The Target Canada Collapse and Aftermath

The Target Canada Collapse and Aftermath

Canadian Grocer Blog Entry: February 28, 2015 (here)

In January of this year, Target announced that it was declaring  bankruptcy in Canada.  Since then, the majority of media attention has been focused on dissecting want went wrong and the fact that 17,600 Canadians are losing their jobs . To my surprise, very little has been written about the aftermath of this tragedy, in terms of its impact on the many stakeholders  across the county that will be damaged  by Target's decision to pull out of Canada.  Behind the scenes, there is an entire supply chain of suppliers and stakeholders that are currently dealing with the fallout of this historic event.  This article provides a synopsis of a few events that we are aware of. In fact, Target Canada's failure is having a significantly negative impact on many different businesses and even cities.

Some of the stakeholders hardest hit by the collapse of Target Canada include:

1. Sobeys Canada:  Target Canada outsourced its food distribution to Sobeys for the supply of frozen food, dairy, and dry grocery products, including national brands and Target's private label products.  Sobeys is a retailer and a wholesaler so the loss of case shipment volume for 133 Target stores will definitely hurt the company's distribution center efficiencies in Alberta, Ontario and Quebec.
1. Sobeys’ existing perishables distribution facilities are conventional (i.e. manual) operations so any reduction in case volume at these facilities will likely result in a corresponding labor reduction.
2. It is also important to keep in mind that Sobeys has invested very heavily into implementing fully automated dry grocery distribution centers in Vaughan, ON and Terrebonne, QC.  The business case for deploying a fully automated distribution center is partially predicated on having a high volume of merchandise being throughput by machines instead of human labor since this equipment can cost upwards of $80 Million per facility.  Now $80 Million buys a lot of labor so maximizing volume through the distribution center is critical to justifying the capital investment.  In North America, the investment into fully automated distribution centers has only been made by several firms (e.g. Sobeys, Kroger, Meijer, Target USA) because of the fact that these facilities are insanely expensive.  This sudden reduction in weekly case volume will certainly not help Sobeys into the future as the company continues to make investments into distribution center automation.  
3. Editors Note:  In the end, Sobeys’ ended up benefiting from the Target collapse by acquiring Target's Calgary distribution center for a purchase price that was small relative to the cost of initial construction.
2. Eleven Points Logistics (EPL): Most Canadians have probably never heard of this company but EPL provided Target Canada with essential supporting services for Target's distribution network that replenishes inventory to the stores.  Eleven Points is a third party logistics (3PL) company that was created by its US parent company Genco for sole the purpose of operating Target's three distribution centers across Canada.  This means that EPL is responsible for managing the distribution operations and the labor force within the following distribution centers:
• Cornwall, ON: Target constructed a brand new state of the art 1.35 Million Sq Ft regional distribution center to support 41 stores in Eastern Ontario, Quebec, New Brunswick, Nova Scotia, PEI, and Newfoundland.
• Milton, ON: Target constructed a similar 1.32 Million Sq Ft regional distribution center to support 45 stores in Ontario west of about Kingston. 
• Balzac, AB: Target constructed a new 1.30 Million Sq Ft regional distribution center to 46 service stores from Vancouver to Winnipeg. 

With the downfall of Target Canada, the Eleven Points Logistics business is essentially out of business since Target was their main customer, if not their only raison d’etre.  Our figures indicate that 1250 Canadians will lose their jobs once Target's supporting distribution centers are expected to close around April, 2015.

3. The City of Cornwall, ON:  Target Canada's massive 1.3 Million square foot distribution center in Target is sitting on a 170 acre site in the heart of Cornwall's industrial park.  Cornwall has been on a healthy roll over the past couple of decades as several important retailers such as Walmart, Target, and Shoppers Drug Mart have built significant facilities here (as well, Loblaws has invested into a large plot of land which is being prepared for future use).  These retailers have established distribution centers in Cornwall to support retail stores in Quebec, Ottawa, Eastern Ontario and the Maritimes.  The closure of the Target Cornwall distribution center means that this facility and its material handling equipment will be up for sale. It is no secret that a building of this magnitude will be a tough sell as few companies in Canada could possibly require this much space in a remote location such as Cornwall. For example, Walmart already has a 1.4 Million sq. ft. distribution center in the same industrial park and Canadian Tire has an expensive automated distribution center just across the Quebec border.  I am hard-pressed to think of a Canadian business that would require such a large and specialized building. It will be interesting to see how quickly a potential suitor is found. If the facility stays on the open market for a long time, or if it sells for a very low figure, then this does not bode well for Cornwall.  Not only does the town lose 350 jobs, but the risks associated with investing in industrial facilities in Cornwall will be exposed which will be a consideration for future prospective investors.  (Editor’s Note: On this prediction I was wrong.  Walmart Canada stepped in and purchased Target’s Cornwall distribution center to increase its total square footage in Cornwall to a whopping 2.7 Million square feet.  Walmart was seeking additional capacity in Eastern Canada but the addition of such a large facility came as a great surprise to me.)
• In our opinion, the risk of Target not being able to sell its Milton distribution center is low.  This GTA region has a very high land cost combined with a low availability of large footprint industrial real estate so there should be a healthy market demand for this facility.  (Editor’s Note: As predicted, the Milton distribution center was sold relatively quickly to the home hardware retailer Lowes which will use this distribution center to launch their entry into the Canadian market.)
• On the other hand, the Balzac AB facility is a real question mark in terms of the market demand for such a large building.  If the oil industry was booming then the chances of selling this facility would certainly be much better.  Keep in mind that 1.3 Million square feet is  an enormous footprint relative to the size of the real estate market in this region, so I wouldn't be surprised if a smart real estate investor eventually buys this facility and then carves it up into multiple smaller leased facilities. (Editor’s note: In the end Sobey’s stepped in and purchased this distribution center at a great discount.  Sobeys will most likely leverage the new Target distribution center to consolidate and modernize their existing Calgary distribution operations which consist of a 788,000 sq. ft. building which was picked up through their acquisition of Safeway Canada and a smaller 208,000 sq ft multi-temperature facility in Calgary.  They will apparently start operations in this facility in Mid-2017)
4. Lastly, let us not forget the multitude of suppliers and creditors that Target owes money to.  Any bankruptcy filing freezes out all creditors from collecting on what they're owed until a judge approves a repayment plan. Of course the governments and then the banks always get their pound of flesh before the rest of us.  In January, a Global News report pointed out that Target owes the Canada Revenue Agency and the provincial governments millions in taxes. As per the report, Target Canada's unpaid tax bill from the CRA is $12 million. The B.C. and Quebec governments are owed $2.6 million and $6.5 million, respectively.  This will likely be one of the largest bankruptcies in Canadian retail history so there will likely be many suppliers, landlords and investors who will suffer substantial losses as a result of Target's pullout from Canada.

All in all, this is bad news not just for Target Corporation, it is bad news for many thousands of other people who are adversely affected by these events.  This business failure is also profoundly bad for Canada as many American retailers are now acutely aware of how difficult it is to turn a profit north of the border . In the United States, Target is a highly respected company and this is a catastrophic failure for the company.  Based on my discussions with executives in the US retail community, this is more than just a passing footnote in the history books.  Many U.S. retailers are now backing away from their plans to invest into expanding their retail businesses into Canada and this does not bode well for the country's economy.

Marc Wulfraat is the President of MWPVL International Inc.  He can be reached by clicking here.  MWPVL International provides supply chain / logistics network strategy consulting services. Our services include: supply chain network strategy; distribution center design; material handling and automation design;  supply chain technology consulting; product sourcing; 3PL Outsourcing; and purchasing; transportation consulting; and operational assessments.