January 16, 2015 / 11:24 PM / 3 years ago

Thin crowds during CEO's visit helped seal Target Canada's demise

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NEW YORK/TORONTO, Jan 16 (Reuters) - Target Corp was scrambling for ways to fix its failing Canadian expansion and considering closing just the weakest locations, but a pre-holiday visit to several stores by CEO Brian Cornell helped seal the decision for a full retreat.

Cornell spent the weekend before Christmas making solo visits to stores in Ontario and Quebec, Canada's most populous provinces, according to a Target source familiar with the U.S. discount retailer's decision to pull out of Canada.

Though the recently appointed chief executive could see signs of operational improvements - notably, better stocked shelves - a key ingredient was missing.

"There just weren't enough people in the stores," the source said. "The weekend before Christmas our stores are usually packed. He wasn't seeing enough people. The stores he visited had never looked better, they were in stock, but there weren't enough people there."

Target said on Thursday it will exit the Canadian market after less than two years, closing 133 stores, throwing more than 17,000 employees out of work, and leaving billions in losses.

A former Target employee in touch with vendors and existing staff at the Canadian headquarters said everyone was blind-sided by the decision, especially by the timing.

Target, which entered Canada hoping it would be profitable after the first year, had invested more than C$7 billion ($5.84 billion) in its Canadian expansion since the start of 2011, according to its Companies' Creditors Arrangement Act (CCAA) filing.

But it wildly overestimated how readily Canadians would embrace its arrival. A laundry list of missteps at all levels of the operation left shoppers disenchanted.

The filing showed the company's struggle to lure shoppers resulted in losses of between $169 million and $329 million every quarter since it opened. Target is projecting a cumulative operating loss of more than C$2.5 billion pretax, more than triple what they originally expected.

Target blamed its colossal failure on four key factors: its large-scale opening, supply chain problems, pricing and product assortment issues, and a lack of online presence.

In the filing, Target said pace and large size of the expansion severely hampered its ability to respond quickly and effectively to problems.

The company had invested heavily in its supply chain operations, but a combination of data-entry and ordering errors, poor training, and confusion over differences between U.S. and Canadian systems resulted in empty shelves for key merchandise and over-stocking of other products.

The Minneapolis-based retailer considered all options as it struggled to right the floundering Canadian rollout, adding resources and consulting extensively since last spring.

It considered selling assets and consolidating distribution operations, but "even under the most optimistic scenarios," Target said in the filing that it could not see a way to break-even in the next five years.

On Wednesday, the Target board gathered for a regularly scheduled meeting, according the unnamed source. Members knew that they would be evaluating Canada's holiday performance, and that modeling was under way to determine what it would take to make the operation profitable.

The source said executives had weighed several scenarios, including shutting dozens of poorly performing stores and trying to save the profitable ones.

Instead, a full pullout was announced, and Target Canada filed for bankruptcy protection.

On Friday, as retail analysts and the Canadian media tore into Target for mishandling the expansion, Cornell called an all-staff meeting at Target's Minneapolis headquarters to explain what had gone wrong.

Taking to the podium in a massive meeting room emptied of furniture to accommodate hundreds of staffers, Cornell spoke for 15 minutes.

Exiting Canada "was the hardest business decision I've ever made," Cornell told the team, according to the source. He said the focus would now be on digital and U.S. operations.

$1=$1.19 Canadian dollars With additional reporting by Euan Rocha in Toronto; additional writing by Andrea Hopkins; Editing by Jeffrey Hodgson; and Peter Galloway

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