Retailer Target may have to back out of Canada entirely if it doesn’t turn around its struggling operations soon, some analysts say.
According to estimates from Tiburon Research cited in the Wall Street Journal, Target is on track to lose $2 billion on its Canadian operations in the first two years of operations.
It already lost $941 million in its first year of operations, a genuinely poor outcome given the company had been predicting Canada would be profitable for it by the end of 2013.
“It is conceivable that they will close Canada,” Cowen and Co. retail analyst Faye Landes told the Globe and Mail. “I assume with a new CEO, everything will be on the table.”
Target CEO Gregg Steinhafel resigned abruptly this week. Most observers attributed the move to the retailer’s disastrous security breach in January, which exposed the credit and debit information of millions of customers.
But many analysts pointed to Target’s problem-plagued entry into Canada as “one giant reason” for Steinhafel’s departure. Belus Capital’s Brian Sozzi warned in January that the chain’s emtpy-shelves problem in Canada could mean the chain risks becoming “extinct” in Canada.
As Forbes reports, Canadian customers’ complaints about empty shelves and a lack of selection stem from investment decisions, and those are made by the CEO.
Target’s new interim CEO, John Mulligan, says the company is committed to staying in Canada.
"Our focus on Canada is on fixing the Canadian business and getting it back on track where it needs to be," Mulligan said this week. He says the company has not changed its goal of reaching $6 billion in annual sales in Canada by 2017. Sales in its first year totaled less than a quarter of that, $1.3 billion.
Target’s rollout in Canada — 124 stores opening in 10 months — may have been too aggressive, analysts told the Globe and Mail, and that may have led to some of the near-comical blunders the company made while setting up shop.
The Wall Street Journal catalogues some of them:
Target trained its Canadian employees at its U.S. stores for months. But when they returned home to Canada, they found the technology and systems were different from what they had learned….
...Inventory was a problem. At one location, workers didn't even have enough products to fill the shelves on opening day. The manager at the time, who declined to be named, instructed employees to spread out action figures and dolls over multiple racks to try to make the toy aisles look fuller….
Within weeks of the first wave of store openings in 2013, some employees were told their hours would be halved because sales weren't keeping pace….
The inventory problems got so bad at one store that workers filled half an aisle with Tide detergent because they didn't have enough other products to fill the space, according to a former employee.
Some analysts say leaving the Canadian market altogether won’t be necessary. Paul Trussell of Deutsche Bank told the Globe it’s more of a question of Target closing its weakest stores.
“New management would need to come in and provide real measuring points ... that will determine whether or not Target is truly positioned well for the long term in Canada,” he said.
Though he doesn’t expect a fast decision on what to do with Target’s Canadian operations, he’s certain of one thing: Whatever happens, “it’s not going to be the status quo.”