Target's (TGT +0.12%) data breach is likely to lead to souring sentiment and increased costs (litigation, upgraded technology, fraud reimbursement, card reissuance). The last thing Target needs is to face another stiff headwind, but that's exactly what Canada has presented.
North of the border
Target had high expectations for its Canadian expansion, but Canadians haven't been overly pleased with Target stores. The primary reason is that prices are higher than in the United States. Since the majority of the Canadian population lives within driving distance to the U.S. border, many Canadian residents travel south so they can spend less while shopping. Therefore, a good portion of Canadians are familiar with Target store prices in the United States. When those consumers see higher prices in their home country, they're not likely to visit those Target stores.
Canadians have also complained about a lack of quality merchandise. As if that's not enough of a bad start for Target's 124 stores in Canada, if you read any Canadian publication with Target as the subject and then read the comments below, you will find that many Canadians loathe American retail brands like Target and Wal-Mart Stores (WMT +0.36%). Many Canadians want to remain loyal to their own country's brands. That being the case, Target can't afford much more negative press north of the border. However, that's what Target is receiving.
An unfortunate email
Target recently sent emails to Canadians who shopped at U.S. Target stores between Nov. 27 and Dec. 15 late last year. Based on this date range, you probably know what's coming next. The email warned these Canadian consumers that their personal information might have been stolen. The catch here is that Canadians who shopped in Target Canada stores weren't affected. But that's not what's important here. What's important is that some Canadian consumers are now going to lose trust in Target just as many American consumers have.
Since Canadian consumers are already disappointed with Target and don't appreciate American brands marching on their home turf, it's going to be more of a challenge for Target to win Canadian consumers back than American consumers. This is a big negative considering Target sees Canada as a big growth opportunity.
To give you an idea of how difficult it is for an American retailer to survive in Canada, Big Lots (BIG +0.00%) recently announced that it's giving up in Canada after entering the Canadian market in 2011. Big Lots reported the Canadian market as not being as strong as anticipated, and that further investments in Canadian operations wouldn't benefit the company or shareholders.
The Big Lots story could serve as a cautionary tale for Target. And Target must also contend with Wal-Mart, which has increased its investment in food and consumables in Canada in order to beat Target to the punch. Though Wal-Mart Canada suffered a 1.3% comps decline in the third quarter, it gained 100 basis points in food and consumables year over year. It also offers 227 Supercenters in Canada, giving it broad exposure to consumers wanting cheap food and consumables.
What does it all mean?
The bottom line
Despite all the negative news coming out of Target recently, the company is still likely to remain a long-term winner simply because it's one of the few retailers to offer everyday low prices to middle- to high-end consumers. The design of the stores attracts a different crowd than Wal-Mart, which gives Target differentiation. However, due to recent events and Target's challenges in Canada, now would not be the best time to consider an investment. Please conduct your own research prior to making any investment decisions.
