Target's Cold Canadian Bath

Recently we posted about Home Depot's failed expansion into Chile. See here

In that case study, we saw how a major retailer's expansion efforts can suffer and even fail if it refuses to modify and bend its business model to fit local circumstances. In that case in particular, Home Depot's failures were due in part to its unwillingness to listen to advice from its IJV partner (Falabella) on how best to approach the peculiarities of the Chilean market.

Now, the New York Times and CBC News are reporting about what appears to be another failed expansion effort by a major retailer, this time Target's failed push into Canada. See here and here . As the articles show, Target entered Canada through the acquisition of over 200 stores once operated by a local retailer, Zellers. Target, apparently believing its one-stop-shopping model could easily be replicated north of the border, renovated the Zellers stores to become full service Targets that combined such things as clothing, appliances, and groceries. In its first full year of operations, it encountered a range of operational issues and lower than expected customer traffic and sales.

The result: a whopping loss of $941 million in 2013! (And that is above the $1.8 billion that Target spent to buy Zeller's stores just 3 years ago. See here

What is going so wrong? As the articles points out, Target significantly underestimated the complexity of selling into a new foreign market when it decided to open hundreds of stores in one fell swoop: a classic case of expanding too fast, too soon. As one Toronto business school dean is quoted as saying: "Most foreign retailers launch with a smaller number of stores. Here you’re talking about a company that basically opened up 124 stores with a new management team and no history in the country.”

It is hard to say if Target would have been more successful if it had employed a different market entry strategy, such as an IJV approach in which a local player with skin in the game may have convinced Target management to take a more conservative approach (although, as the Home Depot case in Chile shows, the US giant would have had to listen to the advice), or even greenfield which would have likely meant a slower, more methodical launch since it is hard to start so many retail locations from scratch. (See here).

What is clear is this: Target has joined the ranks of Home Depot (and many other companies before them) in under-estimating the complexities inherent in foreign market expansions.

We will continue to track Target's Canadian expansion to see if they can turn the ship around.

For a printable PDF version of this document, see here

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Andres Snaider is a founding partner of Nextant, a consulting firm specializing in assisting companies expand their businesses in international markets, with a strong focus on Latin America. With a degree in law and experience working as an international attorney and businessman, Andres has advised clients on a range of commercial matters and investments in almost every country in the Americas, including the US, Mexico, Colombia, Brazil, Ecuador, Argentina, Chile, and Canada, just to name a few. He is a graduate of the Harvard Law School and currently lives and works in Boulder, Colorado.

Email Andres at asnaider@nextant.com

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Nextant has extensive experience in assisting leading clients through its Market Expansion and Business Optimization services. For more information on how Nextant can assist your company in socializing a market entry and initiating sales, please visit our website at http://www.nextant.com