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Summary

  • Target's first international expansion, into Canada, has so far been a disaster. The company has taken heavy operational losses.
  • A combination of executional errors and overconfidence seems to be the reason behind its troubles.
  • However, if Target perseveres and learns from its experience, it can reverse its fortune and become successful. Canada still represents a large opportunity for the retailer.

In spite of being headquartered in Minneapolis, MN, not too far from the border from Canada, it is now obvious that US-based "cheap chic" retailer Target (NYSE:TGT) misunderstood the north country and has scored a massive black eye. This, together with the data breach Target had to deal with last year, has left the retailer reeling. Is this a temporary setback, or will Target throw in the towel and retreat back to its homeland?

A big part of the problem seems to be a combination of biting off more than it can chew, an underestimation of the competitive landscape in Canada, and an assumption that Canadian consumers are just like Americans. Target entered Canada with a bang, opening a large number of stores (124) in just over a year, in a country which has the geographical breadth of the US, but a population less than that of California.

In addition, Canadian households have on average about 15% lower disposable income than US households. Canadian income inequality is less than the US, with more shoppers in the lower middle class, while in the US income classes are spread wider (Target's demographics skew more upper middle class). Sales taxes are high in much of Canada (e.g., 13% in Ontario, 15% in Quebec) which depress consumption.

At the risk of over generalization, Canadians' shopping habits are different from Americans'. Canucks are, in general, more deliberate and value-oriented than their richer American cousins. Also, the cost of doing business in Canada is higher for retailers, given higher minimum wages, geographical distances and unique labeling requirements (such as bilingual labels), which creates dis-economies of scale.

Canadian Entry - Too fast, too late?

Target entered Canada by buying out the leases of Zellers, a discount Canadian brand of the Hudson Bay Company. Zellers was a decidedly downmarket retailer, and was getting squeezed to death between Wal-Mart (NYSE:WMT) and the dollar stores, such as Dollarama. Target could not have entered Canada via a Greenfield strategy. Acquiring a weak Canadian retailer with a presence was really the only way in. In fact, Wal-Mart had adopted a similar strategy in Canada in the 1990s when it acquired Woolco stores and converted them to Wal-Marts. Wal-Mart paid US$335 million for 122 Woolco stores in 1994. Target paid US$1.8 billion for 220 Zellers locations in 2011. Obviously the cost of entry was a lot higher; Zellers was a weaker player than even Woolco at that time, and the completion, after the Great Recession, much more brutal.

Many of Target problems were execution mistakes. Inventory was not in sync with advertising when it started its rollout into Canada last year. Shoppers who were drawn to new stores in response to flyers were annoyed when advertised goods were unavailable for purchase. Initial pricing was off, as goods were higher priced in Canada than the US (understandably, because of the higher cost of doing business in Canada). This garnered a lot of bad publicity in both traditional and social media outlets. (Here, see a resultant apology video the company released.)

Target lost $963 million in Canada in 2013. In Q2 2014, segment comparable store sales declined 11.4%, and operating loss totaled $200 million. Total operating losses in the Canada segment have exceed $1.4 billion since launch. Comparable performance is expected to improve as the firm anniversary's initial periods, but the fact that Target's reputation may have been damaged in Canada remains a obstacle to driving sales higher over the near term. It may be many years before the Canadian segment begins to show operational profit. The question is, given the drubbing it has taken, does Target have the stamina to stick it out in the Great White North, or will it give up and retreat, as Napoleon aborted his attempted conquest of Russia?

What will Target have to do to succeed in Canada

  1. Perseverance. Stuff happens in life. We have to deal with it. So do companies. Sometimes you just have to persevere. Microsoft (NASDAQ:MSFT), in its early days under Bill Gates, always took a minimum of three tries to get it right. Apple (NASDAQ:AAPL) had a near-death experience before it came roaring back to become the most valuable company on Earth. Target has changed its leadership in the US as well as Canada. This is Target's first international expansion. It has learned a hard lesson: that Canada is not the 52nd state. It must learn from its mistakes and reboot. Wal-Mart has also failed in many countries, including Germany, Korea, and Russia, and had to withdraw.
  2. Details. They say retail is detail. Target has to gets its pricing and execution right. While customers understand prices will be higher in Canada vs. the US due to higher taxes, wages, benefits, and so on, Target cannot be seen as price-gouging as compared to other retailers. It needs to put bulletproof systems in place to ensure that it does not disappoint customers again. Unfortunately, this means higher costs, and perhaps years of profitless slog in Canada. Target now needs to stop growth plans and really focus on getting its existing stores to deliver.
  3. Unique Selling Proposition. Target has to listen carefully to its Canadian customers and recognize that they are not the same as Americans. And it has to be willing to change. Every market has a unique local flavor. Target has to develop a unique niche with Canadians as it has with Americans. Why should the consumer go to Target instead of one of the dozens of other retailers?
  4. Develop strong local management that has freedom to respond to their market and is held accountable and well rewarded for results. It should carefully evaluate the imposition of American processes on employees and suppliers. Many of these just don't work in the Canadian culture. For example Canada does not have an "employment at will" culture and legal system. American HR practices can and will bite you back in Canada. Imposing idiosyncratic American supply chain requirements on suppliers will cause delays in fulfillment.
  5. Adapt to local customs. For example, Canadians don't respond well to coupons, but are avid internet shoppers. Target should ramp up its online presence. (Currently it has no e-commerce capability in Canada.)
  6. Do not underestimate the competition. Canada has world-class retailers who have been battle-hardened over the years. They are not going to be pushovers.

Steps Target is taking in Canada to right the ship

Target has appointed Mark Schindele as the President in Canada. It has recently introduced "price match" for its goods to counter its initial reputation of being "expensive". Target will now honor price matches with several major online retailers, including Amazon, and make it easier for people to claim lower prices at the cash register, rather than having to walk to the customer service counter.

A broader line of exclusive products will stretch from the apparel section, with agreements to carry more lines of local designer clothing like Roots, and a wider selection of maternity items. Target will also begin to stock plus-size clothes.

Canada represents a potentially large opportunity. Companies such as Sears Canada are retreating, and there is opportunity to take market share, especially in apparel and soft goods, Target's forte. Target has to persevere, get its value proposition right, and adapt to the uniqueness of Canada. If Target perseveres and succeeds in Canada, it will create an internal confidence and culture for international expansion. If it does not, it risks losing its appetite to become a multinational company for a long time, if not forever.

Source: Can Target Succeed In Canada?