Friday, January 16, 2015

Why Target Failed in Canada

The big news in North American retail this week was Target pulling out of Canada, shutting all of their 133 stores, and putting about 17,600 employees out of work. Now I, like many Canadians, loved to shop at Target whenever we were in the USA. When Target initially announced it was expanding to Canada, like many Canadians I was very excited. Yet, that excitement of many Canadians could not prevent Target from being a colossal failure here.

[image credit: CBC]

Why did Target fail, when another US retail giant, Walmart, succeeded? Now I am not a business expert, even though I play one on TV in this blog, but with my MBA knowledge, let me give my own reasoning, as a Canadian consumer.
  1. Canada is not USA

    Target just opened north of the border, without seemingly doing any appropriate research as to what will and won't work in Canada. They just thought a city in Canada was like any other American city. Even those that travel rarely will tell you despite the language and customs, Canadians and Americans are really foreigners to each other. For example, Canadians don't mind travelling to many places on one trip to get what they want, while Americans are more of a one-stop-shopping mentality. Many other mistakes, such as importing winter jackets that worked in the mild winters of USA, but would not work in Canada, and watching them languish on the shelves, were also committed.
  2. Target is not Walmart

    Canadians loved Target because it offered merchandise that wasn't found in Walmart or other places in the USA. The USA, being a bigger market, often had a larger selection and variety than Canadian retailers. The "Target experience", for Canadians, was going on something akin to a 'treasure hunt' and finding good deals - merchandise that was a cut above the Walmart and others, while being competitively priced. When Target opened in Canada, they just tried to be another Walmart. Their selection was nothing like the selection in Target stores in the US, and their pricing was way, way higher than the US prices. People wanted the "Target experience" in Canadian Target that they enjoyed in the US, and they didn't get that. What they got was another Walmart, just red in colour. Well, if I want Walmart, I will just go to Walmart.
  3. Target opened in locations where the doomed Zellers had been

    Zellers was a doomer retailer that had failed across Canada. It had been a staple of the Canadian retail market ever since I was here. When Zellers failed, Target bought those locations and opened a Target there. So in effect they chose a location that didn't work for the previous retailer, and tried to make it work for them. And as they say, location matters. For a customer in Scarborough, Toronto, the nearest location was outside of Scarborough - and that's a huge area. I have three Walmarts within five minutes - for a Target I would have to drive 20 minutes. And still Target had 133 stores open. That tells me they had too many stores open, spread too wide - when perhaps the better strategy would have been to concentrate on one target (one city or one province) and then expand organically while they iron out their problems (kind of like how Walmart had operated in the last 20 years).
  4. They did not have IT

    Information Technology. Target did not have a website for Canada. Whoever didn't think this was important should be fired ten times over. If I wanted to check whether an item was in stock at my nearby Walmart, I could do so. Not so for Target. Moreover, IT means strict control over your inventory, pricing and stocking of shelves (you are a retailer after all). I remember going to a Target and seeing a bunch of empty shelves (where were the goods), and then another where the most popular items were all sold out (where is your inventory) and the items that were there, were more expensive than Walmart or ToysRUs.
And finally, they exit strategy says a lot about why Target is no. 2 and Walmart is no. 1. Walmart too faced significant challenges initially in Canada but they persevered, adapted and prospered. Target chose to flee. Now I don't have access to all of their numbers, but if I was the CEO, I would try closing the unsuccessful stores only, and concentrating on a smaller but more successful stores, and then trying to grow organically.


Yawar Amin said...

I doubt that would work ... Target's strategy, like Walmart's, is to operate from a position of power when dealing with suppliers. It can only do this when it is ordering at a certain scale. Keeping only a few stores open here and there would greatly reduce its purchasing power and force it to pass on increased costs to the consumer. That would put another nail in its coffin where Canadians are concerned.

mezba said...

@Yawar, I see your point. I was hoping they could use the combined US+Canada to have a good economies of scale. With NAFTA, moving most products across the border shouldn't be a big deal for Target.

Do check out Nordstorm, which has come in Western Canada with only one or two shops, and looking to expand organically. As well as the Lego stores, which opened one, then two and now three stores in high density markets before exploding.

Yawar Amin said...

Hi Mezba. Hmm, yes a lot of bigger players regularly move goods from US to Canada. I would guess Target didn't want to do that because they didn't want it to become a business model of Target US subsidising Target Canada? Maybe I'm wrong here.

Just took a peek at Nordstrom. They seem to be a high-end retailer, targeting people who might go to The Bay. Again I'm guessing here, but maybe their target customers have bigger pockets?

Finally, with Lego you don't have the problem of managing lots of suppliers in different countries--they must be buying fairly uniform raw materials from a limited number of suppliers, and wielding awesome purchasing power over them. They are most likely a monopsony in their market.

Purchasing and manufacturing must be very centralised in at least North America--and notice that we don't actually see a lot of Lego stores; they're mostly distributing through other retailers and Lego toys are consistently the most expensive toys (I've actually browsed through the selection at the Target in Mississauga's Square One mall). This indicates to me that Lego also wields a lot of power over their buyers--including ones like Target!