rfmcdonald | [LINK] "Off-Target: How a U.S. retail giant misread the Canadian market" (Reply)

Chris Sorenson of MacLean's argues that Canada's underlying economic problems are another reason for Target's withdrawal from the Canadian market.

What’s surprising about Target’s Canadian misadventure isn’t that it ran into unforeseen problems. It’s that it didn’t think there was any point in trying to fix them. To be sure, the company was being pressured by investors to improve performance following an infamous data breach in 2013. But one could hardly imagine Target abandoning the state of California, with roughly the same population as Canada, just because it experienced a few teething problems.

Although it wasn’t cited as a reason in Target Canada’s bankruptcy ﬁling, Canada’s rapidly deteriorating economic climate almost certainly hastened Target’s decision to snap a leash on its bull-terrier mascot and head home. Target’s announcement came the same day that Sony Canada closed all 14 of its stores, and federal Finance Minister Joe Oliver announced he was delaying the federal budget because of collapsing oil prices, which threaten to erase surpluses and plunge parts of the country in recession. “They’re looking at a lot of different metrics, and consumer spending would be one of them,” says Peter Chapman, a former Loblaw executive and retail consultant in Halifax. “What we’re seeing in the oil industry and the ripple effect on the economy is huge.”

A saturation of the Canadian retail market may have also factored into Target’s decision. Twenty years ago, Wal-Mart, a discount chain whose arrival was more likely to generate protests than the fawning newspaper coverage enjoyed by Target, managed to successfully colonize Canada with a similarly rapid expansion after it bought 122 Woolco stores. But much has changed since. A long line of U.S. retailers, from J-Crew to Lowe’s, have followed Wal-Mart northward in recent years, each laying a claim to a piece of Canadians’ wallets. Target, in other words, may have simply come too late to the party (to the extent there ever was one)—a realization that should have other U.S. retailers thinking twice about tapping Canada for easy growth.

The outlook for the Canadian economy in early 2015 is far worse today than it was six months ago—around the time Target Canada president and company veteran Mark Schindele was readying a turnaround plan for the struggling Canadian operation. Citing the plunge in oil prices, U.S. investment bank Morgan Stanley, for example, recently downgraded its GDP growth forecast to 1.8 per cent this year and 1.5 per cent in 2016—a full percentage point lower than its previous estimates. By contrast, most economists expect the U.S. economy to grow at three per cent over the same period, with falling energy prices acting as a stiff tailwind. In the Prairies, where the collapse in oil prices is wreaking the most havoc, there is even talk about Alberta being thrown into recession, a marked turnaround from previous years when the province led the country in employment growth. Suncor Energy has already laid off 1,000 workers and there’s likely more pain to come with oil now below US$50 a barrel.

What’s more, the oil-induced hangover could be exported elsewhere, with Ontario having become more reliant on manufacturing specialized equipment for the oil sands in recent years. It all adds up to a rather alarming picture, given that Canadian households now owe a record $1.63 for every dollar they earn. Economists have frequently warned that elevated debt levels make Canada vulnerable to economic shocks—such as wild swings in energy prices.