After a half-century, Target takes first step toward conquering Canada

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MISSISSAUGA, Ont. -- Shortly after lunch on a rainy August afternoon, about 500 Target employees marched into a makeshift white tent.

It was a vintage Target event: bright-red couches, photographs with a stoic Bullseye the Dog, endless tables of sushi -- and ketchup-flavoured potato chips.

"Did you also try the poutine?" an employee asked a reluctant guest, referring to Canada's favourite concoction of french fries, cheese curds and gravy.

Target's close attention to detail -- right down to the local cuisine -- reflects the gravity of what is arguably the boldest project in its 50-year history. Beginning in March, the chain will open the first of 124 stores in Canada, its first expansion beyond the United States. The move is Target's first big step toward becoming a global retail force.

But Target's international ambition has less to do with bragging rights than basic survival. Not only is it running out of room to grow, but recession-worn American consumers haven't been as eager to open their wallets, much to the benefit of low-priced competitors such as Walmart and Amazon.com.

"We've always been focused on growing our core business profitably," Target Canada president Tony Fisher said in an interview from his Mississauga office. "But we always knew at some point that international expansion was going to be a part of our history."

Target has been able to hold its ground by focusing on savvy marketing and exclusive partnerships with prominent designers. But even that magic seems to be fading, as a recent collaboration with Neiman Marcus flopped. Target's website also is a work in progress: Key items were out of stock during the critical holiday shopping season.

So Target needs Canada. In addition to steady economic growth, the country has weathered the global financial crisis better than most nations. Target's potential in Canada is the reason investors have largely ignored its recent holiday struggles.

"If Target really wants to grow, they will need to expand outside of the United States," said Amy Koo, an analyst with Kantar Retail, a consulting firm near Boston. "That will go a long way to stretch their customer base."

In the past five fiscal years, Target has averaged less-than-impressive annual sales growth of 2.7 per cent. With Canada, the company projects annual revenue growth of more than 4.5 per cent in 2013 and 2014.

"We continue to view Target as one of the best-positioned investments in 2013 as the company 'manufactures' accelerated earnings growth and cash flow in the coming two years from the launch in Canada," Christopher Horvers, an analyst with JPMorgan Securities, wrote in a research note.

Canada's familiarity with Target makes it a safe place for the company to learn the ropes of international retailing. If Target can't succeed in America's northern neighbour, it would be hard for the retailer to make it work in, say, Singapore.

"I think it's exciting that Target is coming to Canada, because I don't think we ever had an equivalent of Target," said Lina Duque, a 35-year-old social-media and marketing manager in Toronto. "Target seems to be like Walmart with low prices, only cooler."

In one sense, Target's entry into Canada seems natural, given the country's proximity to the U.S. and the cultural and economic ties between the two nations. Already, plenty of Canadians cross the border each day to shop at Target. Almost 30,000 Canadians carry Target's ubiquitous Red Card.

But look past Canada and it's not hard to imagine Target eventually expanding to other rich nations such as Germany and Italy and to emerging economies such as China, India, and Brazil. Unlike its chief rival Walmart, which has aggressively pursued overseas expansion for years, Target has stuck to its home turf.

The company's next foreign destination will depend on several factors, including growth potential, competition and familiarity with the market. Expanding into Europe might be a logical next move, but Target is likely to face stiffer competition and weaker economies there. Third World countries can offer better growth prospects but also present higher risk because of corruption, language barriers and cultural sensitivities.

So for Target to go global, it makes sense to start in a familiar place.

Canada "is a better match to the ground," Kantar Retail's Koo said.

That's not to say the expansion will be a cakewalk. For one, Canada is big, spanning six time zones and 10 disparate provinces. Consumers also have varying tastes.

"Yes, there's a lot of cross-border shopping, but retailers like Target need to ask, 'What changes do I need to make to really attract the Canadian consumers, not just the cross-border shoppers?' " said Manu Sarna, general manager of retail for Aeroplan, a loyalty consulting firm in Toronto. "Proximity doesn't mean same."

Despite jokes that Canada is essentially America's 51st state, the country is more diverse and tricky than most think. Consumers in Canada's eastern provinces focus mostly on price, while shoppers in the western provinces, buoyed by oil wealth, prefer more expensive merchandise.

As well, many Canadians are still unfamiliar or uncomfortable with the American style of big-box retailing, Sarna said.

"I find the large stores overwhelming," said Candyce Bakke, 29, a hair-salon owner in Saskatchewan.

With his square jaw and close-cropped hair, Bryan Berg looks and sounds more like a military officer than an international aficionado. But Berg, Target Canada's senior vice-president for stores, is probably the closest thing the company has to a global store manager.

Berg was responsible for Target's entry into Alaska and Hawaii. In some regards, that experience was similar to opening in Canada, with one big difference: Target opened seven stores in Hawaii and Alaska, versus a plan for up to 200 stores in Canada over 10 years. Target must also wrestle with issues such as logistics and information technology.

Alaska and Hawaii were states "where people were aware of Target, but they didn't have any first-hand knowledge or experience of us. In Canada, we were also asked to establish a culture and a business in a market where we didn't have a (previous foothold). I think Hawaii and Alaska prepared us for how we are going to approach this in Canada," Berg said.

But Canada's vast size, at 9.8 million square kilometres, poses tricky questions for a retailer that depends on precise management of goods from suppliers to distribution centres to stores.

In Quebec, which often acts as its own country, software designers must create systems in French and English. Determined to protect its French culture and history, many Québécois flirt with the idea of independence every generation or so. So Target stores in Quebec will use both French and English, not to mention carry a healthy dose of local merchandise.

Target always knew it would need to venture beyond both its time zone and comfort zone. The big question was where. The company initially thought about Europe, Asia and South America. Then lightning struck.

In January 2011, Target spent $1.85 billion to acquire the leases of up to 220 stores belonging to Zellers, a once-popular but fading general merchandise chain in Canada. The deal instantly gave Target access to some of the best retail locations across the country, including urban malls and suburban shopping centres. Target was so confident about its windfall, it even sold some leases to archrival Walmart.

Normally, a retailer that enters a foreign market and builds stores loses money for several years before turning a profit. With the Zellers properties, Target enjoys a mass of stores that can quickly add to the bottom line. Target Canada expects to be profitable by the end of 2013.

"The Zellers deal was an incredible opportunity," Fisher said. "It gave us the scale we wanted to have in a relatively short period of time."

In spring, it's officially planning to have Target stores open in former Zellers locations in the Shoppers Mall in Brandon and Kildonan Place Shopping Centre and Southdale Centre in Winnipeg. By next winter, the company said it will open at the former Grant Park Zellers location.

-- Minneapolis Star Tribune

Republished from the Winnipeg Free Press print edition January 25, 2013 B10