Target faces growing pains in Canada

Target Corp. is learning that its ubiquitous "Expect More. Pay Less" motto doesn't always translate as smoothly in Canada as it does in the United States.

Since March, the retailer has rolled out 48 stores in several major Canadian markets — the company's first big push into a foreign land. And while many shoppers have embraced Target in cities such as Vancouver and Toronto, others have encountered bare shelves or grumbled about prices that weren't as low as they had expected.

The volume of shoppers has been promising, but Target executives acknowledge that they underestimated the initial demand, particularly with three stores in the Toronto area.

"That has been the biggest challenge so far," said John Morioka, Target Canada's senior vice resident of merchandising. "There has been no accurate history to plan for our sales."

The sweep into Canada is Target's largest investment as it moves to become a global retail force. The company with deep Minnesota roots is opening stores at incredible speed — 124 are expected to open across Canada within the first year.

That ambitious time frame underscores the biggest challenge for a company that normally introduces about 20 U.S. stores a year. The Minneapolis-based retailer has never operated stores beyond the United States, and even a close neighbor such as Canada poses a formidable challenge for any retailer, analysts say.

"Given the size and excitement surrounding this launch, it's not fair to expect Target to have everything run like clockwork," said Amy Koo, an analyst with Kantar retail consulting firm in Boston.

The distinction was on display during Target's "soft launch" in Toronto in March, when shoppers complained that stores ran out of key staples such as milk and clothing. Reports of empty shelves also cropped up during recent openings in British Columbia and Alberta.

Still, those struggles demonstrate one of Target's most-lauded strengths — the ability to create consumer buzz through savvy marketing and merchandising. Exclusive clothing collections from Kate Young and Roots have been big hits in Canada, Target officials say, as has food sold under the retailer's Archer Farms private-label brand.

Target's Jason Wu pop-up store and Neighbour television campaign also have been well-received.

"There has been a tremendous amount of hype around the launch, much of it perpetuated by Target itself," said Doug Stephens, a Toronto-based retail consultant and author.

But when the new stores don't quite match the hype, it "takes the edge off" the retailer's shine, Stephens said, especially among consumers unfamiliar with the brand.

Those results shouldn't be a surprise, analysts say — Target didn't become the No. 2 U. S. retailer because it couldn't adapt to new challenges.

"They will correct [Canada] over time," said Brian Yarbrough, a retail analyst with Edward Jones Investments. "Over the long term, they should be able to do pretty well."

Target's challenge in Canada springs from its own bold predictions. The company has promised investors it will generate $100 billion in sales by 2017, compared with the $73.3 billion it produced during its last fiscal year.

With U.S. store sales growing less than 3 percent a year, Canada needs to start producing revenues and profits fast for Target to meet its goals.

That explains why Target chose to buy leases from Zellers, a defunct discount chain owned by Hudson's Bay Co., rather than build stores from the ground up like Wal-Mart. The Zellers deal allowed Target to position itself to make a grand, sweeping entry into Canada and immediately start contributing to its bottom line.

Koo, the Kantar analyst, said inventory shortages have eased as Target has opened stores in the western provinces. But some consumers still see problems.

Wes Rath recently visited the Target Calgary Chinook store, one of the best retail locations in the city. There were widespread shortages, including men's clothing and electronics. An employee told him that some merchandise simply didn't arrive in time for the opening, Rath said.

"It was rather disappointing to see half-empty shelves," said Rath, who works in the financial industry. "Target set the bar pretty high with expectations. … You only have one chance to make a good first impression."

Many Canadian shoppers, in interviews and across social media, said they thought Target's prices were higher than Wal-Mart, even though independent data suggest otherwise. Consumers who have visited Target stores in the United States also had assumed they would see the same prices in Canada.

"The Canadian Target falls well short of the U.S. version," said Kevin Hoglund, a resident of British Columbia. "Perhaps it is because many things in the U.S. are generally less expensive, so the entire store seems like one big bargain when we go. Or else it could be because the clothing selection alone is worth the three-hour drive from here."

"Retailers don't do a strong enough job" teaching Canadians why things cost more in the country, said Jeff Spivock, a Toronto-based retail marketing consultant. "No matter what, we have to educate Canadians about prices."

In truth, Target's prices in Canada are evenly matched with Wal-Mart, Koo said. A recent Kantar study that compared prices on 29 national brand items at a Target vs. a Wal-Mart in Toronto found that the total price at Wal-Mart was less than 25 cents cheaper than at Target.

"Customers will start to get a little more realistic about their expectations for Target," Koo said.

Target, however, could do a better job at explaining its pricing strategy, she said. Is Target saying it offers prices comparable to Canadian retailers or the United States?

The answer, Morioka of Target said, is both, noting that Canadians will find prices on select merchandise to be identical to what consumers find in the United States, including collections from Kate Young and Phillip Lim.

Overall, Target appears to be building a promising customer base in Canada, Morioka said.

The company has signed up more than 27,000 shoppers to its REDcard credit/debit program, a positive sign as REDcard users tend to shop at Target more frequently. And Target's Facebook page has attracted 1 million friends, the largest among all retailers in Canada.

"There is already a lot of familiarity in Canada with Target," said Yarbrough of Edward Jones.

Target has especially excelled at offering "Canadians what they can't find in Canada," Morioka said, including home goods and clothing from Shaun White and Nate Berkus. And, he added, Target is "getting a lot of credit" from shoppers for stocking local brands such as Dufflet cakes and Foxy jewelry.

The retailer still needs to educate Canadians about one-stop shopping, which is an uniquely American concept, Morioka said. In Canada, households tend to be smaller, which means consumers, including single adults and renters, don't need to buy as much merchandise during any one store visit. Big-box retailers in the United States generally encourage shoppers to load up as much as they can from the moment they enter the store.

"We are still early in our journey."

Thomas Lee • 612-673-4113