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TARGET CANADA CLOSING: $5.4 BILLION AND COUNTING

Target Canada closing, Target Canada, Target Canada, Target Corporation, Companies’ Creditors Arrangement Act, CCAA, restructuring of insolvent corporations, restructuring and turnaround, business failure, orderly liquidation, Zellers, starting over starting now, financial viability, financial hardship, receivership or bankruptcyTarget Canada closing was announced on January 15, 2015, when Target Canada Co. and related entities commenced court-supervised restructuring proceedings under the Companies’ Creditors Arrangement Act (“CCAA”). The CCAA, which is a Federal statute normally used for the restructuring of insolvent corporations with debts over $5 million, in order to preserve all or a portion of the business and jobs. This time, rather than being used for a restructuring and turnaround, it is being used to provide for an orderly liquidation.

What went wrong? Target Canada is an indirectly wholly-owned subsidiary of the United States-based retailer Target Corporation. Target Corporation was founded in 1902 as Dayton Hudson Corporation, and is one of the largest retailers in the United States of America. You would think they had the experience to avoid such a disaster. It seems that everything went wrong and right now Target Canada estimates that this business failure will result in a loss of $5.4 BILLION!

The mistakes made by Target Canada and its US based parent seem to be very basic. The mistakes made leading to the Target Canada closing can be summarized in the following 9 point list:

1. Walk before you run – Target Corporation’s leadership saw expansion into Canada as an opportunity to extend the Target shopping experience to a broader group of people and thereby expand its revenues and profits. They also believed that there were significant opportunities in the Canadian market that made their strategies well positioned to succeed.

However, rather than starting off with a few stores in select Canadian markets, they began in 2011 by purchasing the net amount of 135 store leases from Zellers Inc. for a net purchase price of $1.6 billion. Perhaps a more modest start would not have put so much financial pressure on Target Canada from the very beginning.

This is reason number one leading to Target Canada closing.

2. Failure to implement your plan in a reasonable period of time – Although Target Canada entered Canada in 2011 through the purchase of the leases, they first undertook necessary renovations and leasehold improvements before Target Canada opened at many of the former Zellers locations under the Target banner. The first stores did not open until March 2013 – more than 2 years after the decision was made to acquire the Canadian locations.

This obviously gave Target Canada’s competitors a long lead time to plan for the Target invasion. The major competitors include Wal-Mart, The Bay, Sears, and also major supermarket chains like Loblaws, electronic retailers like Best Buy and Future Shop, and home improvement stores like Canadian Tire, Home Depot, Rona and Lowes.

This is reason number two leading to Target Canada closing.

3. Miscalculation of Demand for your Product – The opening of that many stores resulted in market densification – particularly in large cities served by more than one Target store – and reduced the impact of many of the new store openings. There were too many stores for the marketplace.

This is reason number three leading to Target Canada closing.

4. Poor Supply-Chain Management – Target Canada encountered significant supply chain issues. Stores were often: (i) out-of-stock for important merchandise, resulting in consumer dissatisfaction; and (ii) over-stocked on other merchandise, necessitating discounts to manage the inventory and impairing operating margins. These supply chain issues created a poor first impression. Therefore, many potential customers appear to have returned to or maintained the shopping practices they had before Target’s entry into Canada where such problems didn’t exist.

This is reason number four leading to Target Canada closing.

5. Tinkering with a proven modelCanadian consumers expected Target Canada to follow Target’s U.S. prices, which is a significant source of loyalty to the Target brand. Rather than match or reflect the U.S. prices in Canada, its pricing model was designed to compete with other similar Canadian retailers and included generally higher prices than Target’s U.S. stores. This appears to have limited Target Canada’s ability to distinguish itself in the competitive Canadian retail marketplace. It appears to me that Target Canada did not attempt to distinguish itself on a superior customer experience and did not attempt to distinguish itself in its pricing model.

Many of the Target Canada suppliers, either directly or through related entities, supplied merchandise to both the Canadian stores and Target Corporation’s U.S. stores, and many of those cross-over vendors have operations in Canada. Couldn’t Target have used its buying clout to not have Target Canada’s pricing model to be the same as its Canadian competitors?

This is reason number five leading to Target Canada closing.

6. No online presence – Need I say any more? Any home-based business owner knows you need to have an online presence today.

Although Target US has an established and successful online retail business, Target Canada elected to focus on the build-out of the physical stores and improving store operations, and did not prioritize the establishment of an online retail business for Canadian customers. This turned out to be a significant competitive disadvantage as the retail market moves beyond traditional bricks-and-mortar stores. By the time Target Canada woke up, it was too late.

This is reason number six leading to Target Canada closing.

7. Too little too late – Beginning in Spring 2014, Target Canada added internal resources and consulted at great length with a variety of strategic, operational and financial advisors in an attempt to improve Target Canada’s operations and identify strategies that could make the Canadian operations viable in the long term. Target Canada could not identify an option that would result in TCC breaking-even in the next five years. Were any of these financial viability studies conducted before the net spend of $1.6 billion on leases in 2011? Would not those same studies have identified what senior executives should have done to have a successful Target Canada launch?

This is reason number seven leading to Target Canada closing.

8. Not understanding the marketplace – In 2011, Canada had a population of 34.4 million. In comparison, this was slightly smaller than the population of the State of California at the same time. The financial returns for Canadian stores were expected to be in line with historical returns for U.S. store openings. This typically meant losses until the completion of the first full year of store operations, and profits thereafter. Target Canada never made any money. For the 2013 and 2014 fiscal periods, Target Canada’s losses totalled $3.6 billion (before interest and taxes).

This is reason number eight leading to Target Canada closing.

9. Management – Based on the above, clearly Target management miscalculated the success of an expansion into Canada out of the US. No doubt other US retailers who may be considering an expansion into Canada, must look at this expansion failure before embarking on implement their own expansion into Canada.

This is reason number nine leading to Target Canada closing.

At the time of filing, Target Canada had 17,600 employees. Because this is an orderly liquidation and not a restructuring and turnaround, those jobs will not be saved as a result of Target Canada closing. No doubt these job losses will create financial hardship for many of these employees’ families. To its credit, Target US has established a trust fund for payment of the Target Canada obligations to its employees. This trust fund is in addition to the proceeds from the sale of the Target Canada assets.

The lessons to be learned from the Target Canada closing story is that every business, regardless of size, must not only have a properly vetted business plan before implementing any business strategy, but management must have carefully studied and tested it to ensure as best as possible that management understands the marketplace it wishes to operate in and that the implementation of the plan will be successful for the business.

Ira Smith Trustee & Receiver Inc. acts for both debtors and secured lenders, in the performance of financial and viability assessments for financially challenged businesses. The earlier that we are consulted, the better the chances are that we can construct and assist management in implementing its plan to return to financial health without the need for receivership or bankruptcy proceedings.

Contact Ira Smith Trustee & Receiver Inc. before your business problems lead to your business closing. The earlier you begin to deal with debt, the more options you’ll have. We approach every file with the attitude that financial problems can be solved given immediate action and the right plan. Starting Over, Starting Now you can live a debt free life.

UPDATE: CHECK OUT OUR NEW VLOG BY CLICKING ON:

SEARS CANADA IS CLOSING: THE #1 REASON YOU HAVE TO RUN AND NOT JUST WALK TO REDEEM YOUR GIFT CARDS AND CREDITS

Note: The facts contained herein regarding Target Canada Co. (“TCC”) and Target Corporation, and the expansion of Target Corporation into Canada was derived from the Affidavit of Mark J. Wong, General Counsel and Secretary of TCC, sworn January 14, 2015 in support of TCC’s CCAA application.

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