This week, Target Corp. announced that its foray into Canada is coming to an abrupt end. That comes less than two years after the U.S.-based retailer opened its first Canadian stores, following its acquisition in 2011 of the leases for its locations from Zellers, in a USD1.84 billion deal.
Though Zellers had once been an institution among Canadian retailers, with 350 discount retail department stores, the company had been struggling in the years leading up to Target's takeover of its locations.
Sadly, unbeknownst to Target, Zellers' bad mojo was also part of the deal. While many expected Target's venture into Canada to prove successful, the company quickly racked up USD2 billion in operating losses.
As Target CEO Brian Cornell wrote in a blog post on the company's website, "Simply put, we were losing money every day." Management believed it would take another six years to turn a profit.
Thankfully, it wasn't Canada's economy that was the culprit. Instead, Target's failure was the result of its initial hubris compounded by poor execution.
The launch of Target's Canadian operations was the fastest rollout in company history, with the opening of 124 locations during its first year. As Mr. Cornell conceded, "We missed the mark from the beginning by taking on too much too fast."
By contrast, the Financial Post (FP) notes that most retailers take a more cautious approach when establishing a presence in new markets, by opening a few test stores, seeing how consumers respond, and then tweaking them accordingly.
The company also failed to be mindful of the fact that prior to Target's arrival, many Canadians had previously made cross-border treks to load up on goods at its U.S. locations. So Canadian consumers found it vexing when the company failed to replicate the shopping experience to which they were accustomed, particularly in terms of pricing and product lines, at its Canadian locations.
But as the FP writes, Target's Canadian operations were ultimately undone by logistics. Target chose to employ an entirely new set of back-end systems, supply chain infrastructure, and third-party logistics providers. That led to serious problems with maintaining proper inventory, resulting in inaccurate product-level details that caused orders to go awry as well as difficulty meeting consumer demand.
Perhaps even more stupefying is the fact that Target failed to support its Canadian operations with a website for e-commerce, something that should be an absolute no-brainer now that we're firmly ensconced in the digital age.
Finally, as the Bank of Canada has periodically observed when tracking consumer-level inflation, the Canadian retail space has recently been marked by intense price competition among retailers. When Target entered the market, it was ill-prepared for the price war that incumbents such as Wal-Mart, Canadian Tire, and Costco were willing to wage to maintain market share.
Although it's reassuring that Canada's economy wasn't responsible for Target's extraordinary flop, the company's departure will add to Canada's economic woes, at least in the near term.
For one, Target's closure of 133 stores, with a total of 15 million square feet of retail space, is akin to 15 regional malls closing simultaneously, as Ross Moore, head of research at commercial real estate services firm CRBE, told the FP.
Fortunately, landlords such as RioCan REIT (TSX: REI-U, OTC: RIOCF) have at least some protection. The Canadian real estate investment trust (REIT) owns 26 locations that are currently leased by Target, representing 1.9% of total annualized rental revenue, with an average remaining lease term of approximately 12.7 years. The company says these leases are guaranteed by Target, generally for their remaining terms.
RioCan CEO Edward Sonshine says he expects "the interruption to revenue will be minimal, if at all." And since RioCan's properties are largely situated in strong retail locations, management believes that could create an opportunity to earn higher rents when they re-lease them to other retailers, especially since, as The Globe and Mail notes, many of the leases Target bought from Zellers were well below market prices.
Subdividing Target's massive retail spaces among several tenants could also wring greater revenue from those locations that don't require a tenant big enough to anchor a mall or shopping center.
Still, that's a lot of work for the REIT to take on all at once. Bloomberg says that Target could end up selling its leases to other retailers or simply negotiate a buyout covering the remainder of its lease terms.
In the event that Target and/or RioCan are unable to find new tenants for these locations, then that could drop the REIT's otherwise high occupancy rate by as much as 4 percentage points, to 93%, according to Bloomberg.
Other landlords, however, own spaces in less desirable locations, which will make it more difficult to find new tenants. And while there are rumors of other U.S.-based retailers who are ready to make a move into the Canadian market, it's unlikely that any one retailer has the desire or scale to fill Target's void.
Target's imminent departure also puts an exclamation point on Statistics Canada's (StatCan) disappointing Labor Force Survey for December.
Last week, the agency reported that the country's economy lost 4,300 jobs in December, falling well short of the consensus forecast of 15,000 new jobs.
The unemployment rate held steady at 6.6%, just above the low for this cycle. On the other hand, that may have been helped by the fact that the labor force participation rate ticked lower, to 65.9%, its lowest level since 2001. StatCan says overall employment grew by just 1% last year.
The good news is that beneath the headline numbers, all the losses were from part-time jobs (down 57,700), while the economy added 53,500 full-time jobs. Full-time jobs are generally considered to be of higher quality than part-time jobs, owing to better pay and benefits, as well as greater stability.
Unfortunately, the employment data will likely take a hit or two at some point in the months ahead, as Target closes up shop.
That's because the retailer's Canadian operations employ 17,600 people. For context, the country's economy added an average of 15,500 jobs per month last year. So the fact that the number of jobs being eliminated exceeds a single-month tally of average job creation underscores the magnitude of the eventual layoffs.
As BMO senior economist Robert Kavcic told the FP, Target Canada accounts for about 0.1% of the country's total employment. "When it does show up in the Labor Force Survey, it's going to be a pretty big drag on unemployment in that given month," he predicted.
While it will take time for the retail sector to absorb that many people, thankfully employment in this area has been relatively steady. StatCan reports that the number of jobs in the trade sector, which includes both wholesale and retail, rose 0.4% year over year. And Target's stores will remain open during a court-supervised liquidation period, while the company says it plans to offer employees at least 16 weeks of severance pay.
This article originally appeared in the Maple Leaf Memo column. Never miss an issue. Sign up to receive Maple Leaf Memo by email.
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