Why Target Corporation Had to Pull the Plug on Canada

By Adam Levine-WeinbergFool.com

Last week, Target finally announced that it wouldshut down its unprofitable Canadian operations. In the course of a strategic review following the holiday sales period, management concluded the retailer was likely to continue losing money in Canada until at least 2021, CEO Brian Cornell said in a press release.

Target could not afford to bleed cash in Canada for more than half a decade, especially with no guarantee of long-term profitability thereafter. Thus, the decision to exit the market was relatively straightforward. However, success in Canada was not unattainable. It was ultimately an overly aggressive expansion timeline that undid the company's efforts in the country.

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A quick fall from graceTarget began its expansion into Canada in early 2011, when the company bought the store leases of Zellers, a struggling Canadian discount retailer. This paved the way for Target to open over 100 stores in Canada just in 2013.

Target's Canadian stores were beset by numerous operational problems. Photo: The Motley Fool

By that point, investors saw Canada as the next big growth market for the retailer. Management projected the company would be profitable in Canada by the fourth quarter of that year. But by midyear, it was clear Target would fall well short of that goal.

Target faced many problems in Canada: small stores in subpar shopping centers, higher prices, and widespread inventory management problems. Some stores were plagued by empty shelves, frustrating consumerswhile others were swamped with excess inventory, forcing Target to take drastic markdowns.

The rapid pace of expansion only served to exacerbate all of these problems.

Opening 124 new stores in 2013 quickly overburdened management.The vast scale of the Canadian operations likely led to the inventory issues in the first place, and it certainly made it difficult to react to problems as they developed. Moreover, it multiplied the financial losses to dramatic proportions. In 2013, Target posted a pre-tax loss of $941 million in the country.

Alienating customers en masseThe massive scale of the Canadian launch also created a major roadblock to engineering a turnaround. If Target had started small, any mistakeswould have affected only a small portion of potential customers. This would have given the company time to contain the damage and address problems before rolling out additional locations.

Nordstrom has adopted this tactic for its entry into Canada. It opened a single store in Calgary last year and plans to open two more in 2015. Nordstrom won't enter Toronto -- Canada's largest metro area -- until fall 2016, by which point it will have two years of experience in the nation.

Inventory management was a recurring problem for Target in Canada. Photo: The Motley Fool

By entering Canada with a bang and botching the job, Targetalienated many of its potential customers all at once. A Target Canada customer easily could have encountered bare shelves on some occasions, overflowing shelves at other times, high prices on some items, and ridiculously big markdowns on others.

Why would anyone go out of his or her way to seek out such an inconsistent and unsatisfying shopping experience? Most Canadians understandably gave up on Target.

No turnaround in sightLast year, I wrote that Target probably needed to increase annual sales in Canada to nearly $4 billion to break even. Through the first nine months of 2014, Canadian segment sales totaled just $1.3 billion, putting it on pace for annual sales of about $2 billion. Pre-tax losses for the first nine months of the yearactually increased slightly to $627 million.

Thus, Target was likely to lose hundreds of millions of dollars annually for years while it worked to double its sales in Canada in order to become profitable. Doubling sales would have been challenging under any circumstances, but leaving a bad first impression in the minds of many Canadian shoppers made the task even more daunting.

Cornell made the right call pulling the plug on the Canadian experiment. Unfortunately, it didn't have to be this way. A more cautious entry into the country could have delivered the long-term growth and profit both management and investors were seeking.

The article Why Target Corporation Had to Pull the Plug on Canada originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Nordstrom. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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