Should Target cut and run in Canada?
Target, by its own admission (see the YouTube video), has made a mess of its business in Canada. The company has lost about a billion dollars since it began operating up north and, while it has pledged to do better, not everyone is convinced it will. In fact, Credit Suisse has gone so far as to suggest that Target’s new CEO, whomever that turns out to be, should seriously consider getting out of the Canadian market altogether.
In a note to investors, as reported by The Financial Post, Credit Suisse analyst Michael Exstein wrote, "We think it may be more prudent for Target to cut its losses and devote 100 percent of its resources on the U.S. — which comprises over 97 percent of the company’s current sales."
![[Image: Target Canada]](/public/images/discussions/17655/target-canada-still.jpg)
Target is looking to roughly double the $1.3 billion in revenue it generated in Canada during fiscal 2013 without the $941 million in losses that went with it. A lot of people are counting on the chain to succeed, including the more than 20,000 individuals it employs in Canada.
Discussion Questions
What are the biggest challenges currently facing Target in Canada? Do you think Target should bail on the Canadian market?
It’s premature for Target to pull out of Canada, just over a year since moving in. The company has too much invested in real estate (which they acquired for a bargain price), infrastructure, organization and corporate pride to throw in the towel this quickly. There are some clear lessons learned from the 2013 results that are correctable, starting with inventory levels and pricing. Target is going to have to be a lot more aggressive on both fronts if it intends to gain market share and cover its investment and costs.
The Canada experience is symptomatic of what ailed Target overall: Too much caution, too slow to react, too much faith that the “brand” (versus good execution) would carry the day. With luck, the interim CEO is addressing these cultural issues quickly, even during the search for his permanent replacement.
Either Target needs to invest the resources to understand Canadian consumers or needs to leave the market. The Canadian market is not an extension of the U.S. market and is not homogeneous. While the U.S. has been described as a melting pot (certainly that term is a debatable description of today’s U.S. market), Canada has been described as a mosaic. The significant implication is that differences among consumers exist, are accepted and celebrated. The resources needed to understand this market will be significant. Invest the resources, learn about how to adapt to different markets, or remain a U.S. domestic company.
Target has acknowledged many, if not all, of the mistakes it made during its entry into Canada. Admitting you have a problem is the first step to recovery.
The next steps are not easy but doable. The infrastructure is in place, the stores are staffed, supply line exists, etc. Finally, as Dick pointed out, Target got into the market at a price it will not be able to replicate should it withdraw now and then decide to reenter.
I agree with Dick Seesel. It’s way too soon. If Canada was located halfway around the world, I might say “yeah, it’s a distraction,” but I can’t see any reason why whatever is done to remake U.S.-based Target won’t be pretty close to what Canadians want as well.
Strikes me that the problem is clear in both countries; lost differentiation (or in Canada’s case, “never found” differentiation). I don’t see any reason to run away. The company has enough cash to work it through and it’s going to need a new CEO with a new vision anyway.
First Target took horrible Zellers locations no one else wanted. It would appear the former CEO was overzealous and took available locations rather than build ground-up in new good locations. Zellers had run them into the ground so deep that Target will have to do better than a mediocre effort. Consumers associate those locations with negative experiences. Face it, Target is not that good in the U.S. Walmart is the standard, and if you are not performing within 10 percent of Walmart’s sales per-square foot, then you are a below par operator. Target stores don’t generate sales per-square foot revenues anywhere near most Walmarts. A $100 million per year Target is rare, while it’s common at Walmart. Going into a new country, a foreign market, you need to be better than below par because going into a new market it’s normal to do 20 percent below your usual effort.
Oh sure, if Target sticks it out they will get better. Just like Fresh & Easy kept getting better and better until they pulled out. There is no place for Target to go but up, but they are so far down they could double their sales and still be well below market. Target’s best effort just isn’t good enough in Canada. They would need new and better locations, and we know that’s not happening. Even if Target did have good locations, it would take several years to overcome their mistakes. I doubt that short-term minded investors have the patience, and therefore, Target needs to put on the brakes, regroup and go home.
Target should stay in Canada for now, but it should minimize its losses as it learns about doing business in the Canadian market. I would suggest focusing on getting the business running much more smoothly, 90 percent-plus of their effort, as opposed to any growth initiatives, because it’s clear the cost structure is out of whack right now, with $1.3 billion in revenues and $941 million in losses.
Note to Target: Don’t bail out of Canada. Get the right lead dog to navigate through the Canadian path. It is obvious those in the lead did not understand the Canadian marketplace or customers. It appears you can’t paint the Canadian shopper with an American brush.
The big current challenge for Target is to face up to the reality that its board and past management took themselves too seriously and Canada too lightly. It has resulted in a quick billion dollar loss in Canada and produced only three percent of Target corporate sales. Now that Target has sobered up, it must decide if additional investments in Canada have the potential to get a healthy return in that land north of Montana.
To the second question, YES. Target doesn’t have the street-level business smarts and infrastructure right now to play in two diverse ball parks.
If Target wants to grow, they MUST grow internationally. The U.S. market is mature and total U.S. domestic growth will not exceed 2.2 percent for the foreseeable future.
The Canadian sortie was a disaster for Target, but it could prove a learning experience on how to take one’s business to another country. Target must understand that from physical execution to understanding the customer, expansion into other countries is not a “copy/paste” exercise.
Walmart initially made similar mistakes in regard to customers in other countries, but they fixed them. After the failure of its international expansion in Germany, China and South Korea, Mike Duke (former CEO) said that Walmart had learned from past mistakes. “We must be more sensitive to local issues … We must understand global needs and trends.” They established a new President for emerging markets with the aim to spot in advance national differences. Today, Walmart International operates more than 6,100 retail units (55 percent of the total) in 26 countries outside the U.S. In fiscal year 2014, Walmart International net sales exceeded $136 billion (29 percent of their total, and growing).
Target must approach international expansion in the same way.
It’s product availability and pricing. Most Canadians are close to the border and able to shop Target US where prices are significantly lower and assortment is better. One of our recent blogs discusses failures and successes of US retailers expanding into Canada and what the Canadian merchants are doing to compete.
Also they don’t have prime real estate as they bought Zellers which was in older, lower-end malls.
They shouldn’t exit Canada because of their huge investment to date, but they need to fix all those problems before they expand any further.
Who would question the opinion of a Swiss bank about the operations of a U.S. retailer? In Canada. Everyone, of course… as well they should: if Target shows it can’t handle Canada, who will have any faith that it can handle Brazil or India or the Congo or….and that day WILL come (if not immediately or those specific countries).
That having been said, obviously there are problems (even beyond the general Target issues of who’s-on-first leadership and security breaches); some of them, such as the out-of-stocks and merchandise selection are typical teething problems…disappointing, of course that they happened, but not something that can’t be worked ooout (so to speak). The issue of site suitability, obviously, is something they’ll have to live with, and we can only hope there are enough good sites to form a viable operation. Their goal is only an average of $20M/store, and while some will argue that just shows how unproductive they are, I prefer the half-full view that it’s modest and attainable.
Now if we can just get them to stop calling customers “guests”….
There are many US based companies making money in Canada. It stands to reason that Target is doing something wrong in their expansion plans. The company’s first order of business should be to identify problems and clean them up as soon as possible. Replacing the CEO is just the top of the priority list which by all accounts is rather daunting.
As for what the bank thinks, or any bank for that matter, who cares? These past seven years of watching and paying off the mortgage disaster brought about by free money legislation and bank teaser loans is reason enough to place low reliability in what banks think or say. Target’s Canadian business is not the problem, Target’s leadership and their planing and execution ability is. Target’s board must keep their attention and focus on the problem if they wish to solve anything.
It is hard to believe a sophisticated US retailer doesn’t have the methods and systems to be successful in Canada given enough time and focus, eh? I think the point of the article is where to focus and how many priorities can be juggled at one time where the 97% of the business isn’t exactly doing so well. That’s a question only Target’s management can make.
Well…Target bought Zellers and got their terrible locations, but what Target needs to do is due diligence and learn and understand the Canadian Market. They can do that and if they provide to Canada what the have provided to other customers, they can do well. They have the ability but they have to do the work. Canada is NOT the northern state of the US and they underestimated Canada and took it too lightly. They need to understand Canada and give them the Canadian Target experience. (Then they need to start the long haul upgrade of their locations.)
Since I do not reside in Canada, not sure I can directly comment on specific challenges that might be inherent to the Canadian market, but I think evaluating current mix of stores and closing underperforming ones would be a possible consideration. It is a challenge that can be addressed and will be by the new CEO.
The stores were completely remodeled inside; lots of money was spent. They are merchandised too much like a US store. Target has a limited product mix and it is clearly not what those customers are looking for. They need to work on merchandising. The in-stock conditions don’t look any worse than in the US.
The goal should be to secure better sites also. The stores remind me on old ’70s Kmarts with Target colors on the exterior facade and brand new floors, lights, ceilings, etc. Inside the stores are fine, but they have poor curb appeal.
I do not think the answer is to close up just yet.
Target’s biggest challenge in Canada is building back trust with Canadian consumers. Target has made some big mistakes, but they have acknowledged them. It’s time to learn from them and move forward.
If Target bails on the Canadian market, they can forget about coming back. Stand and deliver, Target.