Target Push Into Canada Stumbles: Shoppers’ habits and other factors figure into a projected $8 billion to $9 billion loss in the retailer’s first international expansion.

Target Push Into Canada Stumbles

By IAN AUSTENFEB. 24, 2014

Anthony S. Fisher, the president of Target Canada, vowed to change how Canadians shop to get them accustomed to “one-stop shopping.” CreditGeoff Robins/Reuters

OTTAWA — When Canadians crossed the border into the United States on shopping excursions, Target was a prime destination. But when Target crossed the border last year and brought its stores to Canada, the magic somehow vanished.

Lost in the turmoil over the immense theft of Target’s customer information in the United States has been the remarkable failure of its Canadian expansion. Instead of reaching profitability by the end of the year, as Target had hoped, analysts expect that the company will report this week that the Canadian operations produced an $8 billion to $9 billion loss.

“The data breach seems to have come at a good time for them as they would have been answering questions about this,” said Rob Wilson, a retail analyst at the Tiburon Research Group in San Francisco. “I’ve never seen a set of expectations that are so shockingly missed on a rollout.”

The causes of Target’s stumble in its first foreign excursion are varied. Mr. Wilson and others question the wisdom of the company’s decision to open 124 stores in a new market within months. Inventory problems have often led to empty shelves and, perhaps worse, many of the stylish, exclusive brands Canadians see in Target’s American stores did not come north. And, fairly or not, many Canadian shoppers contend that Target prices are much higher in Canada than back home.

“We’ve been down to the States quite a bit and we’ve shopped at Target and we were impressed,” Nicole Chanansingh said after buying a stuffed toy for her daughter at a large Target store in suburban Ottawa. “So we were excited when we heard they were coming. But I don’t think it’s the same merchandise, not the same stuff at all. So, we’ll see.”

After opening more than 100 stores in a year, the priority for Target Canada is improving operations, said Eric Hausman, a spokesman for Target. “The knowledge we gained in our first year will help as we focus on in-stocks and improving sales,” he added.

For its Canadian expansion, Target followed a pattern set by Walmart 20 years ago. Like Walmart, which is now Canada’s largest retailer, Target bought the locations of an ailing discount chain as a way around Canada’s shortage of desirable retail space.

In Target’s case, it struck a deal for the leases of up to 220 locations of Zellers, the last major Canadian discount chain, which was owned by the Hudson’s Bay Company. Hudson’s Bay, a full-line department store chain, is controlled by Richard A. Baker, the chief executive of NRDC Equity in Purchase, N.Y.

In its final days, Zellers tried to fend off Walmart by copying Target right down to a red-and-white color scheme. Zellers’ results, however, were less successful with merchandise, outside of some clothing, often being more cheap than chic. Unpacked inventory often clogged the aisles of its underfunded and understaffed stores, although the chain did have a reputation as a place for bargains.

With about 100,000 square feet on average, the Zellers locations are less than half the size of a typical Target in the United States, and many of the Canadian outlets are in more urban settings.

Several analysts and experts faulted Target for opening so many stores during the first year in Canada, especially when the spaces had to be gutted and rebuilt to eliminate even the faintest whiff of Zellers.

“Target took on a very big challenge,” said Elizabeth Evans, the associate dean of the Ted Rogers School of Management at Ryerson University in Toronto. “Most foreign retailers launch with a smaller number of stores. Here you’re talking about a company that basically opened up 124 stores with a new management team and no history in the country.”

Shoppers interviewed outside several Target stores in the Ottawa area unanimously agreed that the renovations were a decisive improvement over the sometimes dingy and disorganized Zellers stores.

“The store’s very nice. Very bright, very spacious,” said Michelle Prudhomme, who visited Target for the first time because a neighboring Staples store was sold out of the iPad cover she was seeking. What was in Target’s shiny new aisles, however, left her underwhelmed. Indeed, like many shoppers, she still longed for Zellers because she said it offered better bargains.

“I would never think of coming to Target,” she said. “I preferred Zellers, we were brought up with Zellers.”

Ms. Chanansingh was another Zellers nostalgic. She found the Canadian chain offered good-quality clothing at good prices. An outfit she bought from Target in December for her daughter, she said, was made from noticeably inferior fabric and has since worn out faster than she expected.

Perhaps the most surprising thing about several Target stores visited over a three-week period was the large number of empty shelves and clothing racks.

The store that Ms. Prudhomme visited, which is on an unusually busy suburban shopping strip that includes the head office of Costco Canada and one of its warehouse stores, had long aisles filled with nothing but the same brands of toilet paper and paper towels. They were arguably preferable to the shelves in the housewares department that contained only a handful of products scattered along otherwise empty metal shelving. Blank spaces outnumbered merchandise in the men’s underwear department at another store that is on a major transit hub.

Some of those problems may be the result of delays in Target’s development of exclusive brands for Canada, like Beaver Canoe, a less costly line of Roots athletic wear, to replace products locked up by other retailers in this market. But several analysts suggest that the company may also have problems with its supply chain management system. Differences in Canadian packaging laws, protectionist tariffs on some foods and exclusive wholesale arrangements mean that the Canadian stores cannot be serviced from the company’s American distribution network.

Those differences and other cost factors like wage rates, Professor Evans said, also make it “impossible to sell things here in Canada at the same prices as in the United States.” The broad public perception that Target is significantly more expensive in Canada than Walmart, she said, is not supported by price surveys.

No analyst at this stage views Target’s Canadian move as irredeemable. But exactly how quickly the company can achieve profitability and by what methods it can do so remain unclear.

In conversations with analysts and journalists late last year, Anthony S. Fisher, the president of Target Canada, said that it would take time to figure out the product mix that best suits Canadians. He also vowed to change how they shop. Mr. Fisher said that Target hoped to get them accustomed to “one-stop shopping.”

That may be a tall order. To begin with, many of Target’s Canadian stores lack fresh meat and produce, making complete grocery shopping impossible.

And it will be hard to shake Canadian shoppers from the practice of picking and choosing between retailers’ strengths. Ms. Chanansingh, for example, buys many household staples like toilet paper from Walmart, does much of her grocery shopping at Metro, a Quebec-based chain, but buys her fresh meat from Costco Canada. She said that even if Target introduced a full line of groceries, her pattern was unlikely to change.

“They have been potentially fatal in their assumptions about the market and you could go one step further and call it arrogant,” Jim Danahy, the chief executive of CustomerLAB, a retail consulting firm in Toronto, said of Mr. Fisher’s plan to cultivate a one-stop shopping habit. “That’s a concept Canadians do not have culturally as even the mighty Walmart has found. They’re going to have to take a different tack.”