INTERNATIONAL EXPANSION: WHY TARGET MISSED THE MARK IN CANADA
International Expansion is an attractive opportunity. Unlocking new markets can drive revenue, reach new customer segments, and establish brands on the global stage. However, when companies attempt to expand internationally without proper strategic planning, it will inevitably cause organizational chaos, burnout employees, and drain resources.
CASTUS applies a unique three-step approach to International Expansion, which ensures companies are setup for success. The CASTUS approach is strategy, readiness, execution. First, we build a solid strategic foundation by identifying impactful data such as macro-trends and qualitative insights. We draw upon real-world experience and global connections to reach sound conclusions. Second, we ensure products, people, and processes can support new business. We verify the business can scale as new opportunities are identified and secured.
Even the most established, iconic brands are at risk for overlooking the importance of strategic planning when entering new markets. Target’s international expansion into Canada is the perfect case study for what happens when companies skip strategy, readiness, and move directly into execution.
WHY TARGET MISSED THE MARK WITH THEIR INTERNATIONAL EXPANSION IN CANADA
Target traces its roots back to Dayton Dry Goods, which was founded by George Dayton near Minneapolis in 1902. Over the past 100 years, Target has grown into the second largest domestic retailer behind Walmart. The $70 billion titan operates over 1,850 locations in the United States. The chain has carefully cultivated its brand image, specializing in chic products at affordable prices. The company is known for efficient organization and has a highly-admired corporate culture. Target decided to expand into the Canadian market partly because Canadian shoppers already enjoyed American Targets. In fact, “cross-border shopping in Canada is very popular due to duty free exemption.”
Compared with the United States, the Canadian retail market is significantly smaller. In 2020, Canadian retailers generated $606 Billion in total sales. That same year, U.S. total retail sales surpassed $5.62 Trillion. Canada’s population is roughly 37 million people, which means it is smaller than California. Most of the population is closely clustered around major cities. For example, 18% of all Canadians live in the Greater Toronto Area.
Many Canadian retail rivals feared Target’s entrance into the Canadian market. Target announced an uncharacteristically bold international expansion plan in hopes to take the Canadian market by storm. The company purchased the ailing department store chain, Zellers, for $1.8 billion in 2011. Target hoped to renovate those stores and formulated a plan to open 124 locations by 2013. Not only that, but the chain expected to be profitable within its first year.
Fast forward to January 2015 (two years after Target entered the Canadian market). The American retail giant announced it would be exiting the Canadian market resulting in net losses of $2 billion and over 17,000 jobs. Here’s why they missed the mark:
Target originally purchased 220 Zellers stores, a discount department retail chain, to expand their footprint in Canada. These locations “were [located] in rundown shopping centers that were hard to access. The stores were smaller than Target's typical U.S. formats and took more money than expected to expand and convert to its trademark red-and-white layout.” Many of the stores were in low-traffic areas, far away from their target audience.
In Canada, it is critical to understand “complexities of the small population base” and build a coherent store density plan that caters to major metropolitan areas. Additionally, companies need to understand the unique geographical and linguistic differences in Canada. Companies need to build marketing plans that account for the diverse population. The differences between French-speaking Montreal and English-speaking Vancouver cannot be overstated.
The extensive renovations of former Zellers stores further increased Target’s costs, which forced the company to move aggressively to recoup that investment.
At the headquarters in Minneapolis, there was intense pressure to succeed; however, because internal “timelines were hugely compressed,” executives did not have the time to properly evaluate decisions which resulted in some major missteps.
SUPPLY CHAIN + LOGISTICS
Differences in Canadian packaging, protectionist tariffs, and exclusive wholesale arrangements forced Canadian Targets to develop an entirely new logistic network to support the Canadian stores since they could not “be serviced from the company’s American distribution network.” As a result, the company needed to build new distribution centers. Typically, a distribution center takes several years to complete and integrate in the overall system. Target planned to build three distribution centers in less than two years.
On top of this, Target purchased an unfamiliar “off-the-shelf” inventory system because they didn’t have enough time to customize their existing system for the Canadian market. Their American inventory system was not compatible with “the Canadian dollar [or] even French-language characters.” This new internal reporting system did not interface well—or at all—with the other Target systems. It forced some stores to manually process and “verify every single piece of data,” which drastically slowed efficiency and profitability.
Target succeeded in the U.S. thanks to its ability to provide trendy items at affordable prices. The chain failed to realize that the Canadian market was already saturated with value brands, including Wal-Mart, Costco, and Giant Tiger. These competitors were able to successfully undercut Target prices, so many Canadians complained about Target’s high costs. These higher prices meant that Target could not deliver on its core value proposition: Expect More, Pay Less. Additionally, bottlenecks at the new distribution centers and inconsistencies with the new reporting system created huge “inventory problems…[which] led to empty shelves.”
“When the buying team was preparing for store openings, it relied on wildly optimistic projections developed at U.S. headquarters...the company treated Canadian locations the same way they did operational stores in the U.S. and not as newcomers that would have to draw competitors away from rival retailers.” Because Target was forced to build a new supply network, there were product differences between the Canadian and American stores. Many Canadians were frustrated that “many of the stylish, exclusive brands...see[n] in Target’s American stores did not come north.” Executives relied solely on the “strength of the Target brand” to draw consumers to their new stores, even if they were in inconvenient locations.
Target mislead Canadian media outlets by explaining empty shelves were due to stores being “overwhelmed by demand.” The company publicly “made assurances that it was improving the accuracy of product deliveries.” In reality, the company was dealing with failing data systems and major supply chain issues. The company failed to accurately manage customer expectations—and the dramatic international expansion plan didn’t allow Target executives enough time to fix logistical issues before more locations opened.
Target’s international expansion into Canada is a cautionary tale underscoring the importance of having a solid strategic plan before expanding into a new market. However, they are not the first company to stumble when attempting to expand internationally. Tesco’s Fresh & Easy stores didn’t work in the United States. Best Buy closed their stores in the United Kingdom after just two years. Walmart closed operations in Germany and South Korea after failing to gain traction with consumers.
Our team has helped dozens of companies plan and navigate the complexities of international expansion. We have experience growing brands all over the world, so we know what critical data points and influencing variables need to be identified before execution. When you’re ready to expand globally—talk to us.