In Canada: U.S. retailers get the cold shoulder

For years, Canadians would cross the border to the U.S. to shop at Target. Exporting its cheap chic there seemed like a no-brainer.

But a year after opening more than 100 stores north of the border, Target has found business isn’t so easy.

Shelves are hard to keep stocked. Shoppers complain the prices are higher than at U.S. stores. Sales have been weak, and the retailer lost nearly a billion dollars in Canada for the year.

Cracking the Canadian retail market, about one-tenth the size of the United States’, looks simple. The two countries are neighbors. They are culturally similar. And Canada’s malls generate 20 percent more sales per square foot, because there are fewer of them.

But Target’s difficulties expose the challenges of doing business in Canada that have bedeviled other retailers. Some of the problems are old, like the web of costly regulations. But there are new ones, such as a slower Canadian economy and increasing competition that’s making the retail landscape look a lot like the U.S. economy.

The troubles are not what stores expected just a few years ago during the depths of the recession, when they saw Canada as a risk-free way of expanding internationally and re-energizing sales growth.

Now, Target is increasing marketing to convey it has unbeatable prices, while trying to make sure it has the right merchandise at the right time.

“I think there was an assumption that Target would come in and be everybody’s favorite store, but that hasn’t happened,” said Antony Karabus, president of Hilco Retail Consulting, who is based in Toronto.

Target has to fight hard to win over Canadians like Melanie Randall, a Toronto resident who crosses the border four times a year to Buffalo, N.Y., for shopping sprees at the store.

As for the Canadian Target stores, “It’s not the same,” said Randall, 42, who was recently browsing Target at Toronto’s East York Town Centre. “I don’t feel like I get the same deals or shopping experience.”

Target’s tough time in Canada isn’t unique.

Big Lots Inc. is closing its 78 Canadian stores, which it bought just two years ago. Executives declined comment, but Karabus blamed increasing competition amid discounters. Best Buy announced last year it was closing 15 of its 260 stores in Canada and cut about 5 percent of its workforce in the country as it tries to revamp its strategy.

Even Wal-Mart Stores Inc., which has been entrenched in Canada for more than two decades, has seen its sales falter.

One big problem: U.S. retailers tend to underestimate the much different employee benefit laws and other rules, including language regulations. All product packaging must be in both English and French. In Quebec, stores are required to make French more prominent in marketing and signs.

Canada also has a tenth of the population of the U.S. but covers a larger area. That makes distribution more costly.

Aside from those complications, Canadian shoppers are under new financial pressures. The Canadian dollar has weakened, forcing retailers to charge higher prices. Because 90 percent of Canadians live within an hour’s drive of the U.S. border, they are used to crossing over to compare deals, according to Diane Brisebois, president and CEO of Retail Council of Canada.

Competition is also heating up, particularly in discount retailing. Homegrown Canadian standbys like Dollarama and Canadian Tire are formidable rivals.

Canadian Tire, which operates nearly 500 stores in the country and stocks housewares, barbecue grills and other items besides tires, has increased its marketing and deepened its assortment of home decor and other areas.

Canadian Tire, which has been in business nearly 100 years, has loyalty with shoppers who might remember buying their first bike there, said Jim Danahy, CEO of CustomerLAB, a retail consultancy in Ontario.

Each store is also owned and operated by a dealer so it tailors its merchandise to the local market, whether farm town or big city. The stores also offer convenience. Ninety percent of Canada’s population lives within 15 minutes of a Canadian Tire store.

Given the challenges, upscale Nordstrom just postponed the Canadian debut of its discount Rack stores by two years until 2017 as it prepares to open its first full-line department store in Calgary this fall.

Some, like Wal-Mart Canada and Marshalls parent company TJX, are digging in.

Wal-Mart is adding 35 super centers in the current fiscal year, bringing the count to 395 by the end of January 2015.

Wal-Mart reported in February a 1.7 percent drop in revenue at Canadian stores open at least a year in the fourth quarter. Wal-Mart cited price competition and weak spending.

To lure shoppers, it’s pushing $1, $2 and $3 products. Karabus said price wars have hurt Wal-Mart, but business is still very solid.

Canadians looked financially healthier only a few years ago.

Sears expanded into Canada through a joint venture in the early 1950s , while several other major retailers including Home Depot and Wal-Mart entered Canada in the 1990s. But momentum increased following the Great Recession as the Canadian economy was hurt less by the financial meltdown.

In fact, as consumer spending in the U.S. started souring, Canadians continued to buy, nearly catching up to their American counterparts based on retail sales per household, said Colliers International, a global real estate firm.

That’s a big deal. For years, Americans were much bigger spenders than Canadians. As recently as 2004, Canadian retail sales per household equated to US$8,000 while south of the border, Americans’ spending was 50 percent higher at about $12,000 per household.

But after both countries saw spending plunge in the recession, the gap is again widening, with American retail sales per household at about $14,394; it’s $13,014 for Canadians, Colliers said.

That’s because Canadians are deeper in debt than Americans, on average, because many bought big-ticket items like homes at low interest rates. That has left less room for impulse spending.

It now would take a little more than a year and a half for Canadians to pay off their debt using all their income after taxes, compared with one year for Americans, Dana M. Peterson, director of global economics at Citi Research.

Linda An, 36, who recently bought a house in Toronto and is dealing with higher daily living costs, said she’s less confident. She regularly shops at American clothing stores in Canada like Banana Republic and Forever 21, but prices matter. As for household goods, she looks for the best price.

“I’m just being even more conscious looking for deals,” An said.

The environment has pressured American retailers to closely monitor prices, which are generally 10 percent to 15 percent higher in Canada than at U.S. stores, Danahy said.

At clothing retailer Tommy Bahama, which operates nine stores in Canada, the Canadian store had prices 15 percent to 20 percent higher than its U.S. stores. It’s now bringing its prices even with those at its U.S. stores after acquiring its Canadian business back from its licensee.

“(Canadians) are used to watching currency fluctuations and using that to their advantage,” said Doug Wood, Tommy Bahama’s president and chief operating officer.

Analysts are closely watching Target Canada. Target said the stores carry a majority of the merchandise shoppers see at U.S. stores. And Target said it is improving its selection and fixing out-of-stock issues.

It has much work ahead: Target’s Canadian business recorded a $724 million loss on lower-than-expected sales of $1.3 billion for the year ended Feb. 1.

A key to Target’s plans: convincing shoppers it’s priced just right.

Target said it’s not planning to permanently cut prices. The company said prices are in line with those of rivals in Canada, including Wal-Mart, and in some cases are lower. But it acknowledges they’re generally higher than at its U.S. stores.

“We are right on where we need to be in Canada,” Gregg Steinhafel, Target’s chairman and CEO told investors. “Sometimes people compare prices from Canada. That would be like comparing prices in Boston to what we have in rural Iowa.”

Talk to us

More in Herald Business Journal

The 214-foot tall cranes work to unload their first cargo shipments at South Terminal at the Port of Everett on Thursday, April 8, 2021 in Everett, Wa. (Olivia Vanni / The Herald)
Renovated Port of Everett terminal gets first cargo customer

The 655-foot Westwood Columbia is the first ship to call at the newly upgraded South Terminal dock.

Project Roxy is a proposed 2.8 million square foot distribution center that would be built on a 75-acre parcel at the Cascade Industrial Center. The rendering depicts the proposed project at 4620 172nd Street in Arlington from a northwest perspective.
1,000 jobs: Amazon to open distribution center in Arlington

The company is the tenant behind Project Roxy, a $355 million building at the Cascade Industrial Center.

Garry Clark, the new CEO of Economic Alliance Snohomish County (Kevin Clark / The Herald)
At a tough time, a new CEO leads local economic development

Garry Clark has taken the helm at Economic Alliance Snohomish County, where job one is pandemic recovery.

Kathy Coffey (left) and Courtney Wooten
Leadership Snohomish County offers racial equity conference

The fifth annual day-long Step Up: Moving Racial Equity Forward will be held online on April 30.

FILE- In this Sept. 30, 2020, file photo, a Boeing 737 Max jet, piloted by Federal Aviation Administration (FAA) chief Steve Dickson, prepares to land at Boeing Field following a test flight in Seattle. Boeing says it has informed 16 of its customers that they should address a possible electrical issue in certain 737 Max aircraft before using them further. Boeing said Friday, April 9, 2021, that the recommendation was made “to allow for verification that a sufficient ground path exists for a component of the electrical power system.” (AP Photo/Elaine Thompson, File)
Boeing: possible electrical issue in some 737 Max aircraft

The company said that the new problem was unrelated to the flight-control system.

Aerospace supplier with Everett site files for bankruptcy

Wichita-based TECT Aerospace filed for Chapter 11 and plans to sell an Everett manufacturing facility.

Edmonds grocery store workers may soon earn hazard pay

Some employers are required to increase wages by $4 an hour, the city council voted Tuesday.

What local firms are doing to promote diversity and equity

Here’s how some of Snohomish County’s biggest companies and organizations say they are making a difference.

Boeing President Ron Woodard, fifth from left, breaks ground with Boeing officials to make way for the Boeing Commercial Airplane Group Headquarters Office Building at the Longacres Park site in Renton Wash. Wednesday, May 14, 1997. (AP Photo/Loren Callahan)
For sale: Boeing’s Commercial Airplanes headquarters in Renton

A large warehouse on the Bomarc property in Everett also is for sale.

Snehal Patel, Global Head of Cell Therapy Manufacturing at Bristol Myers Squibb, stand outside the facility on Monday, March 29, 2021 in Bothell, Washington. A Bristol Myers Squibb facility in Bothell is one of four facilities in the United States where the company supercharges a person's T-cells to better fight blood cancers. The facility uses a virus  -- a viral delivery system -- to add punch to an individual's T-cells. The T-cells are then returned to the person better-equipped to destroy cancer cells.  (Andy Bronson / The Herald)
Cancer patients nationwide send their blood cells to Bothell

At a Bristol Myers Squibb lab, the cells are altered and returned to patients fighting non-Hodgkin’s lymphoma.

Brett Smith, CEO of Propeller Airports, shares a scene from the March 4, 2019 opening of the commercial airline terminal at Paine Field during a Lynnwood Chamber of Commerce virtual gathering on March 17, 2021. From a screenshot.
Passenger service at Paine Field is gradually bouncing back

Terminal operator Propeller Airports foresees a possible upswing by June as air travel rebounds.

Terrie Battuello (Port of Everett)
Port of Everett economic director to join Economic Alliance

Terry Battuello will fill a newly created economic development position at the public-private nonprofit.