Canada: Target's next bull's-eye

MISSISSAUGA, ONTARIO -- Shortly after lunch on a rainy August afternoon, about 500 Target employees marched into a makeshift white tent.

It was a vintage Target event: bright red couches, photographs with a stoic Bullseye the Dog, endless tables of sushi -- and ketchup-flavored potato chips.

"Did you also try the poutine?" an employee asked a reluctant guest, referring to Canada's favorite concoction of French fries, cheese curds and gravy.

Target's close attention to detail -- right down to the local cuisine -- reflects the gravity of what is arguably the boldest project in its 50-year history. Beginning in March, the chain will open the first of 124 stores in Canada, its first expansion beyond the United States. The move also is Target's first big step at becoming a global retail force.

But Target's international ambition has less to do with bragging rights than basic survival. Not only is Target running out of room to grow, but recession-worn American consumers haven't been as eager to open their wallets, much to the benefit of low-priced competitors like Wal-Mart and Amazon.

"We've always been focused on growing our core business profitably," Target Canada President Tony Fisher said in an interview from his office in this Toronto suburb. "But we always knew at some point that international expansion was going to be a part of our history."

Target has been able to hold its ground by focusing on savvy marketing and exclusive partnerships with prominent designers. But even that magic seems to be fading, as a recent collaboration with Neiman Marcus flopped. Target's website also is a work in progress: key items were out of stock during the critical holiday shopping season.

"If Target really wants to grow, they will need to expand outside of the United States," said Amy Koo, an analyst with Kantar Retail, a consulting firm near Boston. "That will go a long way to stretch their customer base."

Over the past five fiscal years, Target has averaged less-than-impressive annual sales growth of 2.7 percent. With Canada, the company projects annual revenue growth of over 4.5 percent in 2013 and 2014.

"We continue to view Target as one of the best-positioned investments in 2013 as the company 'manufactures' accelerated earnings growth and cash flow in the coming two years from the launch in Canada," Christopher Horvers, an analyst with JPMorgan Securities, wrote in a research note.

Canada's familiarity with Target also makes it a safe place for the company to learn the ropes of international retailing. If Target can't succeed in America's northern neighbor, it would be hard for the retailer to make it work in, say, Singapore.

"I think it's exciting that Target is coming to Canada because I don't think we ever had an equivalent of Target," said Lina Duque, a 35-year-old social media and marketing manager in Toronto. "Target seems to be like Wal-Mart with low prices, only cooler."

In one sense, Target's entry into Canada seems natural given the country's proximity to the United States and the cultural and economic ties between the two nations. Already, plenty of Canadians cross the border each day to shop at Target. Almost 30,000 Canadians carry Target's ubiquitous REDcard.

But look past Canada and it's not hard to imagine Target eventually expanding to other rich nations like Germany and Italy and emerging economies like China, India, and Brazil. Unlike its chief rival Wal-Mart, which has aggressively pursued overseas expansion for years, Target has stuck, almost stubbornly, to its home turf.

The company's next foreign destination will depend on several factors, including growth potential, competition and familiarity with the market. Expanding into Europe might be a logical next move, but Target is likely to face stiffer competition and weaker economies there. Third-world countries can offer better growth prospects, but also present higher risk because of corruption, language barriers and cultural sensitivities.

So for Target to go global, it makes sense to start in a familiar place.

Canada "is a better match to the ground," Kantar Retail's Koo said.

"Yes, there's a lot of cross-border shopping, but retailers like Target need to ask what changes do I need to make to really attract the Canadian consumers, not just the cross-border shoppers," said Manu Sarna, general manager of retail for Aeroplan, a loyalty consulting firm in Toronto. "Proximity doesn't mean same."

Despite jokes that Canada is essentially America's 51st state, the country is more diverse and tricky than most think. Consumers in Canada's eastern provinces focus mostly on price while shoppers in the western provinces, buoyed by oil wealth, prefer more expensive merchandise.

Then many Canadians are still unfamiliar or uncomfortable with the American style of big-box retailing, Sarna said.

"I find the large stores overwhelming," said Candyce Bakke, a 29-year-old hair salon owner in Saskatchewan.

'Comment ca va aujourd'hui?'

"I've been taking French lessons from Rosetta Stone," Berg said last August, preparing dutifully for the company's entry into Quebec.

"Really?" a reporter asked. "I studied French in college. Bonjour Bryan! Comment ca va aujourd'hui?"

"Uh ... I just started," Berg said sheepishly.

Berg was responsible for Target's entry into Alaska and Hawaii. In some regards, that experience was similar to opening in Canada, with one big difference: Target opened seven stores in Hawaii and Alaska verses a plan for up to 200 stores in Canada over 10 years. Target must also wrestle with issues like logistics and information technology.

Alaska and Hawaii were states "where people were aware of Target but they didn't have any first-hand knowledge or experience of us. In Canada, we were also asked to establish a culture and a business in a market where we didn't have a [previous foothold]. I think Hawaii and Alaska prepared us to how we are going to approach this in Canada," Berg said.

In Quebec -- which often acts as its own country -- software designers must create systems in French and English. Determined to protect its French culture and history, many Quebecois flirt with the idea of independence every generation or so. So, Target stores in Quebec will use both French and English, not to mention carry a healthy dose of local merchandise.

"We're going to learn how to translate our brand in a different language for the first time," Target Canada President Fisher said. "Learn how to build a brand-new team in a brand-new country. Bring our employment brand and retail brand to life in a country we have never done before."

Opportunity is a necessity

Target really has no choice. The company is chasing fewer growth opportunities in the United States.

The retailer still opens stores, but at far slower clip. From 2010 to 2012, Target opened 53 stores compared to 194 stores between 2007 to 2009. This past year, Target opened the first five of its CityTarget formats, smaller stores designed to fit into dense urban centers of cities like Chicago, San Francisco, Seattle and Los Angeles.

In January 2011, Target spent $1.85 billion to acquire the leases of up to 220 stores belonging to Zellers, a once-popular but fading general merchandise chain in Canada. The deal instantly gave Target access to some of the best retail locations across the country, including urban malls and suburban shopping centers. Target was so confident about its windfall, that it sold some leases to archrival Wal-Mart.

Normally, a retailer that enters a foreign market and builds stores loses money for several years before turning a profit. With the Zellers properties, Target enjoys a mass of stores that can quickly add to the bottom line. Target Canada expects to be profitable by the end of 2013.

"The Zellers deal was an incredible opportunity," Fisher said. "It gave us the scale we wanted to have in a relatively short period of time."

Going global can be a challenge

Over the years, a good number of American retailers have opened stores in other countries without much luck. Best Buy had hoped to replicate its branded big-box stores in countries like Great Britain, Turkey and China. But mass retailing doesn't naturally translate overseas as shoppers often prefer small, locally owned stores over size and low prices. Best Buy ultimately closed its stores in those three countries.

While it's a bona fide international powerhouse, the company has made plenty of missteps. Wal-Mart's board of directors is currently investigating allegations that its executives bribed local officials in Mexico to bypass zoning and permit laws.

"It is really, really tricky" to go global, said Glenn Johnson, a portfolio manager with Mairs & Power in St. Paul, which owns Target stock. "You have to think about culture and logistics and consumer trends."

As for Target, the company must adapt its own steady-as-she-goes sales culture to one of rapid growth and nimble expansion, not an easy feat for a $70-billion-a-year retailer.

"When we usually add stores to a new market, we can tap into the expertise of leaders who already understand our brand and understand our business," said Berg, Target Canada's senior vice president. "In Canada, we have been starting from scratch."

Target is staffing all of its stores with local hires, people who may be familiar with Target as shoppers but not as employees.

In the meantime, Berg still is working hard on mastering French.

"I'm progressing, but I am hopeful that as I spend more time in Quebec with our fall openings, I will get the benefit of immersion," Berg said.

The same could be said for Target international.