It’s 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.
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 is reaffirming its commitment to the Canadian market, at least for now.
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.
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 hasn’t 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.
Sam’s 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.
Story continues below
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 Ottawa’s Rideau Centre, Toronto’s 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 Target’s 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.
What makes the Canadian market so complex? And what can other prospective American retailers learn from Target’s near-death inducing errors?
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 you’re 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.
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 can’t 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 Toronto’s Yorkdale Shopping Centre. Consumers were angry that prices at the store, and on the retailer’s 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 Target’s to lose, there was such high anticipation," he said. "But you still have to come in and wow people and Target didn’t do that. They failed to bring a unique assortment of products and they got the basics wrong, like not stocking the shelves."
The same applies for luxury retailers, he said.
"Nordstrom can’t just come in and say 'we're Nordstrom, we’re fantastic.' They have to really come and blow the customer away," and replicate its much lauded service in Canada.
Too big, too fast
Another lesson that new entrants need to learn is that they cannot overestimate 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, it’s 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 become oversaturated 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.
"It’s 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.
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.
"There’s 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."