Target

There’s more to Target Canada’s failure than meets the eye

By Mark Satov
Founder and leader, SATOV Consultants

Well, that was quick. Less than two years after it launched its Canadian expansion, Target Corp. is closing all of its stores across the country. The American retail giant is expected to post US$5.4 billion in pretax losses on discontinued operations for the fourth quarter of 2014. Target has only itself to blame for this massive failure. The company never got things right in the critical early stages of its Canadian adventure, disappointing customers again and again.

Expect less, pay more?

By now there’s consensus on a few main reasons why Target Canada pulled up stakes and folded like a cheap tent. If you’ve caught my recent media appearances, you’ve heard me speaking about them. Let’s quickly recap:

Business News Network    “Target Pulls out of Canada”
Canadian Business    “Retailers Brace for a Flood of Cheap Goods as Target Clears Out”
CP24    “U.S. retailers eyeing Canada can learn lesson from Target’s failure, experts say”
CBC News    “Why Walmart Hit the Bulls-Eye Target Missed”
CBC    “Target Liquidation Starts Today”

First, Target bit off more than it could chew. It stampeded into the Canadian market—one it didn’t understand—by opening 124 stores. “We missed the mark from the beginning by taking on too much too fast, ” CEO Brian Cornell admitted.

Other retailers, such as J.Crew, Nordstrom and Japan’s Uniqlo have succeeded in new markets by taking a more modest approach, so they can deal with operational and value-proposition issues during the early days.

Second, the Target misfire is proof that execution is everything. From the start, the company suffered major operational setbacks—a problem compounded by its aggressive expansion strategy. Supply chain problems wreaked havoc with product assortment, which led to understocked stores and unimpressed customers.

Target also went with a footprint that didn’t match its value proposition. Execution is easier when your chosen format is one you’re used to. In Target’s case, this is buying land and planting a box on it. The Zellers stores it inherited were not only different from typical Target locations, but they came in a mix of formats and sizes.

Third, as Target learned the hard way, hype can kill you. Our research showed that Canadians were excited to see the retailer come north of the border, while Target’s own surveys revealed that 70 per cent of Canadians knew its brand and 10 per cent were already heading stateside to visit its stores.

By feeding the hype around its Canuck launch, Target stoked high customer expectations. But sadly, its assortment here wasn’t differentiated, as in the U.S. That eroded its value proposition with Canadians. Many viewed its selection as on par with Walmart’s, while associating Target with higher prices, even if neither was necessarily true. Canadians felt they were getting the opposite of Target’s promise to “Expect more. Pay less. ”

Shooting blanks

Not all Target’s mistakes are as simple as that. Here are three overlooked reasons for Target’s Canadian debacle:

1. International expansion and acquisition is a learned skill

We constantly talk to our clients about managing their growth and market entry strategies in a way that is sustainable and positions them for long-term success. That’s no easy feat. Just ask Target.

Before Canada, the company had never expanded internationally or made a major acquisition. Here it was in a new country with a new supply chain for fresh foods; a new regulatory environment for things like prescription drugs; a new consumer, culture and language; a new store footprint; and, a new population density and seasonality and climate.

Compare Target with Walmart, which has had its failures internationally; think of its exit from Germany and its early struggles in the U.K. At least Walmart had a fighting chance in Canada, for three reasons. One, its management team, organizational structure and systems were geared to manage international subsidiaries. Second, Walmart’s investors were ready for some foreign ventures to go well and others to flop. Third, Walmart didn’t assume that the U.S. model would work abroad, and it had a habit of making its concept thrive in different formats.

2. Target showed up with a teaching mentality, not a learning mentality

Let’s face it: Americans have defined the business world. They’re leaders in many industries and have embedded commerce in their culture in a way that I think will allow them to keep that edge. But some U.S. players assume that, because theirs is the world’s top economy, the foreign markets they enter comprise a mass of boors and yokels who will be ever grateful to finally learn the American way.

This attitude tends to exist in corporate cultures where international expansion isn’t the norm. Companies like GE, IBM and certainly Walmart know how to go into a new market, learn and teach what’s required, and adapt as needed. Not Target. It came in fast and brash, kicked the Zellers management team to the curb and assumed it had the master plan.

Contrast Walmart’s takeover of 122 Woolco stores in 1994. “The stores are being run by Canadians, with the needs of Canadian consumers top-of-mind,” the company stated in its annual report.

It pays to pay attention to the locals. In our next newsletter, we’ll talk more about how a listening culture helps companies succeed.

3. Target took the car into the shop rather than doing roadside repairs

After the Zellers liquidation sales, the stores sat empty for as long as two months. Target was sprucing them up to fit its model and planogram (well, sort of).

There are several problems with this approach. Thanks to lost Zellers sales, Target was behind the eight ball on day one. Also, because Zellers was a mass merchant, it benefited from habitual shoppers. When you close the store, Grandma finds a new place to have coffee and buy dish soap. And when you open again, you have to convince people to come back. Finally, with the stores closed and Target in a remodel mindset, I bet timelines and budgets went sideways in some cases.

As I can attest from having helped convert those Woolco stores two decades ago during my former life in the construction business, Walmart didn’t make the same mistakes. The company’s construction manager berated me about delays—and forbade us from working during business hours. By day Walmart had to sell to Woolco’s customers, and by night my men could paint the ceilings.

If Target had tasted international success and failure before it came to Canada, it might have avoided these fatal errors. But with its impatience, arrogance and big remodelling gamble, the company set itself up for disaster.