It was less than two years ago that Target opened its first store in Canada, marking the big-box retailer's first foray outside the United States. There were plenty of reasons to expect the expansion to be profitable: Wal-Mart had successfully pushed into Canada years earlier and Target followed its rivals' playbook, buying an established big-box chain and renaming the stores. The Target brand was already beloved by Canadians who made trips over the border to go to its U.S. stores, a sign that the retailer would have an enthusiastic customer base.
But Thursday, Target conceded that its venture into Canada was a failure. The Minneapolis-based retailer announced that it will shutter all of its 133 Canadian stores after determining it would take at least six years for the business to turn a profit.
Things have been rocky for Target in Canada from the beginning. Customers complained that shelves were frequently empty as Target grappled with supply chain problems, including a hastily-built technology system that made it difficult to track inventory. Some of the exclusive brands customers had come to love at Target's U.S. stores were not available at the Canada outposts. And the prices were higher than they were in the U.S.
The company pulled out all the stops this holiday season to try to shine up their blemished image. On a conference call with investors Thursday, chief executive Brian Cornell said the stores were well stocked, including 15,000 new items. The4 company lowered prices, adjusted its promotion strategy and launched a big marketing blitz. But it was too late.
"The harsh reality is that both sales and profits continued to fall short of our expectations and we had not realized the improvement in Canadian consumer sentiment,” Cornell said.
The move allows Target to get some huge drag off its balance sheet; Cornell said in a blog post that the Canada business was "losing money every day." Investors appeared to cheer the move, sending the company's stock up nearly 2 percent. But it's going to expensive to unload the Canada business, as executives said they expect it to cost $500 million to $600 million to shutter the stores, including laying off more than 17,000 employees.
The flop also reveals the depth of Target's challenges going forward. If the company couldn't make it in Canada, a close neighbor to the U.S. where its arrival was anxiously awaited, can it make it anywhere overseas? And if it can't expand successfully abroad, what are its real opportunities for growth going forward, given that it already has 1,801 stores here at home?
Target has been testing a new concept it calls Target Express, a small-format store that would allow it to gain deeper penetration into urban neighborhoods. It also has begun launching CityTarget stores, which are smaller than its big-box outposts but not quite as small as Target Express. The retailer is set to open CityTargets in Brooklyn and Boston in 2015. It just became much more crucial for Target to get these formats right, as they are now the best bet for the company to grow in the near future.
E-commerce, too, could be another key avenue for growth, and the retailer said it saw a strong jump in digital sales this holiday season. During the fourth quarter, online sales comprised a significant portion of the overall sales growth, the company said. Critics might be quick to chalk up the online strength to Target's seasonal shipping offer, which allowed shoppers to get free shipping on all purchases instead of only on purchases over $50. However, company executives said that since the free shipping offer ended, it has continued to see digital sales growth in January, which suggests Target might be gaining some momentum with online shoppers.
Target also believes it can wring additional sales out of its existing stores by prioritizing its apparel, home, baby and kids' departments.
Cornell only took the helm at Target last August, with big plans for restoring the ailing retailer to health after the economic slowdown and a massive data breach took a toll on sales. He just unloaded the company's biggest albatross, which is likely to be good for its bottom line. But looking ahead toward the future, his avenues for growing Target's business are relatively narrow.