Target's (NYSE:TGT) biggest growth opportunity exists in Canada. Despite the company not performing well there so far, improvements are possible. That said, Target is making a big bet that it will be able to change the way Canadian consumers shop which is always a hard thing for any retailer to accomplish.
Reinventing the wheel
Target has a very simple strategy in the United States. It strategically selects its store locations to attract middle-income to high-end consumers looking for discounts. Target provides convenience because a wide variety of items can be found under one roof. It also helps that Target stores are well-lit, always kept clean, and offer wide aisles. The customer service is almost always better than what you will find at Wal-Mart Stores (NYSE:WMT) as well.
Based on the above strategy, and considering that Target is opening locations in similar areas throughout Canada, you would think that the company's northern expansion would be a success. However, that hasn't been the case.
Canadian shoppers are used to shopping for different items at different stores. Canadians aren't like Americans when it comes to shopping. While Americans are often pressed for time and want to get through their shopping lists as fast as possible (so they can rush through the next aspect of their lives), Canadians want to enjoy the shopping experience. It's not about speed and having everything under one roof for them.
It also hasn't helped that Target's Canadian store prices are higher than what's found at U.S. Target stores. Target's defense is that customers can save when using the REDcard; but to Canadian consumers, this is just a poor excuse. Many of these consumers live close to the border and have shopped at Target stores in the United States before. If Canadian prices are higher, they're going to feel as though they're being treated unfairly.
Canadian consumers haven't been pleased with Target's much-hyped arrival, but the retailer still believes Canada can be a long-term win. Why? Because Target believes it can change Canadian shopping habits. Possible, but easier said than done.
While it's difficult to determine how Canadian consumers feel about Target stores in the middle of a quarter, there are some hints to take into consideration.
While there isn't as much competition as in the United States, the competition is still just as fierce for Target. Three of the biggest competitors are Shoppers Drug Mart, Costco Wholesale (NASDAQ:COST), and Wal-Mart.
Shoppers Drug Mart has been around since 1962, giving it decades to accumulate loyal customers. Those customers can purchase everything from cosmetics to groceries, making it a direct threat to Target. In 2012, Shoppers Drug Mart did $10.5 billion in sales.
Costco only has 87 locations in Canada, but that didn't stop it from generating $13.2 billion in sales in 2012. Costco has also established a presence, having been in operation north of the border since 1985.
Wal-Mart got started in Canada a little later, in 1994, but it still managed $22.3 billion in sales in 2012. Wal-Mart and Target are foes in the United States, and that will also be the case in Canada.
As you can see, Target has its hands full in Canada. While it's possible for Target to win the trust and loyalty of Canadian consumers, a lot of powerful competition stands in the way.
Target recently opened three stores in Canada: the Toronto Stockyards, Kingsway Mall in Edmonton, Alberta, and the Hillside Mall in Victoria, British Columbia. All three stores will have the aforementioned Target features, licensed Starbucks (NASDAQ:SBUX) quick-service restaurants, and in-store pharmacies with patient-centered health care.
The Starbucks stores should help Target thanks to the brand's enormous global appeal. Ironically, this might do more for Starbucks than Target. Starbucks is a master of expanding its global brand recognition. In addition to opening a location right outside Disneyland, it's now increasing brand recognition in Canada via Target stores.
Starbucks is fortunate to have top-tier management. The company always finds a way to win, which is why its top line has grown 52.7% over the past five years; selling, general, and administrative expenses, meanwhile, have only grown at a 36.4% clip. Therefore, you might want to consider digging deeper on Starbucks prior to doing so with Target.
The Foolish bottom line
Target isn't resonating well with Canadian consumers, and attempting to reinvent the wheel (in this case, Canadian consumer preferences) is never easy. The strategic locations and exposure to the company's target consumer base offers long-term potential. But this is going to be a long and bumpy road. When combined with the data-breach situation, this might not be the ideal time to invest in Target. As always Foolish investors should do their own research prior to making any investment decisions.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and Starbucks. The Motley Fool owns shares of Costco Wholesale and Starbucks. 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.