Target’s failed entry in to Canada
Lessons learned from Target's botched entry into Canada.
In January 2015, Target announced it would close all 133 of its stores and exit the Canadian market after only two years of operation. With the original goal of turning a profit within a year of opening, CEO Brian Cornell declared that Target wouldn’t become profitable until at least 2021 and would need additional funding to keep the company operating. Target decided to pull-out of the Canadian market and re-focus its attention on the US market by pursuing smaller stores in urban areas and by improving its e-commerce model [i]. Target withdrew from the Canadian market amassing a write-down of $5.4 billion and a total net loss of $2 billion [ii].
How did this happen? How did the company known as Tarzhay, manage to thrive in the US economy, but fail miserably in the Canadian market? To understand this better, we should look at Target’s core business model and see how the operating model failed to execute.
Business Model
Expect more, pay less
Target was similar to other retailers such as Walmart and Kmart, as they centered their business models around the traditional discount retailer value chain. Target differentiated itself from the competiton by offering unique and higher quality products affiliated with designer brands and sold alongside standard discount store products [iii]. Unlike Walmart, Target attracted customers across varying income levels and presented their products in a clean upscale environment that further enhanced their image of being a quality provider.
Target charged the same price for discount goods as found in competing stores such as Walmart, and then offered upscale products primarily in the home furnishings, apparel and kitchenware areas. While these products were more expensive than the standard fare found in discount stores, they were significantly cheaper when compared to offerings found in department stores or fashion boutiques.
Operating Model (Canada)
Inventory planning: Target swiftly opened 124 stores in the first two years of operation and never implemented a proper supply chain system. As a result, its shelves were overstocked with certain products, and was severely under-stocked in other areas thus leaving its shelves bare [iv].
Pricing: Canadian shopper sentiment was truly and deeply affected when Target introduced the same products available in the US at a markup in their Canadian stores. About three-quarter of Canadians live within 160 km (100 mi) of the US border, and with increasing allowances of bringing back products, Canadian’s frequently visited Targets south-of-the-border and generally viewed the company with high regard. The clean, upscale environment with quality offerings at discount prices, provided a breath of fresh-air when compared to local Canadian discount retailers [v]. Canadian shoppers were eagerly optimistic when news of Target’s foray in to Canada first broke. For numerous reasons, one of which is pricing, Target broke the hearts of Canadian shoppers, who would have otherwise guaranteed the company great success!
Location, Location, Location: The reason Target was able to launch over a 100 stores in two years is because they had taken over the lease of now defunct retailer Zeller’s. The Jan. 2015 Fortune article states, “But the reality is that most Zellers stores were dumpy, poorly configured for Target’s big-box layout, and were in areas not frequented by the middle class customers Target covets.” Travelling to Targets was a hassle for urban Canadian shoppers and hence making the stores easier to avoid.
Competition:
Anticipating Target’s arrival, various discount retailers with an established presence in the Canadian market such Walmart, Loblaws, Canadian Tire, etc. improved prices on offerings and introduced a wider variety of selection thus squeezing Target out of what was already a competitive space [vi].
Ultimately, poor execution on various fronts, and increasing losses forced Target to withdraw from the Canadian market as quickly as they had entered it.
Sources
[i] https://hbr.org/2015/01/why-targets-canadian-expansion-failed
[ii] http://fortune.com/2015/01/15/target-canada-fail/
[iii] http://www.ftsmodules.com/public/texts/valuationtutor/VTchp3/topic8/topic8.htm
[iv] http://www.slate.com/blogs/moneybox/2015/01/15/target_closing_in_canada_these_pictures_sho
w_why_it_failed.html
[v] http://www.cantechletter.com/2015/03/the-overlooked-reason-target-failed-in-canada/
[vi] http://globalnews.ca/news/1774769/heres-why-target-failed-in-canada/
Nice post Sid, I think this is going to be an HBS marketing case some day! I followed this story fairly closely as well, and what I found most interesting was that many of the problems that Target Canada faced in its launch (supply chain, pricing and locations) could and should have been anticipated from the outset. If a reasonable person had thought about these questions with any level of rigor, I would be surprised if they would not identify some if not all of these issues.
Do you have a perspective on why Target didn’t foresee these problems? Or perhaps they were overly confident in their own ability to replicate the US business model and execute in another country?
Thanks for the comment Roger. I think Target was a somewhat naive entering the Canadian market. Given the geographical proximity of the two countries, Target assumed that Canadian shopping habits would be similar to that in the US.
The other big issue I think affected them was the lack of trying to understand local demographics. They simply took over existing leases of Zeller’s stores without understanding the need for a Target in the given area. Other US retailers such as Walmart, Costco and Home Depot have successfully launched operations in Canada but at a much slower pace. By gleaning information from in-store sales and customer preferences, they were able to gradually expand operations to other parts of Canada.
Sid, this is a great post!
It sounds bizarre that a company with as much experience as Target would take a business and operational model that worked well for them, had customers happy and apparently had Canadians excited as well but botch it up so badly by essentially mismanaging the very core of what makes them Target (expect more pay less)! This might be really apparent looking in hindsight, but what’s interesting is that they failed to ‘go back to their core’ even as performance slid. I also wonder if there were other factors that hindered their success in the Canadian market? Perhaps what I’m getting it was if it was a choice on their part to depart from their ‘core’ or were there other factors (e.g. taxes / currency, regulatory etc) that required them to change their model?
Enjoyed the post!
Great post Sid ! I agree with the points Shaharyar and Roger raised. It’s interesting to see how successful companies assume that a winning recipe in one geography will work in another. At the same time, Canadians were really excited to have Target open stores in their country, but, as you said, were really disappointed with what target had to offer especially in terms of product and pricing. Do you think that the high expectations of Canadians created more problems for Target than if they didn’t have high awareness in the Canadian market ? And, do you think Target suffered from the fact that Canada was already an established market ? I hope that they will remember the lessons from this failure as they try to enter other international markets !
Whoa. I had no idea. Cool post. I love the “meta” questions – how in the world can an organization screw up this badly. And Canada is not Outer Mongolia, right? We should know how to do this. I need to do a case on this!!!
Interesting post Sid! Great read on how a successful US company (pre data theft) failed to expand into a close, neighbor!
Questions/comments:
How were competitors such as Wal Mart able to expand and be successful in Canada?
What do you think was the biggest cause?
Inventory planning – Given the company’s history and experience, why did they not implement supply chain mgmt. properly? Was it a lack of understanding consumer demand or supply chain coordination in new market? Why wasn’t company able to fix this?
Pricing – how large was the mark up? was it defendable? Did customers actually save when taking into account transportation and convenience? Or was it more of an emotional let down? Why wasn’t company able to adjust pricing in two years?