a hard look at our business and operations in an effort to improve our performance and transform our company,” said CEO Brian Cornell in a press release this morning. “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. Personally, this was a very difficult decision, but it was the right decision for our company.”

Target’s U.S. parent company announced that it would take a $5.4 billion writedown on the closure of its Canadian arm and that Target Canada stores will remain open during the liquidation process.

As a retail operation, Target had experienced difficulties with its Canadian plans from the very start. Shoppers often found its stores disorganized and understocked.

“It was evident right from the beginning that they had very grave supply chain issues,” says retail consultant Doug Stephens. “At the grand opening, their stores had empty shelves. That was something that should have been dealt with immediately, but there was a posturing and excuse-making on their part: ‘Oh, we’re tinkering to get the right products for Canadians.’ But for everyone else, all they saw were bare shelves.”

The sheer size of Target’s Canadian misadventure makes it a historic blunder, says independent retail analyst Jan Kniffen. “By the time it’s over I think they will have blown $7 billion dollars in Canada,” says Kniffen. “Including the cost to get in, what they lost and now a $500 or $600 million cash writedown—and that’s not counting the non-cash writedown. This may be the biggest squandering of money by a retail chain—even including Ron Johnson and JCPenney.”

The collapse of Target Canada will first and foremost be felt by its 17,600 employees. As part of its wind-down, Target says it will place $70 million into a trust to provide for a minimum of 16 weeks of pay and benefits for those who are laid off. However, 17,600 jobs is a loss that will be felt across the job market.

What is undeniably bad news for Target employees, however, is going to be greeted with more cheer in other quarters. For one, Wall Street is applauding the pullback: Target shares rose nearly 3% on the news and there is the sense that Target investors feel they are ridding themselves of an albatross.

“We see the exit as the right thing to do,” Credit Suisse retail analyst Michael B. Exstein wrote in a note to clients this morning. “The venture into Canada was poorly thought out and executed, and diverted significant resources and management attention from the U.S. business that represents 97% of revenue.”

A victory for Walmart

Walmart is the undisputed victor as its largest U.S. rival pulls out of Canada. “Walmart has done relatively well in Canada and they will do better now with Target leaving,” says Kniffen. “We watched Walmart get ready for Target right up until the time Target opened. Walmart was repositioning and upgrading stores the whole time. They clearly gave Walmart time to prepare for them.”

Target’s withdrawal will end what had become a damaging price war with Walmart in the Canadian market, says Doug Stephens. “That may have been the final nail in Target’s coffin. Because Walmart very deliberately goaded Target into dropping their prices. That’s not a battle you can win, not against Walmart.”

Target was not the only victim of that price war, says Stephens, and many competitors will be glad to see the end of it. “You had other chains—Giant Tiger, Winners, The Bay—all of whom were affected by the shrapnel coming from Walmart and Target. I would say everyone is breathing a sigh of relief. But Walmart’s got the biggest grin right now.”

Others have no reason to grin. Target landlords RioCan and Morguard—which between them owns nearly all of the locations Target occupies—now finds itself without a major anchor tenant at more than 100 locations. “That’s an awful lot of empty real estate,” says Stephens. Both RioCan and Morguard REIT shares were down 2% this morning.

But Stephens suggests even the sudden real estate glut may play into Walmart’s hands, as it will now have the opportunity to pick and choose from the best locations that Target is vacating. “I could see Walmart going back to that trough and seeing if there are any locations of interest to them.”

“In some cases, Target has some good real estate,” says Farla Efros, COO of retail consultant HRC Advisory. “That will mean opportunities for different retailers to take a peek. Even for Nordstorm, which is looking to open up Rack stores, there could be opportunities. It will make way for a lot of the off-price retailers who are having trouble finding real estate now. So it will get scooped up. Depending on the mall and the location, this issue will resolve itself relatively quickly.”

Not all of that real estate is desirable. The former Zellers locations that Target took over from Hudson’s Bay were often second-rate, and the lack of consistently prime real estate harmed Target while it operated the stores. Some of them are unlikely to be attractive to new tenants either without a further round of costly upgrades.

“I think they messed up location big time,” says Michael Mulvey, an assistant professor of marketing at the Telfer School of Management. “It’s not so much the cities they chose—the problem is that the launch in Canada was tied to a big real estate deal, and they got these antiquated, inadequate spaces. They have low ceilings, and it’s like being a rat in a maze. It didn’t seem very nice.”

That stands in stark opposition to the shopping experience at U.S. Target locations, Mulvey says. “The shopping experience is better designed and optimized, and they’re clean as can be. The layout is consistent. It doesn’t matter if you’re in Seattle or Pennsylvania, you’ll have the same sort of shopping experience. And they didn’t do that here.”

Trouble in the discount aisle

Target’s Canadian failure will be watched closely by the other major U.S. retail players who are currently gearing up their presence here. If Target couldn’t make it here, can anyone?

Upscale department store Nordstrom has just opened its first Canadian location, at Calgary’s Chinook Centre, and has seven more scheduled to open this year and next. Hudson’s Bay plans to open seven Saks Fifth Avenue locations in the next two years. Both represent bets that Canadian consumers are already well-served at the cheaper end of the market but there is room for growth in luxury retail.

“Would you be crazy if you are a discount operator to come into Canada right now? I think you would. But I still like the fact that Nordstrom is coming to Canada,” says Jan Kniffen. “At the high end it’s a totally different customer. They are going to open 8 stores and they are much better than Target is at serving the customer. Their first store, in Calgary, is doing extremely well for them. This won’t shake Nordstrom’s confidence at all.”

The smaller scale of these rollouts—a handful of stores in premium locations—is also cause for greater confidence. Doug Stephens says that Target’s enormous push to open more than 100 stores at once across the country looks now like hubris. “They tried to open too many stores,” he says. “For any retailer to do that—particularly one that had never ventured outside their own country—was an enormous task, and very unrealistic.”

“Nordstorm really studied Target, and is learning from Target,” says Efros. “They’re moving into Canada very slowly, and in a very controlled manner. They have one store in Calgary now, and they’re doing really well. When J Crew entered Canada, they got unbelievably bad press because of their pricing. This is nothing new. Target came in with a big blast, thinking they were going to scoop up consumers and it would be an easy win.

“Remember when Walmart opened up in Canada?” says Efros. “They weren’t doing so well either. For the longest time they had what they called division 1 stores, which were not focused on food, and only in the last 5 to 10 years did they open up superstores. They took the time to get it right before they went gangbusters.”

Failure to connect

Target also simply failed to understand the Canadian consumer, and by the time the extent of that failure became evident, it was too late. No amount of backpedaling could fix the first impression: disappointment.

“They opened up too quickly, too fast, and they didn’t take time to take the temperature of the Canadian consumer,” says Farla Efros, COO with retail consultant firm HRC Advisory. “We’re finicky. Target should have mimicked their stores that do quite well in the US. They decided to change the game a bit here and make it too Canadian. They underestimated the Canadian consumer. We have spent our lives cross border shopping. they have underestimated how aware we are about the dollar, and price differences between Canada and the U.S., and how smart we are really in terms of cross border shopping.”

Marketing consultant and Canadian Business columnist Bruce Philp says that the supply chain fiasco and empty-shelves were clearly part of the problem, but also says there was something wrong at a deeper level with Target’s approach to its Canadian venture.

“To me, Target’s destiny here was foretold by something altogether simpler: high expectations,” says Philp. “At Target, the expectation was that we were so excited to have them here that they’d just have to open the doors and the cash registers would ring. That led to a modest launch effort that might have felt to us on some level arrogant—as if we could tell they didn’t think they’d have to try very hard.”

Mark Satov of retail analyst firm Satov Consultants agrees that Target underestimated the scope of their challenge in Canada: “They took Zellers’ locations, and thought, ‘All we have to do is be less crap than Zellers.’ And it turns out they were even more crap than Zellers. Who knew?”

There is also the fundamental problem with mass-market retailing in general right now, which is that players like Target are being squeezed by even leaner players like dollar stores from the bottom and luxury players at the high end. The kind of department store that Target aimed to be may be one that just doesn’t have a robust place in the retail ecosystem anymore. Says Philp: “The expectation was that this would be the retail paradise we’d eternally pined for—a magical mix of quality and design and affordability that we’d always imagined our neighbours to the south were enjoying while we were denied. Nobody could have fulfilled those expectations here, and certainly not as a mid-market department store, a proposition that isn’t working very well anywhere these days.”

Our Previous Target Canada coverage:

A Timeline of Target’s First Troubled Year in Canada

Canadian Business contributor Monika Warzecha assembled this timeline of Target’s first 12 months back in April 2014: