Sorry Target, You Can’t Win the Canadian Market

In 2011 Target (NYSE: TGT  ) announced its plan to open stores in Canada. With hundreds of locations across the U.S., expanding to Canada could logically drive growth. Unfortunately, a rough start and a recent announcement from another retailer spell doom for Target in its new market.

Canadians loved Target
The Office of Consumer Affairs, a Canadian government organization, said in a report that "Target is well known among Canadian consumers; it is estimated that already 30,000 Canadians hold Red Cards and over three million Canadians had shopped at a Target in the US within the past year, providing Target with a strong awareness among a large portion of the Canadian population."

Target's management set ambitious financial goals of earning $6 billion or more in sales and $0.80 or more in earnings per share by 2017.

Target's report card so far
With ambitious financial objectives in place, the company has no choice but to deliver. How is it doing so far?

"Target Canada still plagued by price perception problems as sales fail to meet expectations," read a headline from Canada's Financial Post. "Cool Canadian welcome hurts Target's profits," said the Toronto Star.

The Toronto Star referenced Target's third-quarter report, which said that companywide net income fell 46% to $341 million, or 54 cents per share, lower than the consensus estimate of 62 cents. Bloomberg wrote that Target's Canadian woes "accounted for almost all of the 8-cent gap between the retailer's results and analysts' estimates."

The 800-pound gorilla makes itself even bigger
What does a company do when its competitor is down? If that company is Wal-Mart (NYSE: WMT  ) , it adds insult to injury and announces a massive $500-million expansion plan.

On Feb. 4, Wal-Mart announced that it will invest more than $376 million to build, expand, relocate, or remodel its Canadian stores. The company will spend $31 million on e-commerce projects and $91 million to enhance its distribution network so it can handle more fresh food.

While Wal-Mart Canada does not report earnings separately from its American counterpart, Wal-Mart Canada's CEO Shelley Broader said that the company had a successful 2013 in Canada and continues to see market share there grow.

Broader took a direct jab at Target Canada and said that Target's entry into the Canadian market has made Wal-Mart Canada better.

"We are leaner, we are stronger, we are faster than we were a year ago, we are price-sharper than we ever have been and it's resonating with customers and it's showing up in market share."

When Wal-Mart issued a profit warning in late January the company blamed bad weather and a reduction in food stamps. The company understands that it is operating in a slowing U.S. retail environment and it is using its financial might to conquer foreign markets, such as Canada and China, to reverse declining sales trends in its international operations.

Wal-Mart announced in October 2013 that it plans to open as many as 110 new facilities in China from 2014 to 2016, in addition to the 30 it opened in 2013. Last year, Wal-Mart acquired Yihadodian, one of China's fastest growing e-commerce sites, which sells both groceries and general merchandise. 

Are all American retailers in Canada doomed?
Canadian malls are set to welcome Nordstrom (NYSE: JWN  ) with a three-story flagship location in Toronto in 2016. The company intends to open "a couple of dozen" stores across the country which will include its lower-priced "rack" stores. 

The luxury goods market across Canada indicates that there are plenty of big spenders in the nation who have deep pockets. Research conducted by The Globe and Mail found that "the number of households with income of more than $200,000 accelerated four times as fast as that of households with average incomes since 2007. The number of households in the top bracket – over $250,000 – jumped 34.2 percent since 2008."

During Nordstrom's annual general meeting, the company's Principal Executive Officer Blake Nordstrom said that the company is committed to making its Canadian operations successful and that by 2020 "we should be in a position of strength" to look at other international expansion opportunities such as Brazil and Mexico.

Final Foolish thoughts
Target has been placed in a position where it will have difficulty fighting off the 800-pound gorilla, which just gained a few hundred additional pounds.

In a pricing survey conducted by the Globe and Mail, Target Canada is more expensive than its counterpart Wal-Mart, and Canadians are familiar with this fact. This perception will likely stay in the minds of consumers as Wal-Mart invests $500 million in improving its stores while Target is forced to play catch-up.

Target heavily pitched its Canadian expansion to investors and the company has an obligation to its shareholders to meet its objectives.  Target's investors are already in pain due to the recent data breach, so any further bad news is likely to be met with further shareholder annoyance and disapproval.

Nordstrom already has over 15,000 credit card holders across Canada and an expansion seems like a logical decision. Nordstrom operates a high-margin business that appeals to higher-income customers and if need be it can lower prices to move merchandise without overly sacrificing its bottom line. Canada will be the company's first step in what could be even further international expansion.

Which two retailers stand a chance of beating Wal-Mart?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


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