Print Page | Contact Us | Sign In | Join RVCF
Blog Home All Blogs
Search all posts for:   


View all (335) posts »

The Great Canadian Expansion: Lessons Learned from Target's Failure

Posted By Administration, Thursday, June 11, 2015
Updated: Wednesday, June 10, 2015


Many U.S. retailers looking to capitalize on new markets have set their sights on the less-saturated Great White North. After all, our Canadian friends speak the same language and are familiar with many American retail brands. Many cross the border to shop at their stores. The close proximity to Canada would allow for the use of domestic supply chain assets to help facilitate expansion.

Canadian consumers, like American consumers, are also tech savvy and mobile friendly, and high-income households are on the rise. A study from Environics Analytics found that the number of households with an income of $200,000 or higher grew four times as quickly as the number of households with average incomes since 2007.1

However, expansion to Canada can be very challenging for U.S. retailers. The cost of doing business is higher, with higher taxes and wages and increasingly complex national and provincial regulations. Without a Canadian distribution center, an online purchase could cause Canadian shoppers to be hit with higher costs in the form of high shipping rates, sales tax, duties and brokerage fees. The failure of Target reveals how a number of other factors can derail Canadian expansion.

What Went Wrong with Target's Canadian Expansion?
Target recently announced that it would be closing its 133 stores in Canada and laying off 17,600 employees less than two years after opening its Canadian stores. According to CEO Brian Cornell, it would have taken until at least 2021 for the retail giant to be profitable in Canada. Not only is Target taking a $5.4 billion write-down, but investors, suppliers and shoppers will likely be wary of any future international expansion.

After opening 124 stores within the first 10 months, Cornell admitted, "We missed the mark from the beginning by taking on too much too fast." Stores were open within a few months of buying store space even though significant remodeling was required at many stores. Planning for inventory, operations and staffing was largely based on U.S. models, which Target soon realized didn't apply to Canadian stores or shoppers.

A rushed rollout, paired with many less-than-ideal locations, contributed to serious supply chain issues. Empty shelves and a lack of selection were a huge problem as Target struggled with inventory replenishment and distribution due to a lack of reliability, speed and efficiency in the supply chain. Supply chain issues also caused a delay in offering online shopping, and that lack of Internet presence made it difficult for shoppers to find what wasn't available in stores.

Trying to fill the same role in Canada that it has in the U.S. was another major misstep by Target. Just because there were no Target stores in Canada two years ago, that didn't mean there was a need for Target in Canada. Although 90 percent of Canadians live within an hour of the border and many shop in the U.S., Canadian shoppers have different wants, needs and expectations compared to American shoppers. For example, Canadian consumers tend to be more price-conscious, and the discount retailer market in Canada is fairly well-saturated.

Canadians were outraged when they noticed the price discrepancy between American and Canadian stores. According to a Vision Critical survey, nearly nine in 10 Canadians felt Target failed to meet the expectation set by its slogan, "Expect More. Pay Less." 60 percent of regular Target shoppers in Canada had shopped at American Target stores. 53 percent believed Canadian Target stores didn't offer the same low prices as American stores, and 40 percent said that Target failed to deliver the same experience in Canada as it does in the U.S. 2

Of course, Canadian retailers – and Walmart – weren't just going to roll over while their customers found new places to shop. They knew Target was coming. They wisely ramped up their technology and operational infrastructure investments, which made Target's shortcomings look even worse. Target then got into a price cutting war with Walmart and other competitors to gain market share, resulting in much lower than expected profit margins.

More Retailers Continue to Push Northward
Walmart Canada plans to spend $270 million to build 29 supercenters by January 31, 2016 and expand its distribution network. These initiatives are designed to drive growth in Walmart's grocery and e-commerce offerings and in-store pickup services. This expansion will bring the Walmart Canada store total to 396.

Undaunted by Target's failed Canadian expansion, and wiser because of it, a number of leading U.S. retailers are moving forward with their plans in Canada, including:

  • Nordstrom. Seattle-based Nordstrom didn't have far to travel to open its first store in Calgary, where more than 2,000 shoppers celebrated the opening. Nordstrom plans to open five more stores during the next two years as it attempts to establish itself in the Canadian luxury market. The company implemented a new operations and inventory management solution to support the expansion.
  • Saks Fifth Avenue. Nordstrom competitor Saks Fifth Avenue will join the fray, opening two stores in Toronto in 2016. These stores will offer something not seen in American Saks' stores – large grocery departments – as well as a number of moderately priced fashion brands. Owned by Canadian luxury retailer Hudson's Bay, Saks Fifth Avenue plans to open as many as seven stores and up to 25 Saks Off 5th stores.
  • Lowe's. A player in Canada since 2007, Lowe's will acquire 13 Target leases and a distribution center to expand its Canadian footprint. Lowe's plans to double its store total during the next three years.
  • Ikea. Ikea is opening a major distribution center in Ontario to fulfill orders for four stores in the Toronto area. The company will also open a number of "pickup points" across Canada. In addition to serving as customer pickup locations, these facilities will have a limited in-stock inventory and 10 tablets that customers can use to browse and place orders. A website overhaul is in progress as well.

Key Takeaways for Retailers
First and foremost, the Canadian consumer does not equal the American consumer. Retailers need to research and understand how Canadian consumers define value, what they're specific needs are, and what and why they buy. This requires localized planning, even for online shopping, as well as input from people who live and work in the markets that you plan to enter.

However, one area in which Canadian and American consumers share an identical view is the customer experience. Both demand the best, from proper stock levels to customer service and floor displays.

Second, the right operational and supply chain strategies must be developed and executed. The sour taste caused by empty shelves and poor selection is just as bad in Canadian stores as it is in the U.S. Also, thinking you can get away with high pricing just because Canadians are used to paying more for certain products in the U.S. is a big mistake.

Lastly, some experts have called Target's foray into Canada an invasion rather than an expansion. It was simply too much, too soon. Simultaneously opening more than 100 stores, hiring thousands of employees, and building and perfecting the supply chain, especially in unfamiliar markets, can't be done effectively. Could some of Target's mistakes have been corrected with a slower rollout? Perhaps, but we'll never know.

Despite the challenges, there is enormous growth opportunity for U.S. retailers in Canada. Those who embrace a methodical approach and take the time to understand the Canadian consumer and the necessary supply chain investments will have the best chance at success.


CLICK HERE to return to the JUNE 2015 RVCF LINK

Tags:  Canada 

Share |
Permalink | Comments (0)
Innovative Retail Technologies EDI Academy