January 15, 2015 / 10:55 PM / 6 years ago

After Canada exit, Target thinks small with U.S. expansion plans

Jan 15 (Reuters) - Target Corp’s exit from Canada means Chief Executive Brian Cornell will have to rely solely on the saturated U.S. market for growth, the success of which could hinge on a shift towards smaller and urban-based stores.

Target announced plans on Thursday to close all of its 133 stores in Canada and put the local business in bankruptcy. With no other market outside the United States seen as a good fit for Target, the move effectively puts an end to its international ambitions, analysts said.

The Minneapolis-based retailer said the move would free up funds to put towards bolstering its U.S. operations. Target operates 1,801 stores in the U.S., the bulk of which are large-format locations averaging 135,000 square feet.

Cornell also told a conference call he planned to accelerate the expansion of its CityTarget locations, which are based in big cities and range from 80,000 to 160,000 square feet, and a convenience store-like format called Express.

While Cornell did not disclose a numerical target for that expansion, some analysts said these smaller formats offered Target the largest potential growth, partly because they are targeting urban areas not yet exposed to Target stores.

“They could easily open in the range of 500 to 600 smaller format stores across the country,” said Craig Johnson, head of retail consultancy Customer Growth Partners. He said, however, that it could take a few years before Target “got the formula right.”

In focusing on smaller and urban-based stores, Target is taking a page out of the playbook of Wal-Mart Stores Inc . The largest U.S. retailer is planning to open 180 to 200 Neighborhood Market stores this year, making the more compact format a key pillar of its growth plans.

Target launched the first CityTarget in 2012 and currently has eight of the stores with plans to open one in Boston this year, its first on the East Coast. It has only one Express, a 20,000-square-foot store opened in Minneapolis last year.

Given the focus on smaller stores, Fitch Ratings analyst Phil Zahn said he was expecting Target’s square footage to grow by only about 1 percent annually for the foreseeable future.

“You have to build a lot of the small stores to move the needle,” Zahn said, adding that he was skeptical of the prospects for expansion outside the United States.

“If they are trying to carve out a discounter niche it may not fit in Mexico or other emerging markets. So I have a feeling that is a ways down the road.” (Reporting by Nathan Layne in New York; Editing by James Dalgleish)

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