Next week, luxury retailer Nordstrom, (JWN +0.00%) will open its first store in Canada, at Calgary's Chinook Centre. Canada is a natural place for Nordstrom to extend its business, given its similarities to the U.S. market.
However, another iconic American retailer recently discovered that expanding into Canada isn't always easy. Target (TGT +3.17%) made a big push into Canada in 2013, which has been a disaster so far.
Fortunately for its shareholders, Nordstrom is likely to have a much smoother entry into Canada. The company's focus in three areas -- replicating its American store experience, optimizing store locations, and allowing for "learning" -- makes it very likely that Nordstrom's growth in Canada will be a big positive for investors.
Target's botched expansion
Target entered the Canadian market last year to big fanfare. The company initially projected that its new stores there would turn profitable by the end of 2013. Instead, Target posted a pre-tax loss of nearly $1 billion in Canada last year. Through the first half of 2014, Target lost more than $400 million in Canada, indicating that there will be no quick fix.
Target lost nearly $1 billion in Canada last year (Photo: The Motley Fool)
There are a number of problems that conspired to cause Target's problems in Canada. To some extent, Target simply suffered from flawed execution, such as not having the right amount of inventory.
However, this was aggravated by Target's decision to open 124 stores in less than a year. This fast roll-out overburdened management and multiplied the scale of problems that arose. By contrast, Target has about 1,800 stores in the U.S. today -- more than 50 years after the chain was founded.
Real estate is another problem for Target Canada. The company achieved its quick entry into Canada by buying the leases of Zellers: a failing Canadian discount chain. However, while Target's management has defended its choice of real estate, many analysts characterize the Zellers sites as unattractive: too small and concentrated in down-market malls.
Lastly, Target Canada has not been able to offer the same selection as the company's U.S. stores. Many Canadians who had shopped at Target in the U.S. were disappointed to find that a number of top brands were not available in Target's Canadian stores. This has led to very low customer satisfaction ratings.
Nordstrom: getting the experience right
Nordstrom's first priority for its stores in Canada is replicating its trademark customer service. Customer service has been a differentiating factor driving Nordstrom's growth for many years. As an upscale department store, Nordstrom absolutely must project a welcoming environment and make potential customers in Canada feel "wanted."
Nordstrom is sparing no expense to deliver this experience. For each new location, it is hiring 30 department managers months in advance of the store opening and then bringing them on an all expenses paid trip to Seattle for a three month cultural immersion program. This will culminate with each one working alongside a mentor manager in a Seattle-area store.
Nordstrom is investing heavily to perfect its store experience in Canada (Photo: The Motley Fool)
In the U.S., Nordstrom promotes its managers from within in order to maintain a consistent company culture. Immigration laws made that impossible in Canada. The cultural immersion program for Canadian management employees is the best possible substitute, as it will ensure that they understand what the Nordstrom experience is supposed to be.
Securing the best real estate
Nordstrom is avoiding another one of Target's pitfalls by being extremely picky about where it opens stores. The six Nordstrom Canada locations announced thus far are in some of the best malls in all of North America as measured by sales per square foot.
Part of the appeal of expanding into Canada is that Canadian malls are much more productive than their counterparts in the U.S. (On average, they generate 50% higher sales per square foot.) However, because mall space in Canada is so valuable, it is also scarce.
Nordstrom is capitalizing on the financial woes of Sears Holdings to get around this problem. Sears Canada has sold numerous prime store leases back to its landlords in recent years in order to raise cash. More than half of Nordstrom's Canadian store locations were formerly Sears stores and became available in this manner.
Locating its new stores in high-performing malls will give Nordstrom a big leg up. These malls already have plenty of foot traffic from big spenders. If Nordstrom can lure these passersby into its stores and turn some of them into loyal customers, it will build a valuable franchise in Canada.
Leaving time to learn
The most important way that Nordstrom is deviating from Target's botched expansion plan is by leaving time to "learn." Nordstrom executives recognize that there are differences between the U.S. and Canadian markets. As a result, they are more interested in getting the launch right than getting it done quickly.
Whereas Target opened 124 stores in less than a year, Nordstrom is opening its initial batch of Canadian stores at a sedate pace: roughly one every six months between now and the spring of 2017. By the time Nordstrom opens its first store in the critical Toronto market, it will have two years of experience in Canada, and it will have operated stores in three separate markets for at least a year each.
In other words, Nordstrom will have plenty of time to correct mistakes and fine-tune its Canadian operation before scaling it up. This should help the company minimize problems and avoid turning off customers by giving a bad first impression.
Nordstrom is delaying the Rack's Canadian debut until 2017 (Photo: The Motley Fool)
Additionally, Nordstrom announced earlier this year that it will not open any Nordstrom Rack stores in Canada until 2017. This will allow the management team to focus on making the full-line stores as good as they can be. It will also help Nordstrom to develop its brand in Canada, rather than risking customer confusion by simultaneously opening full-price and off-price stores.
Foolish conclusion
In order to avoid a replay of Target's botched Canadian launch, Nordstrom is focusing on three areas to ensure a smooth start-up. First, it is investing heavily in management training in order to keep its customer-service culture intact. Second, Nordstrom waited patiently to acquire space in Canada's best malls. Third, Nordstrom is moving slowly in Canada so that it can learn from its mistakes.
Obviously, even these wise moves do not guarantee success. However, Nordstrom is putting itself in the best possible position to conquer the Canadian luxury retail market -- turning this $1 billion opportunity into a long-term cash cow.
