Rarely has a retailer raised consumer expectations so high and dashed them so quickly.
Target Corp. arrived in Canada almost a year ago amid buzz and anticipation that the U.S. discount chain, nicknamed Tar-zhay by some of its fashion-savvy fans, would wow shoppers with chic bargains.
Instead, Target stubbed its toe badly, unable to do the basics of replenishing its store shelves while taking criticism for charging noticeably higher prices than at its U.S. stores.
"It's a bit of the curse of high expectations," said Neil Stern, senior partner at retail consultancy McMillanDoolittle in Chicago. "There was so much buildup and drama around Target coming, and it would change the retail landscape. The disappointment was palpable."
The extent of the damage became clear this week when Target unveiled its grim 2013 results, which included a $941-million (U.S.) operating loss in Canada. It had originally forecast a profit here as early as the fourth quarter of 2013.
In 2014, it anticipates a Canadian loss of $314-million (before interest, taxes, depreciation and amortization). The company says it is fixing its inventory snags, which are leading to empty shelves, and the situation already is improving.
Now comes the hard part: changing consumers' perception that Target Canada is Target Lite – or worse, that it's a buffed-up version of Zellers.
"Our goal was to bring the true U.S. Target experience to Canada, which included bringing the brands and products our guests [customers], who have cross-border shopped, know and love – and we have," Tony Fisher, president of Target Canada, said in an e-mail this week.
It's not enough for many shoppers, who say they find lower prices in U.S. stores than Canadian stores on identical items – or can't find the same products at all. The letdown has prompted some to continue to zip down to Targets south of the border, or just ditch the retailer altogether.
"They just don't have the variety of products here as in the States," said Sherri Redshaw of Stouffville, Ont., who has been shopping at Target for decades. She will head to Target during a business trip to Indianapolis next month to buy Hershey's cinnamon baking chips and the chain's "up & up" migraine medicine for her husband, among other products – merchandise she can't find at Target in Canada. "I never leave Target in the States without $300 of purchases."
Heather Arlen of Guelph, Ont., is in Florida right now, stocking up at Target on toys for her grandchildren and more than $50 worth of M&M's. The retailer south of the border carries seven varieties of the candy, for example, including coconut and peanut butter, while in Canada it has only two, plain and peanut, she said.
"Good grief, I can buy plain M&M's at the corner store. Why go to Target [in Canada]?"
Fashionistas also see a product gap. Sonia Basu, a graduate student in Kitchener, Ont., said she finds a wider selection of clothing styles at Target across the border, especially now that she's pregnant and looking for maternity and plus sizes. Target in Canada carries plus sizes, although they are not in a separate section but scattered throughout the apparel racks, and run to XXL rather than XXXL in the U.S., Target spokeswoman Lisa Gibson said.
Mr. Fisher said the perception that Target Canada is missing products is partly because of the troubled but improving supply chain, which has led to noticeable gaps on store shelves. "We remain fully committed to improving in-stocks and delivering a more consistent experience for our guests," he said.
As well, Target counts on its suppliers to recommend products that Canadian consumers prefer, Ms. Gibson said. "We will adjust our merchandising mix based on feedback we get."
Food and drug regulations mean that some U.S. products would have to be reformulated for Canada, which has stopped Target – and other retailers here – from carrying some items, she said. For instance, last year it could not bring its Archer Farms Sweet & Spicy Thai-Style Chile Reduced-Fat Kettle Chip here because the seasoning blend contained stevia, which could not be used to sweeten snack foods in Canada at the time. (Ottawa gave the green light to stevia in snack foods in January.)
Still, Target carries more than 90 per cent of the same in-house and designer apparel and home decor lines in its Canadian stores as it stocks in its U.S. outlets, including Nate Berkus homewares and Mossimo fashions, Ms. Gibson said.
But the retailer is at a disadvantage: Its Canadian stores are on average 18-per-cent smaller than those in the United States, forcing the retailer here to carry fewer offerings. Target bought the store leases from ailing Zellers in 2011 in a $1.8-billion deal; it hand-picked more than 120 of the best ones for Target, Mr. Fisher has said.
The Zellers deal allowed Target to do its Canadian expansion quickly – maybe too quickly. The retailer might have been better off with a slower approach.
Alex Arifuzzaman, a partner at InterStratics Consultants, a retail real estate advisory firm, characterizes Target's sites as ranging from "very good" to "average." He said Target is scheduled to open an "excellent" store soon in west-end Toronto that is being built to its specifications at about 140,000 square feet, close to the average size of its U.S. outlets.
The locations it picked up from Zellers "weren't ideal," he said. "But they were able to ramp up much faster" than they otherwise would have been if the company had bought store leases one by one. It poured about $10-million into renovating each store.
"I don't think the locations are the issue – it's what's in the box, I think, that is the issue in terms of Target's performance to date."
Target's first stores rolled out prematurely without the proper merchandise, he said. "You only have one chance to make a first impression and they failed to meet their U.S. experience in terms of both price and selection. … Other retailers such as Canadian Tire do huge store launch events with deep discounts. Target did not. They had a high hurdle, no question. They did not clear it."
A survey done in late 2013 by brand consultancy Level5 found that only 24 per cent of consumers considered Target better than other general merchandise retailers such as Wal-Mart Canada Corp. and Canadian Tire Corp. Ltd., a stark drop from the 57 per cent just six months earlier. It left Target on par with troubled department store Sears Canada Inc., Level5 chief executive officer David Kincaid said.
Target has also suffered because consumers psychologically connect Target with Zellers – especially because the stores have a similar colour scheme. Zellers had emulated Target in its choice of red-and-white decor and some of its merchandise and store presentations, Mr. Kincaid said. "Consumers' emotional memories don't just shut off because you change the name of the store."
The firm's research last spring found that prices of a basket of household and food items were just 3 per cent cheaper in Target's U.S. stores compared with a comparable Target in Canada; when adjusted for foreign exchange rates, the U.S. prices were a mere 0.4 per cent cheaper.
Somehow, that hasn't improved the perception among customers that Canadian prices are out of line. Mr. Fisher has repeatedly said that prices here are comparable to those at low-cost Canadian rivals, and higher than those in the U.S. because of higher transportation, labour and other costs here.
In some categories, there are big price discrepancies. Research firm Gfk has found Target charged 31 per cent more on digital cameras and 11 per cent more on a home-theatre-in-a-box stereo at its Canadian stores.
Software engineer Nikolai Grigoriev said he headed to his nearby Target in Brossard, Que., last fall looking for a vacuum cleaner. He ended up buying something cheaper at Sears. If I am to go to a few local stores to find something inexpensive for my home, Target won't be among my destinations," he said.
Even so, Target wants to woo back shoppers such as Mr. Grigoriev. It has started to offer more deals, especially for everyday household and food items that tend to bring customers to stores more often.
"Selectively we're going to go out and be more aggressive," chief executive officer Gregg Steinhafel told analysts on Wednesday.
Most industry experts are betting Target will eventually get it right in Canada. Mr. Stern, the retail consultant, said other chains have stumbled and picked themselves back up. When consumers complained that Domino Pizza's product tasted like cardboard, Mr. Stern said, the company responded with a new recipe and marketing that essentially said: We know the pizza was terrible, here's the new stuff.
"At some point Target is going to have to do a Canada 2.0 and say, 'We're listening, we heard you, here are the things we've done to make those changes for you.'"
Gerald Storch, a former Target vice-chairman and former CEO of Toys "R" Us, said Target often has trouble entering new markets, even in the U.S. "At first , the consumer sees that beautiful store and assumes it's more expensive than it actually is. It just takes time. They need to improve their price perception and their in-stock position.
"It's a very large, well capitalized company. They should be able to fix it. … Obviously they didn't expect to lose almost a billion dollars in one year. That's a major disappointment."