Target’s exit leaves suppliers and pharmacists with debts and doubt, Marina Strauss

…already mobilizing to push the company for a better deal. They formed an association to fight Target, charging on a website they created that their pharmacy franchise operations were “a failed business model for pharmacy franchisees.” Target was “forcing franchisees to continue to bleed money, while giving periodic financial injections to stay alive and knowing that one of the only ways out is by declaring bankruptcy,” the pharmacists said on the site. The pharmacists’ message in 2014 was eerily prescient.

The Globe and Mail
January 23, 2015

Target’s exit leaves suppliers and pharmacists with debts and doubt
Marina Strauss


A Target store in Saint-Eustache, Que., is shown on Thursday, Jan. 15, 2015. (Ryan Remiorz/THE CANADIAN PRESS)

When U.S. retailer Target Corp. this month announced its decision to exit Canada, the shocking news reverberated across the country. Just two years into its major cross-border expansion, the company was suddenly calling it quits.

To some who did business with Target Canada, however, the company’s misguided strategies and financial pain were evident early on. Long before the retailer pulled the plug, Target had created rifts with pharmacists, suppliers and other stakeholders, often steamrolling along without seeking input, industry insiders say.

Among the first to feel the pinch were Target’s franchised pharmacists. They had each sunk more than $50,000 into inventory to team up with the retailer for its much-touted arrival in 2013, encouraged by projections of high-volume prescription sales and heavy shopper traffic.

But about a year after Target’s launch in the spring of 2013, some struggling Target pharmacists, grappling with lower-than-expected revenues, were already mobilizing to push the company for a better deal. They formed an association to fight Target, charging on a website they created that their pharmacy franchise operations were “a failed business model for pharmacy franchisees.”

Target was “forcing franchisees to continue to bleed money, while giving periodic financial injections to stay alive and knowing that one of the only ways out is by declaring bankruptcy,” the pharmacists said on the site.

The pharmacists’ message in 2014 was eerily prescient. Last week, Target Canada sought bankruptcy-court protection from creditors and is now moving swiftly to close its 133 stores by May, letting go 17,600 employees. Despite $7-billion of investments in its operation here, Target couldn’t see a path to profit until 2021.

The grim outlook was partly formed during an executive visit to the Canadian stores. On the weekend before Christmas, typically the busiest shopping days of the year, Target Corp.’s new chief executive officer, Brian Cornell, visited several stores in Ontario and Quebec. Strolling the aisles, he found “not as much traffic as we would have expected,” a company source said.

But Target’s pharmacists, suppliers and other stakeholders had felt cracks in the operations long before Mr. Cornell’s pre-Christmas store tour.

Even so, the company’s abrupt decision to stage a wholesale retreat from Canada remains a mystery to some, who thought Target was slowly starting to turn a corner. Some suppliers said that in the month leading up to the chain’s Jan. 15 bankruptcy-protection filing, they received merchandise orders from Target that were considerably larger than previous ones in 2014.

“They were really starting to get it together,” said Gary Grundman, president of Garbo Group Inc. in Toronto, which supplied private-label fashion accessories, such as jewellery and scarves, to Target Canada. Garbo is owed $39,160. “I think there is a back story here that we don’t know about.”

Santo Fata, vice-president of Sager Food Products Inc. in Montreal, which is owed more than $11,000 – he calculates $16,000 – said he was finally beginning to see “wonderful” sales numbers of its cooking oils at Target by late November, receiving its last order the day before the filing.

The inventory orders “were steady, regular and getting larger,” Mr. Fata said. “We were happy.”

Now some suppliers owed hundreds of thousands of dollars are considering ways they can force Target to return their unsold goods that were shipped within 30 days of the filing – rather than have the inventory be included in the chain’s liquidation sales.

The vendors would have had the right to try to reclaim unsold merchandise that had been delivered 30 days before the filing had Target filed for protection under the Bankruptcy and Insolvency Act, said Ivan Bern, a lawyer for Elfe Juvenile Products in Montreal, which is listed as owed $38,294. (Mr. Bern says the debt is $147,758). But instead, Target filed under the Companies’ Creditors Arrangement Act, which doesn’t have the 30-day goods provision.

Target spokesman Eric Hausman said this week its Canadian team “was operating the business as normal until the day of the announcement” of the filing. Mr. Cornell and other Target executives weren’t available for interviews.

From the start, Target was plagued with supply chain problems that often left its store shelves empty, while it grappled with customer complaints of high prices. “We missed the mark from the beginning by taking on too much too fast,” Mr. Cornell said last week.

He said the retailer had “undertaken a massive effort” to ensure that it entered the crucial holiday season with levels of stock that were at “an all-time high.” But Target didn’t see as much of an improvement during the holiday season as it had been seeking, he said.

While wrestling with its supply challenges, Target also faced increasingly disgruntled franchised pharmacists, many of whom were struggling with mounting losses. They initially had been assured by Target that the stores would enjoy heavy traffic, which they counted on for a healthy prescription business. But by the spring of 2014, some Target pharmacists had formed the Pharmacy Franchisee Association of Canada to take on Target.

By the end of 2013, Target had agreed to provide ailing franchised pharmacists with annual payments of up to $110,000, a source familiar with the situation said.

However, “only some received this while others who were in a similar or worse financial situation did not receive anything,” said Stavros Steve Gavrilidis, a Target pharmacist in Windsor, Ont., and PFAC’s acting secretary.

Now many of the Target pharmacists face an uncertain future. Other drugstore retailers aren’t generally rushing to pick up Target prescription lists, suggested Clint Mahlman, chief operating officer of London Drugs Ltd. of Richmond, B.C.

Not many Target pharmacists have lucrative lists of prescription customers because they didn’t have the two to three years usually needed to build them up, he said.

Target typically shared little sales information with suppliers about how business was going, Garbo Group’s Mr. Grundman said. “They didn’t really take advantage of the knowledge in the market. … They just came in here with a preconceived idea of how they were going to land and market in this country.” Still, suppliers were starting to see improvements in recent months, Mr. Grundman said.

And not all creditors see the Target experience as a disaster. Michael Budman, co-owner of fashion chain Roots Canada Ltd., said it successfully re-ignited the Beaver Canoe line, which generated strong sales at Target. Now Roots, which is owed $433,248 in royalties, will “assess all our options” for selling the brand elsewhere.

Some industry observers said Mr. Cornell may have had little upside in hanging on to Target Canada because the stumble would have quickly become part of his legacy with no quick fix in sight.

Sager Food’s Mr. Fata said he doesn’t blame Target for deciding to leave Canada given the anticipated long turnaround period.

“It was a little shocking and disappointing,” Mr. Fata said. “But it’s a tough market.”

But Rick Chad, president of executive search firm Chad Management Group, said he helped recruit some executives for Target – plucking people from secure jobs – and found the retailer’s officials he dealt with “wouldn’t take anybody’s advice.”

“In my estimation, they threw in the towel too early,” Mr. Chad said. “I think they came in in a ridiculous way – they ran before they walked. Americans sometimes seem to think they know more about Canada when they come here than Canadians do.”

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