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 United States'.
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.
Major U.S. retailers like Sears 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.Comment on this story
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."
AP Retail Writer Anne D'Innocenzio reported from New York. Follow Anne D'Innocenzio at — http://www.Twitter.com/adinnocenzio