Target Canada's failed launch offers lessons for other retailers

The impending Canadian launch of fabled American retailers Nordstrom and Saks Fifth Avenue is eagerly anticipated by consumers, but the disastrous rollout of Target stores might make executives pause.

Its no secret that Target stores in Canada have struggled out of the gate. The Minnesota-based retailer posted a $1-billion loss in Canada last year. Customer satisfaction is abysmal, despite efforts to improve product availability and pricing.

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Just this week, a retail analyst at Credit Suisse recommended executives shutter the Canadian operations entirely only 18 months after the stores opened. The company has balked at such a move and isreaffirming its commitment to the Canadian market, at least for now.

Fumbled launches

But Target is not the only American retailer to flounder.

In the wake of the 2008 recession, many American retailers turned their sights north, a market that was spared the worst of the economic downturn.

You still have to come in and wow people and Target didnt do that.- Doug Stephens, retail consultant

It seemed like a no-brainer: the countries are side by side, culturally similar and millions of Canadians shop in American chain stores each year.

But it hasnt been quite so simple for new entrants. In addition to Target, teen retailer Aeropostale, which began its aggressive expansion north of the border less than 10 years ago, is closing many of its 77 stores this year.

Sams Club, a membership-based wholesaler, and a division of Wal-Mart, closed all of its stores after a less than rosy reception from consumers. Another discount chain, Big Lots, closed all of its stores in this country in February, two years after making its first foray.

Will they ever learn?

The American invasion continues, unabated, despite the mixed results of some of these retailers. Upscale department store chain Nordstrom will make its much anticipated debut in Calgary this fall. Stores at Ottawas Rideau Centre, Torontos Eaton Centre, Yorkdale and Sherway Gardens will follow in subsequent years.

But the Seattle-based retailer has had to amend its ambitious plans in the wake of Targets troubled entry. It has pushed back the launch of its off-price division, Nordstrom Rack, from next year to 2017. The company said the complexity of the Canadian market was behind the delay.

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What makes the Canadian market so complex? And what can other prospective American retailers learn from Targets near-death inducing errors?

Price matters

The major sticking point is price. Target Canada has been inundated with complaints from shoppers that its wares are just too pricey. It has had to fight the perception that it is significantly more expensive than its direct discount competitor, Wal-Mart, or homegrown chains like Canadian Tire and Loblaws.

Doug Stephens, a retail consultant, and the president and founder of Retail Prophet, said pricing has been a headache for Target because the store experience has been lacklustre for many consumers.

"If youre not really blowing customers away, you give them a reason to focus on price. Target got caught up in a conversation that should have never happened," Stephens said.

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He said that nearly everything in Canada is more expensive than in the United States, but other retailers have escaped the ire of price-conscious Canadians because of execution.

"Nobody obsesses over the difference between computer prices at Apple in Canada versus the U.S. because, by and large, we just really love the experience of dealing with Apple," he said.

Stephens said new entrants, like Nordstrom, have to be cognizant of the fact that Canadian consumers are familiar with the products and prices on offer in the U.S. and that they will have to carefully manage expectations.

"You cant be gouging customers,"he said, and that while price matching is nearly impossible as wages, benefits and taxes are often higher in Canada than in the U.S. they should at least be competitive.

Don't rest on your laurels

J. Crew, a popular preppy fashion chain, faced an onslaught of bad press when it opened its first Canadian store at Torontos Yorkdale Shopping Centre. Consumers were angry that prices at the store, and on the retailers website, were up to 30 per cent higher than in the U.S. for the same item. It assumed the hunger for its goods would outstrip backlash from inflated prices. Stephens said that is an error many American retailers, including Target, made when entering the Canadian market.

"They say 'this is going to be a cakewalk.'But, in fact, you cannot rest on your laurels, your reputation, coming into the country. The market in Canada was Targets to lose, there was such high anticipation,"he said. "But you still have to come in and wow people and Target didnt do that. They failed to bring a unique assortment of products and they got the basics wrong, like not stocking the shelves."

Name recognition can also be a double-edged sword.

"It was a good thing and a badthing that people knew the Target brand," said Maureen Atkinson, a retail consultant at J.C. Williams Group,"the bad thing was people expected what was in the U.S. stores and the Canadianstores just simply dont have the samekind of magic."

The same lesson applies for luxury retailers.

"Nordstrom cant just come in and say 'we're Nordstrom, were fantastic.'They have to really come and blow the customer away,"and replicate its much lauded service in Canada, Stephens said.

Too big, too fast

Another lesson that new entrants need to learn is that they cannotoverestimate the strength of the Canadian economy relative to the U.S.

"In 2009, retailers had a very good reason to look north and think wow, its the promised land, but now we face our own headwinds here," Stephens said.

"Consumer credit is very, very high, and wages in the middle class are not robust in terms of growth,"and the market can becomeoversaturated with new stores, Stephens said. Target opened 124 stores, mostly in now-defunct Zellers locations, in less than a year, a pace far too fast to execute the experience properly, Stephens said.

Many retailers face pressure from Wall Street to expand at a rapid pace to keep growth rates high and investors happy.

"Its the issue that Lululemon is facing now, and that Starbucks faced in the early 2000s. They stretched organizational resources, and the customer experience is disappointing," Stephens said.

Starbucks ultimately closed 900 stores in North America and focused on growing same-store sales, a key retailing metric, in existing stores. The results have paid off; Starbucks posted higher earnings in 2013.

Atkinson said Target undertook agargantuantask in opening as many stores as itdid in such a short time.

"It's a different country, with different tax laws, language legislation, you name it. Its a major, major undertaking and Target definitely underestimated just how difficult it would be," she said.

Lessons learned

That experience is a cautionary tale that Nordstrom seems to have already learned from, by delaying the launch of Nordstrom Rack, to concentrate on its six new full-line stores, he said. "But it might be hard to deal with the innate pressure from investors to open more stores in the future."

Canadians are voracious shoppers malls just over the border are teeming with Canadians on the hunt for a good deal or the latest must-have product.

"Canadians are just a little bit more moderate [than Americans]in their shopping habits and they need a good reason to buy,"Stephens said.

"Theres a tremendous opportunity for American retailers if they just execute everything perfectly, stores that are fully stocked in a remarkable environment," he said. "Anything less will open them up to a barrage of criticism that they may never recover from."

Atkinson believes Target ishere to stay.

"When you make that kind of investment youre not going to walk away," she said.

Target, and other American retailers, will depend on international expansion to grow, she said, "and if they can't learn how to operate in Canada, they don't have much of a chance in markets like France or Germany."