The retailer slipped up badly in its expansion north of the border, but executives say they are focused on fixing inventory shortages and other problems.
Target Corp. never expected immediate profits when it charged into the Canadian market last year with 124 new stores.
But neither did the company expect to lose $941 million there in its first year.
Almost 12 months into the Canadian campaign, sales have been a clear disappointment. Too many shoppers can’t find what they want, and too many stores have been saddled with a glut of unwanted inventory that has to be sold at clearance prices.
Perhaps most worrisome, Target’s missteps have lost the retailer ground with disillusioned Canadian shoppers, whose frequent and faithful visits to stores will be crucial to the company’s long-term success in its first, massive international expansion.
“It’s easy to say in hindsight — they bit off way more than they could chew,” said Brian Yarbrough, a retail analyst at Edward Jones. “I give them credit for remodeling these stores and getting them opened, but they weren’t inventoried right, they didn’t have enough of the right inventory, they had too much of the wrong inventory.”
The theft of customer data that rocked the Minneapolis-based company in December has overshadowed Target’s stumble in Canada. But as the dust settles on the data breach, analysts are turning their attention to the company’s efforts to correct what’s gone wrong there and demonstrate progress toward the goal of $6 billion in Canadian sales by 2017.
It won’t be easy. Fair or not, Target shoppers in Canada have complained about prices and quality. Empty spots on shelves have been a widespread problem.
“Some guests have come and have been disappointed and I think we recognize that and are looking forward to improving that situation, and then giving them reasons to come back and try us again,” said Eric Hausman, a spokesman for Target.
Tia Houde, 43, who lives in Edmonton, Alberta, said missing products left her cold the first times she visited Target stores on the south and west sides of the city.
“They’d have like two eye shadows out of the eight, three lip-liners out of the six,” she said.
She went back a few months later, and the situation was no better. The store was “dead,” she said, with few sales staff in the aisles.
“I can understand a few glitches to begin with, but not months and months and months of no stock,” Houde said. “We’re forgiving, but not that forgiving.”
Target says its inventory problems in Canada are fixable, that it is calibrating the flow of goods from distribution centers to stores as it gathers more data on customers’ shopping habits and improves shipping and information technology.
“The team’s No. 1 focus is on in-stocks, ensuring we have the right quantity of each item in the right place at the right time,” Target CEO Gregg Steinhafel said.
The company used the holidays to clear excess inventory at a discount in Canada, which was unavoidable but, the company hopes, also drove home the message that Target offers competitive prices. In the near term, the clearance sales cut the retailer’s fourth-quarter gross margins in Canada to 4.4 percent, compared with 27.6 percent in U.S. stores.
Selling at cost doesn’t drive profit
“They’re practically selling at cost to shoppers coming in the door,” said Amy Koo of Kantar Retail in Boston. “This is certainly a period where they are trying to even things out. That being said, it is remarkable that this drop is still happening.”
Efficient inventory management is a priority at Target. When it orders too much merchandise, it must sell it at a discount, driving down profitability. Avoiding this is a key metric for executive incentive pay, so leaders have financial motivation to keep inventory down. For most of its history, the strategy has worked nicely, garnering Target praise for generating good profits in an industry known for low margins. But low inventory leaves less margin for error.