Analysis: Target's Canadian Lessons

In reviewing Target’s troubled expansion into Canada, Kantar Retail breaks down the misfires into a finance-operations model:



BRAND



Canadians are not Americans: Target did not fundamentally believe Canadians had significantly distinctive needs and expectations, as both the retailer and shoppers may have taken Canadians’ desire for stores that were just like those in the U.S. too much at face-value. Canadians have different value-for-money expectations, and the competitive retailer set makes their choices very distinct from those in the U.S.



Expect More than what?: The U.S. is a more unequal society than Canada, with social dynamics that encourage an “aspirational” edge for retail. Target thrived off this dynamic as positioning itself as a place where shoppers can “Expect More” than at retailers like Walmart. In contrast, Canadians have fewer income-based retailer distinctions because there are just fewer national retailers to choose from—many of which are home grown and intimately familiar with their shoppers’ wants and needs (Loblaw, Shoppers Drug Mart, Sobey’s, Canadian Tire).



Winning marketing does not win sales: Advertisements, in-person marketing campaigns, and special events wowed Canadians and revved expectations much higher than what Target was able to provide.



Competitors were on notice: Because of the nature of its real estate deal with Hudson’s Bay, everyone knew that Target was coming in two years prior to a single Target banner store opening. While this was unavoidable, Target did not consider their ramp ups as seriously as it should have, as they tightened their assortments, value propositions, and loyalty programs.



FINANCE



Unrealistic expectations: Prior to launch, Target announced that sales rates would exceed that of its U.S. stores. With that goal in mind, Target Canada profitability would have needed to exceed Walmart Canada’s.



Traffic incentives weren’t as strong: Target was not able to get traction from its frequency driving initiatives. Its grocery assortment was not as attractive as other retailers, hurting its ability to gain replenishment trips (with out of stocks also exacerbating the situation). REDcard sales penetration never exceeded 5%, indicating Canadians’ unwillingness to invest the time to sign up for the program for the 5% discount.



Who’s Paying Less?: Target was expecting margins to be higher in Canada, not lower, as the retailer decided that retail prices were to be marked to market. Unfortunately, due to unclear expectations, Canadian guests were led to believe they were to be offered U.S. pricing. Not only did this outrage guests, but Target’s efforts to “sharpen” pricing pushed the retailer to earn less through reduced margins as the company scrambled to make amends—without a pronounced effect on shoppers.



OPERATIONS



Faster is not better: While Target gave its competitors a two year notice, it decided to hit the market with an incredibly fast roll out of 124 new stores. The Canadian market entry was the company’s largest store expansion in its 50+ year history. Given the huge costs, it was startling that Target planned out long term inventory, staffing, and operating decisions depending solely on U.S. models, because they didn’t have data from actual Canadian sales.



IT infrastructure was untested: Target tried to start with a fresh infrastructure, but like the Target.com re-launch a few years before, the size of the project was too unwieldy for such a large roll out. The system was overwhelmed and error prone, requiring Target to hand count each store’s inventory in late summer.



Inventory and logistics were swamped: Too much of some things, and too little of others was one of the first problems that developed. However, it was months before Target was able to get its operations under control to consistently improve its in-stock positions in the stores. Clearance items glutted the stores, causing Q4 2013 to end on a stunning 4.4% gross margin.



“As Target finally closes out its Canadian chapter, it is clear that its new management is laser focused on revitalizing its U.S. operations,” noted Amy Koo, senior analyst at Kantar Retail. “As the Canadian operational strains and costs subside, some of the margin pressures will diminish for both its suppliers and buyers."