Why Canada is giving Target heartburn

If you build dozens of beautiful department stores, but raise prices too high and leave many shelves bare, will anyone come?

For Target's (TGT) floundering Canada unit, the answer is no. The retailer's botched rollout of 133 stores in the country has turned into a major headache for CEO Brian Cornell. He pulled out all the stops over the holidays to revive Target Canada, including stuffing store shelves with thousands of new items and matching competitors' prices. The company's holiday performance there will likely factor heavily into Cornell's plans for Target Canada in the future.

Target has been analyzing every aspect of its Canadian operations, and Cornell is promising to give investors news early this year.

One option for management is to exit Canada completely, bowing out of a turf battle with Walmart (WMT), which already has a strong presence in the country. That would be a blow, with the chain opening its first store in Canada only in March of 2013. But Target has seen nothing but losses in Canada since then, and Cornell is under pressure to correct course.

How did things go so wrong up north? It all started in 2011, when Target said it would buy the leasehold interests of up to 220 stores run by Zellers, a subsidiary of department store chain Hudson's Bay. The company planned to open as many as 135 stores in Canada, budgeting an average of $10 million or $11 million to remodel each location.

But the company got tripped up by a number of major issues, starting with hiccups in the supply chain. The barcodes on items going into the company's warehouses didn't match the numbers in the computer system, for example. As a result, toys, clothes and other items piled up in distribution centers while store shelves went bare.

Target also jumped right into the retail pool in Canada, opening more than 100 stores over the course of a few months in 2013 instead of going with a slower, province-by-province rollout, Reuters reports. The company may not have realized how complicated it was to sell in Canada, and how different regions have different tastes.

The chain's prices also turned off shoppers. Analysts say that Walmart and Costco (COST) handily beat Target's prices in Canada, and customers quickly learned that better deals were elsewhere.

Quarter after quarter, Target Canada has reported steep losses that threw off the rest of the company's earnings. The company responded by firing Tony Fisher, the president of Target Canada, in May.

Righting the ship will be a tall order for Cornell, who just started at Target in August. He already has a lot on his plate, including the continued fallout from a widespread data breach in 2013. Cornell is also trying to make Target hip with U.S. shoppers who once adored the store, but were turned off when it began selling groceries and tried to compete more intensely with Walmart. "We need to be cool again," Cornell told CBS News last year.

Target Canada is going to require more than a cool injection, however. It will need more resources and more commitment than the chain may be ready to give at this point.

  • Kim Peterson

    Kim Peterson is a financial journalist covering business and the economy. She has written for several online and print publications, including MSN Money and The Seattle Times.