Why Target failed in Canada

January 15, 2015, 4:32 PM UTC

In his biggest move since taking the reins in August, Target CEO Brian Cornell pulled the plug on the discount retailer’s ill-fated, poorly executed foray into Canada, its first attempt at international expansion.

Target (TGT) opened 124 stores in one fell swoop two years ago, but empty shelves, dreary locations and unexciting merchandise failed to entice shoppers in Canada, a country of 36 million people with a way of life similar to Americans’ but with habits different enough to make it a potential minefield for U.S. retailers.

For Target it was a costly mistake: it is taking a $5.4 billion writedown on the Canada business and had a total net loss in the Great White North of some $2 billion. And clearly, enough was enough for Cornell, who is busy with a much more important task: re-igniting American shoppers’ desire to shop at Target.

Under the most optimistic scenario, Target Canada would have made a profit in 2021 at the earliest, unacceptable to Cornell as the company prepares to expand its small-format stores in the United States, a capital-intensive effort.

“Our Target Canada business had reached the point where, without additional funding, it could not continue to meet its liabilities. Simply put, we were losing money every day,” Cornell said in a blog post.

Here is closer look at why Target Canada failed.

1. Location, location, location.

In 2011, Target bought the store leases of the now defunct Canadian discount chain, Zellers, for $1.8 billion from HBC, a move hailed at the time as brilliant, as it gave Target an immediate cross-country footprint and spared it the expense of building out its own stores. (Target now has 133 stores in Canada, versus nearly 1,800 in the U.S.)

But the reality is that most Zellers stores were dumpy, poorly configured for Target’s big-box layout, and were in areas not frequented by the middle class customers Target covets. And inheriting many awful locations from a dying low-end retailer was at the heart of the damage to Target’s cheap-chic allure in Canada.

“They diminished people’s image of what Target was. They should have done fewer stores, but better stores,” Doug Stephens, president of Retail Prophet Consultants in Toronto, told Fortune.

2. Empty shelves

Opening 124 stores within such a short period of time led to havoc with inventory planning, causing a big problem with stock outs early on, disappointing shoppers expecting to see the same abundance they would see cross-border shopping in the United States. With bare shelves, Canadian shoppers couldn’t even shop if they wanted to. In May, Target named a long-time U.S. executive with operational experience to address but the retailer’s performance during the key holiday season in Canada, but it wasn’t good enough to convince Cornell that Target should stay the course.

“While we made some recent progress, the changes were not enough to inspire the guest to shop Target,” Cornell said.

Target’s popularity hinges on being a treasure trove for trendy but affordable fashion and higher-quality merchandise, but its Canadian assortment was seen by many customers as not especially more compelling than Wal-Mart’s (WMT). Speaking of which…

3. Aggressive Wal-Mart pricing

In the absence of exciting merchandise, Target found itself having to compete on pricing with Wal-Mart, which has been in Canada since 1994 and got aggressive to protect its hard-fought Canadian market share. (Wal-Mart has reported two straight quarters of modest comparable sales growth there, a fragile recovery for the retailer.) Target has admitted it hadn’t offered sharp enough pricing, creating a perception things were more expensive than necessary there and annoying customers.

“Walmart Canada did what Walmart does- it started a price war with Target,” Stephens said. “You just can’t beat Walmart at their own game, and they want you to try.” Tough to do at a time Target’s gross profit margin rate was in the basement and the company was looking to plug the drain on its coffers.

4. Too late to win those Canadians back

While Canadians are generally very familiar with Target thanks to years of visits when on vacation in the U.S., for many of them, the Target Canada ship has sailed. Even well-established, mass merchant brands like Target only get so many chances. No numbers were given, but Target Canada’s performance during the holiday season suggested that the damage was too deep to the retailer’s reputation there.

“Given that the holiday season is our busiest time of the year, we evaluated our fourth quarter performance carefully and unfortunately didn’t see the step change in our performance we needed to see,” Cornell said.

5. A big distraction with so much to do stateside

Target reported U.S. comparable sales rose a better than expected 3% during the holiday season, another encouraging sign for a retailer which many customers feel lost its cheap-chic halo in recent years with less than exciting merchandise. Cornell, a former PepsiCo (PEP) executive eager to make his mark, has made it clear he intends to re-invent Target and make it Tarzhay again.

Cornell told Fortune in October that expanding Target’s smaller format stores, particularly in cities, was a central part of that strategy. And of course opening stores is an expensive proposition. So better to cut your losses and focus on what really matters: the U.S., a market that generates nearly $75 billion in sales.

In Canada, Cornell said, “We delivered an experience that didn’t meet our guests’ expectations, or our own. Unfortunately, the negative guest sentiment became too much to overcome.”

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