Way Off Target in Canada

While we had hoped to open 2015 with positive news on the business expansion front, we must instead report on one of the worst expansion failures of all time: Target's woeful failure to expand into neighboring Canada. We began covering this story last year here when Target's losses in Canada were already mounting, but news last week that the retail giant had finally pulled the plug on its Canadian venture revealed that the initial losses were only a sign of very bad things to come. See here.

When the dust clears, Target will have:

• suffered a whopping net loss of $2 billion in less than 2 years in Canada

• closed over 130 stores

• laid off 17,600 workers

• written off almost $5 billion associated with closing the Canadian operations

• had to replace its CEO in part because of the Canadian fiasco (also in part because of its credit card security issues)

What went so wrong?

From an expansion strategy stand point, virtually everything. To begin with, Target entrusted its massive expansion to US executives rather than enlisting top Canadian management talent. Not surprisingly, Target's expansion team severely misjudged the Canadian market's adoption of its retail format. One critical mistake was a failure to detect that Canadian customers had developed a loyal following to local retailers including the Zeller chain of stores that Target purchased as part of its expansion strategy. Another blunder was that many of the Zeller store locations were located in outdated strip malls that did not combine well with shiny new stores. Yet another mistake involved expanding far too fast too soon. By opening dozens of stores at the same time, Target outstripped its ability to obtain adequate supply of products for the local market, resulting in often-empty store shelves. Finally, Target took much too long to steady the ship. As we reported last year, Target knew early on in its Canadian venture that losses were mounting yet, instead of slowing its store openings, it plowed forward until the losses were threatening the company's overall financials.

Basic lessons from Target's Canadian failure

1. Expect complexity in every new market

If there is one take-away from Target's Canadian nightmare it is that every foreign market -- even one that neighbors the US and speaks English, must be approached with great care. From all appearances, it seems that Target simply treated Canada like another US state and expected customers to flow in. Instead, it discovered very wary customers who were under impressed by Target's shoddy debut.

2. Too big, too soon

Another basic lesson is that massive market entries place a huge strain on business operations, making it very hard to make a solid fist impression on customers. By opening so many stores so quickly, Target simply never gave itself a chance to detect and solve the multiple expansion challenges involved in getting it retail format right in Canada.

3. Need local partners and management

One area where Target seems to have failed is in securing local partners and management. It is hard to imagine that experienced Canadian retail executives would have committed the unabated series of expansion mistakes that doomed Target in Canada.

4. Expansion requires an authentic brand

In the end, Target's expansion failed because it was unable to establish an authentic relationship with the Canadian market. With each misstep -- whether it was opening in a wrong location or failing to secure adequate supply for its shelves -- Target looked more and more like a foreigner lost in a new land rather than a local player ready to do business.

Sadly, after being burned so badly in Canada, Target has now abandoned international expansion altogether opting instead to focus on US markets. See here. We say "sadly" because the result could have been very different had Target followed a more sober, well-planned international expansion strategy.

For a downloadable pdf version of this article, please 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 across the Americas. 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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