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01/01/2015

Should we stay, or should we go?

About three months after it experienced a data breach that compromised 40 million credit/debit card accounts and 70 million customer records, Target announced it would bring in an outsider as CEO for the first time in history.

Brian Cornell,
CEO, Target

Brian Cornell, former CEO at PepsiCo Americas Foods, took the top spot at Target in August 2014. He faced not only the data fiasco, but also questions about the viability of the retailer's recent (and troubled) expansion into Canada. A critical decision also loomed about whether Target would de-emphasize grocery in favor of apparel and housewares and recapture its "cheap chic" allure.

Cornell, a former Sam's Club CEO, made it clear on his arrival that he recognized the challenges before him. He also shared his long-term vision of making Target a leader in omnichannel retailing. But first, on to more pressing matters.

In 2011, Target spent $1.8 billion to acquire leases from now-defunct Hudson's Bay, part of holding company Zellers. Target moved quickly to open about 100 stores, a strategy that proved to be overly aggressive with the benefit of hindsight. Customers, who often encountered empty shelves due to supply chain issues, complained of higher prices in the Canadian stores than in the U.S.

As of third quarter 2014, Target has lost about $2.1 billion on its Canadian expansion. As of press time, a decision on the future of Target Canada was expected during the retailer's fourth quarter earnings call in late February.

On Target's third quarter 2014 call in November, Cornell offered some insight into the struggles there.

"While our Canadian segment continues to see robust year-over-year growth, third-quarter sales in Canada fell short of our expectations. The team in Canada has been working diligently to make improvements to operations, assortments and pricing in preparation for the fourth quarter," he said.

"But we know that to succeed in Canada, we will need a major step change in performance. The fact is, given where we are performing today, we need to see improved financial performance from every Target store in Canada over time."

Target became known as "Tar-jey" to its most loyal customers in the 1990s thanks, in part, to then-CEO Robert Ulrich and Robyn Waters, then vice president of trend, design and product development.

Their notion that a mass market department store might evolve into a fashion destination for the upmarket crowd seemed a stretch to some, but their designer housewares at department stores prices captured attention. A subsequent move into fashion-forward but affordable apparel sealed the deal.

As other retail channels like mass, drug and convenience stores began to expand their food offerings, Target joined suit, rolling out its first Super Target store in 1995. In 2009, the retailer launched its P-Fresh store remodel program, boosting the amount of fresh food in stores by 40 percent.

Recently, however, Target's food strategy has been questioned, leaving Cornell to decide whether to de-emphasize groceries in favor of the hard goods that made it famous.

"We believe we should continue to present a meaningful food offering in our stores and online, but we need to ensure that our food offering is uniquely Target and clearly differentiated from our competitors," Cornell told investors on its third quarter 2014 earnings call. "Looking ahead, we know our identity in food will continue to involve a combination of national brands and our own and exclusive brands, with increased emphasis on natural and better-for-you products."

Cornell says he plans to determine exactly what the Target guest is looking for in the food category and adjust the mix accordingly. Look for more on-trend products, like organic and natural foods, a space Cornell feels brings strong opportunities for innovation.