American retailers, like Target, have been fast and furious about moving into Canada over the last year, but many have not yielded the desired success selling to our northern neighbors. Whether a problem of price, product selection or opening too many stores too soon, some U.S. retailers have missed the mark.
Sourcing Journal spoke to Brian Winston, a leading advisor for Winston Collective and Associates, a Canadian retail and consumer products consultancy, to uncover what Target did wrong and why shoppers aren’t spending as expected.
“They want the U.S. experience,” Winston said of Canadian consumers. “They want the selection, the availability, the price structure.”
But whether Target, or other U.S. retailers, have grasped the Canuck consumer culture or not, the Canadian invasion is well underway.
Nordstrom opened its first Canadian store in Calgary in September, and has plans to open five more across Vancouver, Ottowa and Toronto by spring 2017, with hopes for up to 10 stores down the line.
And timed in line with Nordstrom’s opening, Hudson’s Bay Company said its Saks Fifth Avenue brand and a discount Off Fifth will have stores in Canada by 2016.
Target announced the official opening of three new stores in Canada last month, bringing the brand’s total to 133, and Walmart announced earlier this year that it would invest $500 million in expansion in Canada, adding at least six stores to its existing 389 by the end of January 2015. Rumors of Barneys and Bloomingdales coming to Canada also continue to circulate, according to Winston.
The sudden influx without insight into the Canadian market has left some wondering how U.S. brands will fare in the country. Here, three lessons to learn from Target’s mistakes.
Pricing parity has been an issue when retailers establish themselves in Canada, as the consumer generally knows crossing the border to get better bargains is a likely, though less convenient, option.
According to a study released by Statistics Canada last month, Canadians made almost 56 million visits to the U.S., in 2012, up 38 percent from 2006, and spent roughly $8 billion Canadian ($7.05 billion) in cross-border shopping in 2012, up from $4.7 billion in 2006.
Price structure was one place where Target made its mistake in the country. Some said too much early hype in advance of the company’s move to Canada in March last year led to lackluster reactions from consumers, but pricing that was overly disparate from the company’s cross-border counterpart played a major role. Some shoppers even reportedly reversed the discounter’s motto to “Expect Less, Pay More.”
“Canadians do not wish to feel ripped off and especially if they are switching allegiances to a new company,” Winston said.
The Canadian consumer also has high income taxes averaging 42 percent, high cost of living including other taxes (17 percent) and high housing costs (26 percent), which together account for 58 percent of household spending, according to data from the Winston Collective. And consumer debt has risen to new highs of $1.63 for every dollar earned, which also impacts consumer spending.
Target said it built its business model to be competitive with the lowest-price leaders in Canada, but the reality of the country’s vast geography and increasing fuel played into its pricing.
“It will be impossible to match U.S. pricing when currency is at a 10 percent difference and there are assorted transport and logistical charges that need to occur,” Winston said. “However, there might be a strategy of explaining to the consumer why and how the pricing is determined so that they lose their defensive mentality.”
After floundering in its new home and taking heed of consumer gripes about the shopping experience in its stores, Target announced a price match policy in August under which guests can get prices matched to any local competitor’s flyer or weekly ad, and also have access to price matching for select online retailers including Amazon.ca, Walmart.ca and Bestbuy.ca, among others. Guests can also use apps like reebee and flip for price comparisons instead of having to bring in a paper flyer.
“If we see a like item priced higher at Target, we’ll lower it,” Schindele said back in August. “And with the addition of our price match guarantee, and 5 percent off every purchase with a REDcard, guests should be confident they’re getting the best price at Target.”
A recent study by Minneapolis-based investment bank Piper Jaffray & Co., found that Target is in fact making progress on pricing and consumer perception. According to the September survey of 5,000 Canadian women, 52 percent said they had shopped at Target, up from 43 percent in March, and roughly one-third said they thought the retailer’s prices were fair, up from a much lower 25 percent in March.
Target’s time for redemption will come with this holiday season, however, as analysts say it will be a defining moment for the retailer: if Target can’t get shoppers in stores to buy product and leave pleased during the holidays, the company could consider closing Canadian stores.
Too much too soon
Target moved into Canada in full force, opening 124 stores across the country in less than one year, and continuing to expand in the face of under par performance.
Customers were not only complaining about price, but lackluster in-stocks and merchandise assortments. “They need to get their supply chain right, timing and merchandise must coincide with U.S. counterparts,” Winston said.
According to an article in the Star Tribune, president of Target Canada Mark Schindele, was less than confident in the retailer’s immediate influx. “With the benefit of hindsight, I wished we wouldn’t have opened up so many stores as we did at once,” Schindele told the Star Tribune. “We probably should have scaled back from what we did.”
The retailer has since continued evaluating consumer feedback and is working on initiatives to improve the guest experience in Canada.
In terms of merchandise improvements, Target said it would bring in more than 30,000 new items to its assortment for fall and holiday. Target partnered with Canadian brand Roots to extend its Beaver Canoe assortment with expanded home décor and new apparel like sleepwear and slippers. The retailer also expanded its cosmetic offerings through an exclusive partnership with e.l.f., by tripling the space allotted for the popular NYX line in October. And women’s fashion line Nick & Nora will be available at Target Canada next year.
Target’s too-fast rollout led to inventory issues like often out-of-stock merchandise, and consumers complained about a prevalence of empty shelves.
In revamping its supply chain to quell this concern and get its stock in line, Target Canada took physical counts of inventory at all stores, and reset systems to allow for more accurate ordering and shipping data. And now that the retailer has access to last year’s sales data, it will be better able to forecast and allocate product based on sales history and promotional plans to make sure product is where they say it is when they say it’s there. Delivery schedules have also been adjusted so that stores receive merchandise more frequently.
“As we have more history, we’re making better decisions,” Schindele told the Star Tribune. “Ultimately, your inventory levels are as good as your forecasts. And your forecasts are as good as your history.”
Slow and steady wins the race for retailers in Canada, according to Winston, who added that the country cannot be conquered in a week.
The key to coming to Canada, Winston said, is to first build an understanding of the Canadian business and cultural model. According to Winston, Canadians tend to have a more group-oriented approach to business decisions, with an informal management style and communication takes a more subtle approach. While there’s a certain pride in being Canadian, reassurance on success is sought from looking abroad.
Store service should be attentive with disciplined operational execution that nods to the subtleness of the Canadian culture, according to Winston. Product selection should be adventurous and complete, factoring in sizing differentials and weather like warmer rubber boots for colder climes. At the outset, Winston said, Target’s material choices were not specific to the climate zone.
Lastly, building on a successful Canadian model that matches the foreign model but is tweaked to meet Canadian business needs, will be vital.
“I do believe the higher end retailers will have success if they can duplicate or expand upon the American in-store experience and expectations. This refers to price and selection as well,” Winston said. “I believe that SFA [Saks Fifth Avenue] will be a serious player in the luxury market based upon their unique relationships with the vendors specific to this tier,” he said, adding that if the retailer learns the regional, economic and cultural traits of the region, it will be far ahead.
Nordstrom’s recent opening, however, will give Hudson’s Bay Company a run for its money, according to Winston. “They do well at the affordable end of luxe and try to reach into designer. Up until now, their designer offerings have been limited and would not necessarily allow a top tier customer sufficient depth and breadth of selection. It is my understanding that the footwear and handbag selections will be well stocked in the designer tiers,” he said.
“These retailers must tread slowly and learn the market as they go along to avoid the disasters that occurred with Target’s entrance into Canada (and their more than $1 billion loss).”
Target released its third quarter earnings Wednesday, reporting 1.6% comparable sales growth for its Canadian segment. Segment sales increased 43.8% to $479 million from $333 million last year. The Canadian segment earnings before interest expense and income taxes (EBIT) was down $211 million in the third quarter compared to $238 million loss the same period last year. Target Canada has accrued nearly $1.4 billion in losses to date.