Target Corp's (NYSE:TGT) Canadian adventure is an even bigger and more costly debacle than previously thought. The retailer's first venture outside the U.S. has been so badly botched that Target actually created a YouTube.com video apologizing to Canadian customers.
Yet even the apology video is a failure; news reports indicate that it has become a laughingstock in the Canadian media. The video shows clips of a well-stocked Target store and associates apologizing to customers. The reaction from Canadian consumers wasn't what Target wanted.
One typical comment related by Canadian broadcaster CTV seemed to sum it up: "So far Target is the biggest retail failure Canada has ever seen."
The Biggest Retail Failure Canada Has Ever Seen
Target investors can certainly agree with that statement. The retailer reported a return on equity ratio of 11.61% in April 2014, down from 17.24% in April 2013. One year of operation in Canada slashed Target's ROE by nearly 6%.
In contrast, Wal-Mart Stores Inc. (NYSE:WMT) reported an ROE of 21.71% in April 2014, down from 23.69% in April 2013. That's a 2% decline despite Wal-Mart's well publicized problems.
The reason for Target's ROE decline can be traced back to Canada; The Toronto Star reported that Target Canada lost $941 million in 2013, its first year of operation. During that period, Target Canada reported $1.3 billion in sales.
The Wall Street Journal pegged Target's Canada loss figure even higher at $1.6 billion. If The Journal is correct, Target's Canada losses exceeded its sales.
If that wasn't bad enough, Target had a tiny 4.4% profit margin in Canada, The Star noted, because it had to result to deep discounting just to attract customers during the Christmas season. Part of Canadian customers' complaints about Target is that its prices north of the border are not that much better than Wal-Mart.
Target's Old-Fashioned Business Strategy
The worst aspect of Target's Canadian adventure is the outdated thinking behind it. Target's interim CEO, John Mulligan, told The Canadian Press that his company has no plans to start an online retail operation in Canada this year; instead, it plans to open more brick and mortar stores like the ones already losing money.
Target's Canadian website consists of a weekly flyer, a few coupons, and some pictures of merchandise in the stores. That's right; Target's only online activity in Canada seems to be the apology video. It seems to be repeating the same costly mistake over and over again.
This at a time when Wal-Mart's online sales increased by 30% in 2013 to $10 billion. Target was ranked the number 18 online retailer by InternetRetailer.com. Wal-Mart was number four and rising fast.
Wal-Mart's strategy of investing in next generation retail initiatives, such as expanded e-commerce and same day delivery, seems to be paying off. Target's strategy of aggressively expanding its physical stores and pretending that the Internet doesn't exist is falling flat.
One has to wonder what century Target executives are living in. The Canadian expansion was staged like it was still 1995 and Amazon.com (NASDAQ:AMZN) was still operating out of Jeff Bezos' garage.
The failure in Canada seems to be the result of a highly dysfunctional corporate culture described in a recent Wall Street Journal article. In the piece, reporters Paul Ziobro and Serena NG show how Target has adopted a bureaucratic mindset that has effectively stifled creativity and innovation.
The Canadian debacle proves that the challenges facing brick and mortar retailers like Target are even greater than we thought. One has to wonder how Target can remain a major player if its leadership team cannot even grasp anything as basic as the importance of online sales.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I conduct some online retail sales through Amazon.com.