Companies & Industries

Target becomes the targeted

Walmart and HBC lock in vendors, leaving Target shelves bare



Target may be one of the biggest retailers in the world, but it may have underestimated just how competitive the Canadian marketplace really is. Consumers have enthusiastically hailed the retailer’s splashy debut, but the shoppers in the aisles are only part of the equation; it’s the vendors at the loading dock that are causing growing pains.

Retailers like HBC and Walmart have had two years to prepare for Target, and they’ve put that time to good use: Hudson’s Bay is undergoing a transformation that includes major renovations to its stores, while Walmart has retooled by improving signage, making its stores friendlier and by beefing up its grocery business.

But the real war is being waged over the supply chain, behind the scenes. Ahead of Target’s opening, both competing retailers noted that the vendor structure in Canada is more complicated and difficult than it is in the U.S., says Jan Kniffen, an independent U.S. retail analyst. To him, that’s a polite way of saying the incumbent chains are using their clout to try to dissuade vendors from selling to Target. The only difference is that in the U.S., retailers would have come out and said that openly, he says.

It’s not a hard argument to make: given the small size of Canada’s vendor ecosystem, it wouldn’t be uncommon for retailers like HBC to account for 80% of a smaller company’s sales. And if a buyer that big signals it might prefer a vendor not deal with its biggest competitor, that message carries a lot of weight. Vendors know there is finite demand for their product. Shoppers may like the novelty of the new stores, but from the vendors’ perspective, changing the sign from Zellers to Target doesn’t necessarily produce new sales.

That’s not to say vendors aren’t interested in doing business with Target, at least in theory. Jeff Doucette, general manager at Field Agent Canada, says that last year he sold out several seminars for vendors on working with the U.S. retailer. “There was definite interest,” he says. “But I think Target might have misstated a bit communicating with vendors themselves.”

Large vendors, like Procter & Gamble or Kraft, are at the table because of their existing U.S. relationships, but Target is still trying to make inroads with smaller Canadian vendors. The chain got off to a bad start when it asked such vendors to send an e-mail to an anonymous inbox and wait, says Doucette, rather than engaging them directly. “Their buying organization has struggled to get back to vendors in a timely manner, and that may have rubbed them the wrong way.”

That could hurt Target’s ability to build out its network of wholesalers in Canada. “As a vendor, unless it’s more profitable to sell at Target than my current customers, then it’s not a huge opportunity,” Doucette says.

That makes attracting vendors and filling its shelves a problem for Target, but for the manufacturers and distributors with merchandise to sell, having the largest retailers in the country jockeying for your product is a good position to be in. “If I were a Canadian vendor, I’d be pretty happy now because, clearly, people want you in your stores, and it’s not a bad thing to have more demand than you have product to deliver,” says Kniffen.

Stiff competition isn’t the only thing snarling Target’s Canadian supply chain. Some smaller vendors simply don’t have the capacity to meet Target’s demand. The retailer could license those products and manufacture them itself—it already does this for designers like Issac Mizrahi and Mossimo—but some vendors who have been approached by Target have balked at the concept, since they’d lose some control over the brand and quality of the product.

For now, Target can dismiss its empty shelves as a symptom of overwhelming demand. But that will only work for so long. By the company’s own admission, it didn’t “buy deep”—retail lingo for being overly cautious with the amount of merchandise it purchases. Given the time it takes to order, manufacture and ship products, analysts believe it could take up to six weeks before inventory levels settle out.

Launch issues aside, Target will still be a strong competitor, especially with its private-label brands, says Kathleen Wong, an analyst with Veritas Investment Research. Private-label brands are quite lucrative to retailers because they have higher margin and don’t incur advertising like national brands do. Few doubt Target’s ability to sort through these challenges, although Kniffen isn’t convinced the retailer will see a high return on its investment in Canada. In his view, the company paid too much for the leases, spent too much on the stores and took too long to get in. “Canada is a great market, but it looks like Target paid a great deal to get in to compete against its worst nemesis in the world: Walmart.”