Target Sees Backlash in Canada Over Prices

The three “pilot” stores that opened in Ontario in March have received mixed reviews as complaints about the pricing have flowed in from customers.
 
Minneapolis-based Target is set to open 124 new stores across Canada by the end of this year, but at least one analyst thinks perceptions of the company will need to change to ensure Target’s future success in the Great White North.
 
“After a strong opening for Target Canada, traffic has slowed below expectations in recent weeks, driven partly by Canadians’ perception that prices are too high, both relative to Wal-Mart and Target’s U.S. locations,” Paul Trussell, retailing analyst at Deutsche Bank Securities, Inc., said in a Tuesday research note. “While shoppers appreciate the higher-quality assortment, especially in discretionary categories, the complaints on pricing were alarming.”
 
Prices have historically been higher in Canada stores compared to their U.S. counterparts due in part to taxes, labor, real estate costs, and, most recently, to the new tariffs on goods entering Canada from the federal government’s 2013 budget, according to Trussell. Prices at Target’s Canada stores are an average of 3 percent higher than at the U.S. locations.
 
Canadian customers have been most pleased with the assortment of women’s clothing, kids wear, electronics, toys, and home items, but are disappointed in the amount of footwear sizes, the lack of a clearance area, weak food offerings, and the lack of a separate plus-size section in apparel, according to Trussell’s report.
 
Trussell argues that it may take some time for Canadian shoppers to become comfortable with Target. The local shoppers have a “pricing perception issue” caused by the lower prices at Wal-Mart and at U.S. Target locations, according to the report. Canadian Wal-Mart locations had a pricing advantage on 65 percent of items compared to the new Target Canada locations.
 
Trussell believes this perception can eventually be overcome, and if it is, that there is a big opportunity for Target in the Canadian market because Canada has very similar retail spending per capita as the United States.
 
“We believe Target will be able to compete just as effectively in Canada as they have in the U.S.,” Trussell concluded in the report.
 
Target expects its Canadian operations to become profitable by the fourth quarter of the current fiscal year, which ends in February. Target expects to generate $6 billion in sales and $740 million in operating earnings by 2017 from its Canadian outlets.
 
But one analyst believes Target’s plan to open all 124 stores within a year is too ambitious. “We think the expansion is high risk as Target will have little time to test its Canadian format . . . and will have to test it in real time,” Jason DeRise, an analyst at UBS Investment Research, said in a recent research note. “Making adjustments at scale is much more costly than making changes in a few test stores and then rolling it out.”
 
While DeRise believes Target will make a good first impression, he thinks that in order to hit its long-term goal, the company will need to increase its gross margin and revenue per square foot.
 
“We believe Target’s revenue goals for Canada are realistic, but will likely come at a lower margin for a longer period of time than the market expects,” he said.
 
Meanwhile, Target recently announced that its total first-quarter adjusted profits would likely come in below its previously announced expectations. It expects the results to be slightly below “the low end” of its predicted $1.10 to $1.20 per share due to low sales in “seasonal and weather-sensitive categories.”
 
Target is Minnesota’s second-largest public company based on revenue, which totaled about $72 billion for the fiscal year that ended February 2—up 5 percent from the prior year. It operates 1,778 stores across the United States. In addition to opening stores in Canada this year, Target also plans to add 15 to 20 new U.S. stores.