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How Target got it wrong in Canada

Retail experts and analysts weigh in on the discount chain's demise in Canada

After nearly two turbulent years here, discount retailer Target announced plans Thursday to close its Canadian operations.

With 133 stores and approximately 17,600 employees, Target expects to report roughly $5.4 billion losses. Winding down its Canadian operations will cost up to US$600 million.

But while Target entered Canada with a bang, it will leave with a whimper and a black eye.

Target's impact on most retailers was so small during its run here that its exit won't have much of an impact on them either.

Only Loblaw's Joe Fresh apparel line and pharmacy and grocery retailers' health and beauty categories could be affected, BMO analyst Peter Sklar surmised in a research note.

“We view Target’s exit from Canada as only a modest positive for Canadian retailers,” he wrote.

READ: Target to pull out of Canada

Sklar estimated Target’s annual grocery sales to be approximately $300 million, compared to Canada’s total grocery sales of about $100 billion. So grocers such as Metro, Sobeys and Loblaw won't feel much of an effect in terms of their sales.

Sobeys acted as a wholesaler to Target in frozen, dairy and dry groceries so there will be some impact on Sobeys wholesale business, Sklar noted. "The modest positive impact of one less competitor could be more than offset by the loss of Sobeys’ wholesale contract with Target as its grocery supplier," he wrote.

But a spokesperson for Sobeys said the company doesn't expect to take a significant hit from Target’s exit.

“We were disappointed to hear Target’s news today,” Andrew Walker, senior VP corporate affairs at Sobeys, told Canadian Grocer. “Sobeys can confirm that the loss of this wholesale account will not have a material impact on our results.”

Sobeys wasn't the only grocer to work with Target. Metro ran pharmacies at some Target stores in Quebec through its Brunet banner.

Credit-Suisse analyst David Hartley said in a note on Thursday that he doesn't expect much of an impact on Metro, writing that Metro's "exposure via Brunet in Target stores in Quebec was likely insignificant."

Target’s decision to exit Canada can be blamed on inventory challenges and a failure to replicate the U.S. Target shopping experience, according to analysts. But the final nail in the coffin may have been the falling loonie.

“I think with the plummeting Canadian dollar and the fact that they’re reporting in U.S. earnings, any hope or plans of turning the ship was like an iceberg hitting the hull,” marketing consultant Tony Chapman told Canadian Grocer. “They probably said 'We’re better off taking this write-off now and satisfying our shareholders.'”

Target was plagued by problems from the start, including supply chain issues that resulted in empty shelves, and complaints that prices were too high compared to U.S. stores.

READ: Target’s timeline

Brian Cornell, who became Target's chairman and CEO last year, said in a statement that when he joined the company, he promised to take a “hard look” at the business and operations in order to improve its performance.

“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,” he said.

Target, which bought the store leases of discount retail chain Zellers in 2011, was well known to Canadian cross-border shoppers before it expanded here.

But with higher prices in Canada and lackluster inventory, the retailer failed to recreate the U.S. Target shopping experience that Canadians had come to love.

Toronto retail consultant Ed Strapagiel said Target’s biggest downfall was supply chain management. “They simply couldn’t get the right product in at the right time,” he said. “It took them too long to really address this problem and that turned off the consumer. And once consumers make up their minds about a retailer, it’s very difficult to get them to reconsider.”

READ: Can food fix Target?

Another key mistake was expanding too quickly: in just two years, the company opened 133 stores across the country. “They clearly bit off more than they could chew,” said Chapman. “They would have been better off starting with six flagship stores that were the place to shop and build from there.”

Eric Blais, president of Toronto-based Headspace Marketing, said the decision to expand rapidly coast to coast, including Quebec, is a mistake that most American retailers coming north wisely avoid.

“They don’t go to Quebec initially,” said Blais. “Some of the successful entries in Quebec have done it in a very measured way and they’ve been very smart about it… Despite all Target’s best intentions, they didn’t necessarily understand the landscape.”

Target said it would work with an advisor to sell its real estate, and with 133 stores, there’s a lot of space up for grabs.

Sklar predicts Walmart could cherry-pick some locations, but most of Target's stores are smaller than Walmart's typical footprint and would likely be too small for Supercentres with a full grocery offering.

"It is too early to speculate on whether we would assume any of the retail locations, ” Andrew Pelletier, VP of corporate affairs and sustainability at Walmart Canada, said Thursday, adding he's sorry to see a competitor leave the Canadian marketplace as Walmart believes competition ultimately benefits the consumer.

Prior to Target's arrival most of the former Zellers properties were considered rundown and mostly in unattractive locations. When Target acquired the stores, the company tore up the floors and refreshed lighting to reflect its trademark red and white appearance.

Target ultimately spent about $10 million on each location, both the inside and outside, which could prove to be a selling feature when the stores hit the sales block.

``There's going to be a number of retailers who are going to want to get their hands on (some of) these stores,'' said Antony Karabus, chief executive of HRC Advisory, a firm that consults with retailers. ``But I think some of them are going to sit empty for awhile.''

Some potential bidders include Walmart, Canadian Tire, and grocers like Loblaw analysts suggested.

Even Canadian retailers who have recently closed underperforming stores, like Sobeys and Rona, could also find assets in Quebec and elsewhere to gobble up in the process, said Karabus.

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