Target Out of Canada

target-canada-office

There is a reason why Canada had long been a popular first step in international expansion of American companies, and for Target it was no different. Numerous restaurant chains, such as Baskin Robbins, Burger King, Dairy Queen, Little Caesars, McDonalds, Popeyes, Quiznos and Wendy’s have been active in Canada for years, some since the 1960s. Retailers were also drawn to Canada: Sears arrived in 1953 through a joint venture, and Costco, Home Depot and Walmart arrived through acquisitions in 1986, 1992, and 1994, respectively.  In 2010, more than ten percent of Canadians had shopped Target stores in the United States, and 70 percent of the population was familiar with the Target brand. Therefore, it made sense that Target would be drawn to Canada for its first foray into international expansion.

Target followed the acquisition model established in Canada by Cosco, Home Depot, and Walmart. It purchased the Canadian discount chain Zellers in 2011, and organized Target Canada with headquarters in Mississauga, Ontario. It planned to convert over a hundred of the former Zellers locations into new Target stores. After two years of planning, Target opened its first three stores in Ontario on March 5, 2013. Target rapidly opened stores across Canada over the next 21 months, eventually growing to 133 stores. Yet on January 15, 2015, Target Canada filed for bankruptcy, citing huge losses of over two billion dollars and its inability to meet payroll.

What happened to Target in Canada?

Some news accounts – especially from Canadian sources – blamed differences between the Canadian consumer and the American consumer for Target’s failure. Others blamed Target’s rapid expansion across Canada coupled with its historical shortcomings in supply chain management, along with marketing problems. The problem is that from a strategy standpoint, these are radically different challenges that require completely different strategic treatments. Was Target’s strategy failure in Canada really more of a cultural problem, or an operations management and marketing failure?

To examine the possibility of the former, I’ll broaden the scope beyond cultural concerns and examine the entire CAGE framework, defined by the distance in cultural, administrative, geographic, and economic factors between two countries. A CAGE analysis will tell us whether Target failed to take into account the differences between Canada and the United States in devising its Canadian strategy.

From a geographic standpoint, Canada and the United States share the largest international border in the world, with a length (excluding the Alaskan border) of nearly 4,000 miles. About 75 percent of Canada’s population lives within 100 miles of the border with the United States. The population distribution across Canada somewhat resembles the United States in an east-west sense, with greater densities on the coasts and more scattered population centers in the middle. Therefore, geographic distance between Canada and the United States in the CAGE framework is about as small as it can get; the challenge is one of managing a supply chain that either must address the east-west population distribution within Canada, or manage customs in crossing the border between Canada and the United States. Neither is an unfamiliar strategic problem for any company with supply chain experience.

From an economic standpoint, the cost of labor is generally higher in Canada than in the United States. Minimum wages are higher in Canadian provinces, and the taxation burden is higher. Previous to Target’s entry, the Canadian dollar was weak relative to the US dollar; however, a stronger Canadian dollar and a robust economy following the financial crisis of 2008-09 made the Canadian market very attractive for entry. Supply of real estate is more limited in Canada versus the United States; the number of lenders for retail development is fewer, so access to capital is harder. (This is a reason why many retailers choose to enter through acquisitions–the path chosen by Target in Canada.) Canada’s economy is comprised of regional commercial centers that are far apart, and to some extent, independent of one another. Yet in 2011 sales per square foot in Canadian malls were nearly 50 percent greater than sales per square foot in American malls. Therefore, despite the higher cost of labor and limited real estate market, other economic conditions such as exchange rates and sales per square foot made an entry into Canada very attractive in the early 2010s. (Foreshadowing hint: how Target managed expectations around price differences relative to the different cost structure is a point I’ll discuss later.)

From an administrative standpoint, there are some differences between Canada and the United States in language, labeling and other regulatory requirements. All mandatory labeling information must be in English and French (the official languages of Canada), and measurements must use the metric system. Provincial franchise disclosure laws have a higher requirement for disclosure that can trip up an American company if it is not well versed in those disclosure requirements. Yet Canada follows rule by law just as the United States does. (One of the quaint differences is that lawyers robe in court in Canada, but at least don’t wear wigs.) Although the differences (robes included) can add to costs, none are considered a major impediment to strategy.

Lastly are the cultural differences. Some of Canada’s population hubs are immensely multi-cultural; others are less so. Consumer differences are sometimes driven by the generally colder weather. However, the population distribution and consumer differences are not markedly different than that obtained by taking a northern slice across the United States, and accounting for this difference strategically should have been straightforward for a company founded and headquartered in Minneapolis with a store presence in a similar variety of settings across the United States. Target’s market research prior to its expansion into Canada indicated that customers wanted the “true U.S. Target.” Based on a smart approach to accounting for regional differences and stated consumer preferences, addressing the above cultural differences should not have been an insurmountable strategic problem.

The above CAGE analysis recognizes that Canada does have uniquely Canadian factors. However, none of the CAGE dimensions – cultural, administrative, geographic, and economic – were the key contributing factor to Target’s downfall in Canada. Instead, its downfall was a problem in executing a manageable strategy in operations management, along with a failure in marketing. The company has admitted it botched management of its supply chain with a rapidly expanding store footprint across Canada, which often led to empty shelves. Marketing, long considered Target’s forte, focused too much on conveying the sheen and trendiness of the Target brand. Target took its same “Expect More. Pay Less” tagline to Canada, and it is reasonable the Canadian consumer took that to mean they would expect more and pay less than they did in the United States, now that Target was in Canada!  Target augmented its slogan with “Target Loves Canada”, yet failed to set consumer expectations that because the cost structure is slightly higher in Canada, prices would be, too. These are a failing of operations management and marketing strategies that have nothing to do with the CAGE differences between Canada and the United States.

The bottom line is that Target’s customers in Canada wanted the exact same Target they experienced in the United States, and they didn’t get that.  Target failed in its operations management and marketing strategies in delivering to its Canadian customers. That is why Target in Canada failed.


References

Austen, I. and Clifford, S. (2012, September 14). American Retailers Face Challenges in Expanding to Canada. Retrieved from http://www.nytimes.com/2012/09/15/business/american-retailers-expanding-to-canada.html?_r=2

Canada Facts. National Geographic. Retrieved March 20, 2015 from http://travel.nationalgeographic.com/travel/countries/canada-facts/

Evans, P. (2015, January 15). Target closes all 133 stores in Canada, gets creditor protection. Retrieved from http://www.cbc.ca/news/business/target-closes-all-133-stores-in-canada-gets-creditor-protection-1.2901618

Hanuka, B. (2014, March 5). The Dangerous Mistake U.S. Retailers make in Canada. Retrieved from http://www.huffingtonpost.ca/ben-hanuka/us-retailers-canada_b_4901030.html

Kopun, F. (2013, November 22). Cool Canadian welcome hurts Target’s profits. Retrieved from http://www.thestar.com/business/2013/11/22/cool_canadian_welcome_hurts_targets_profits.html

Kopun, F. and Sparks, R. (2015, January 15). Target Canada lessons: Six ways not to expand into Canada. Retrieved from http://www.thestar.com/business/2015/01/15/target-canada-lessons-six-ways-not-to-expand-into-canada.html

Prentice, B. and Dahlhoff, D. (2015, January 23). Why Target’s Big Canadian Expansion Went South. Retrieved from http://knowledge.wharton.upenn.edu/article/why-targets-canadian-exspansion-went-south/

Target Canada. Wikipedia. Retrieved March 20, 2015 from http://en.wikipedia.org/wiki/Target_Canada

Townsend, M. (2015, January 22). Why Target is Raking Up Its Maple Leaves. Retrieved from http://www.bloomberg.com/news/articles/2015-01-22/why-target-is-closing-up-shop-in-canada

Weinberg, L. (2012, August 10). Why Canada is still the best place for U.S. brands to expand. Retrieved from http://business.financialpost.com/2012/08/10/why-canada-is-still-the-best-place-for-u-s-brands-to-expand/

Zimmerman, A. and Talley, K. (2011, January 14). Target is Going Abroad – to Canada. Retrieved from http://www.wsj.com/articles/SB10001424052748703583404576079690417970136

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Target Out of Canada