The sun is setting on Target's northern expansion, but no one's laughing: U.S. retailers like Wal-Mart realize just how difficult a market Canada is to crack. Source: Mike Mozart via Flickr.
Where Target (TGT 0.70%) fears to tread, Wal-Mart (WMT 1.60%) continues moving boldly forward.
The mass-market retailer announced last week that by the end of the month, it would have completed its current year expansion program in Canada that will give it 280 supercenters and 114 discount stores up north. It reportedly continues investing between $550 million and $750 million annually to build new stores and remodel existing ones.
Because Target recorded over $2 billion in net losses since 2011, it announced it was exiting the Canadian market, leaving many to believe Wal-Mart's performance in the region will improve as a result.
Canada can result in a white-out
Perhaps. Wal-Mart has operated in Canada for over 20 years, proving it can navigate the country's challenging operating conditions.
Last quarter, net sales were up 3.3% on a 0.6% rise in same-store sales rose 0.6%, helping it gain 20 basis points of market share in food, consumables, and health and wellness combined, according to Nielsen data.
But it was also only Wal-Mart's second consecutive quarter of same-store sales growth after six straight negative quarters, and though the increase was composed of 2% rise in basket size, it also included a 1.4% decline in traffic.
The presence of any rival in the highly competitive market can impact results, and even Wal-Mart hasn't always found the Great White North a hospitable environment. In 2009, it closed down all six of its Sam's Club warehouse stores, which found even they couldn't effectively compete against its parent's supercenters or against Costco (COST 0.32%), which is firmly entrenched in Canada with 88 locations.
In Costco's fiscal 2015 first quarter, its Canadian operations enjoyed comparable sales growth of 8%. Just like in the U.S., Costco enjoys a 91% membership renewal rate.
A lot of retailers have gotten a chilly reception from Canadian consumers, including Big Lots, which announced last year it was closing down its operations in the Great White north. Source: Nicholas Eckhart via Flickr.
A vast graveyard
Canada is the country where retailers go to die. Big Lots is closing down its Canadian operations two years after buying the Liquidation World chain. Sony also said it was closing down its business up north, Best Buy and Staples are both scaling back its business there, and Sears Holding is trying to unload its investment in the dwindling Sears Canada operation.
Yet the promise of the Canadian market keeps luring retailers back. Global real estate investment firm CBRE says sales per square foot of $625 at Canadian malls are much higher than the $482 per square foot at their U.S. counterparts. Canada enjoyed a strong dollar, a robust economy that avoided much of the financial markets' fallout experienced here, and consumers very similar to those in the U.S.
That explains why J. Crew and Ann Taylor preceded Target into Canada while DSW and Nordstrom entered for the first time last year. TJX Companies also operates its Marshall's brand in Canada and has expanded its footprint there, but it has also experienced a 1% decline in comps over the past nine months.
The same but different
But Canada has a much smaller population stretched out across a vast land mass, about nine people per square mile compared to 80 in the U.S. Costs of doing business are higher in Canada as a result, and with the U.S. dollar strengthening in relation to the Canadian dollar, it's caused Canadian consumers to lose purchasing power as retailers raised prices. Moreover, the ease with which Canadians can cross into the U.S. allows them to easily comparison shop with retailers to the south.
Walmart Canada says it serves more than one million customers each day, and its online store is visited by 400,000 Canadians daily. But you won't find it dancing on Target's grave.
Its rival's exit from the market might ease some of the competitive pressure, but it won't completely remove the challenges it faces, and Wal-Mart understands the Canadian retail landscape is still a dog-eat-dog environment where reversal of fortunes can happen quickly. Wal-Mart is only just turning around its own operations up north, so it has its hands full already without taking the time out to celebrate a competitor's demise.
