For American businesses looking to expand internationally, Canada generally presents the easiest point of entry as the Canadian market mirrors the American one in many ways. However, not all American enterprises successfully make the transition north of the border.
Target Corporation (TGT +0.11%) recently pulled the plug on its Canadian venture just two years in as problems including inventory shortages, higher prices, and poor site selection led to sizable losses. Recognizing that the cheap chic discount chain wouldn't be profitable in Canada until 2021 at the earliest, CEO Brian Cornell pulled the company out of Canada to refocus on the U.S.
Target's retreat left thousands of employees jobless and plenty of vacant real estate, which has been getting snatched up piece by piece by other retailers. Last week, rival Wal-Mart Stores (WMT +2.18%) said it would get in on the fire sale, buying 12 stores' leases, one store outright, and a distribution center for about $135 million. Including store renovations, Wal-Mart will spend about $290 million to add the 13 outlets to its 395 locations in the Great White North.
The move comes at a time when several other American companies are closing stores in Canada, including Best Buy, Big Lots, and Sears -- the last of which recently sold the majority of its stake in its Canadian arm.
Despite other retailers' struggles, Canada has been a bright spot for Wal-Mart lately. The company has reported positive comps in the last three quarters and an increase of 1.8% in the most recently reported period. Target's abrupt exit likely gave Wal-Mart a good price for the acquisition, and Wal-Mart Canada CEO Dirk Van den Berghe called the stores "well situated" as his company was able to hand pick from the dozens Target left abandoned.
When opportunity knocks
When Borders declared bankruptcy in 2011, a number of retailers scooped up the defunct bookseller's real estate, among them DSW. The shoe retailer was able to speed up its expansion by acquiring old Borders stores, and from 2012 to 2013, the stock more than doubled.
With just 13 stores coming into the fold, Wal-Mart's acquisition is unlikely to have a similarly noticeable effect on the stock, but it underscores the way that the retailer's growth can come in fits and starts. In 2012, for example, Wal-Mart expanded its store count in Canada by nearly 15% to 379, which included a purchase of 39 stores from Zellers, the same company whose stores Target moved into.
However, Target's entry into the Canadian market at the same time squeezed Wal-Mart's profit -- same-store sales fell 1.3% in the quarter when Target opened its first stores. With Target now gone from Canada, Wal-Mart could deliver strong results in that country when it reports first-quarter earnings on Thursday.
This also makes it an auspicious time for Wal-Mart to grow in Canada. In addition to acquiring the 13 former Target stores, Wal-Mart announced plans earlier this year to convert 29 of its smaller discount stores into supercenters in Canada, making this another strong year for growth north of the border.
More acquisitions to come?
Though Wal-Mart has grown in the U.S. by opening new stores, acquisitions have been key to its expansion in international markets. Over the last few years, high-profile acquisitions include its purchase of a majority stake in 2011 of South African retailer MassMart, which served as a jumping off point for growth in Africa by giving it nearly 300 stores, and the acquisition of the discount supermarket chain Netto in the U.K.
For the current year, Wal-Mart has decided to moderate its square footage growth in order to focus on e-commerce investments, but acquisitions could be its best opportunity for brick-and-mortar growth going forward.
Price is likely the biggest concern for the company when considering acquisitions. It generally spends about $12 to $13 billion on capital expenditures per year. Last year, Wal-Mart spent about $4 billion to add about 21 million square feet of space in the U.S., or about $200 per square foot.
By comparison, it's spending about $100 per square foot to add the former Target property, though nearly half of that space is the distribution center. That means the company likely saved money on the purchase compared to building new stores from scratch.
Should similar opportunities arise, look for Wal-Mart to pounce, padding its store growth numbers and financial results in the process.
