Why Target’s Big Canadian Expansion Went South

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Barry Prentice and Denise Dahlhoff discuss Target exiting the Canadian market.

For the second time in about a year, Target is dealing with a major problem — and this time, the issue is not in cyberspace, but in the Great White North. According to the retailer, its ambitious expansion into Canada couldn’t have reached profitability until at least 2021, and with black ink a minimum of six years away, the company has decided to close all 133 of its Canadian stores. 

In a recent interview on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111,  Dr. Barry Prentice, a professor of supply chain management at the University of Manitoba in Winnipeg, and Denise Dahlhoff, research director at Wharton’s Baker Retailing Center, discussed why a company that has enjoyed such success in the U.S. found itself stymied on the other side of the border.

Listen to highlights from the interview above and read edited excerpts from the conversation below.

Knowledge@Wharton: Barry, you’re in Canada. Was this a bit of a shocker — the fact that Target just shuttered all these stores so quickly?

Barry Prentice: I don’t think anybody actually saw this coming. I mean we knew that Target was having some growing pains settling in, but they were in the process of opening brand-new stores almost the week they started closing them. 

Knowledge@Wharton: What would you say was the cause of Target’s failure? 

Prentice: It’s a case for the marketing textbooks, because it wasn’t one thing — it was a lot of different things…. I think one of the complaints that we heard very widely from people [was] that the shelves were empty. I mean, there were often cases where there [wasn’t] the stock people wanted. And the prices were much higher than people had experienced driving south of the border [to shop at U.S. Target stores.] Perhaps this is where Target also got misinformed, because Canadians were driving south of the border and in large numbers to shop at Target. Even my own daughter — she was kind of misty-eyed about losing Target here because she loves the store. And I think a lot of Canadians do, but what they love is the one that’s south of the border, where it has a better selection and prices.

Knowledge@Wharton: It seemed like Target had been looking for a while to expand outside the U.S. and they finally saw what they thought was a good opportunity to move into Canada.

Denise Dahlhoff: I think they had a good idea. Their online business was lagging, so they were looking for growth, and Canada looked like a good market because it was so close.… They also did a lot of market research ahead of entering Canada, and they found that people really wanted the true U.S. Target. But then there were all these execution issues. As Barry mentioned already — they were stocked out, the pricing wasn’t [the same] as in the U.S., and the merchandise was different. And those two factors — specifically, the pricing and the merchandise that differentiates them — [are] important in a competitive market like the Canadian discount segment.

Knowledge@Wharton: Target launched its Canada entrance by purchasing most of the former locations of the now-defunct retailer Zellers. Did the opportunity to acquire so many locations so quickly cause the Target to act before it was ready?

Dahlhoff: That’s what I think, because it seemed like a very fast move. Maybe this chain came up for sale and they took the opportunity. What I’ve also heard about the Canadian retail real estate market is that there aren’t many vacancies. So maybe they had been looking for a while and this just looked good and they jumped on it.

Knowledge@Wharton: Barry, is the market up there for retail space kind of tough?

Prentice: Well, I think it is, and certainly Zellers had been going through problems for some time. It was owned by Hudson’s Bay, ­ another retailer … and it had been failing for some time.… It looked like a tremendous opportunity. I mean, everybody here thought, “Well, this makes sense and we really should see them being successful.”

Again, it was back to execution, and on that point I would raise the issue of the Canadian geographic space. We’re sort of like Chile sideways … a long, thin country in many ways.… If they could’ve just extended U.S. distribution to the stores, it would’ve been easy, because most of the cities are within 150 kilometers of the border. But they couldn’t do that. They had to have distribution in Canada, and that, I think, also was a complicating factor.

“Sometimes your proposition just doesn’t cross the border.”–Barry Prentice

Knowledge@Wharton: Target went through a very tough time two holiday seasons ago with the Target data breach, and Gregg Steinhafel resigned as CEO. Is it possible that if he hadn’t resigned, that maybe Target would have stayed in Canada longer?

Dahlhoff: I’m not sure, because the CEO of Target [Canada] was actually let go two weeks before Gregg Steinhafel left. Then a new CEO came in, [and] he obviously couldn’t save the business. They waited until the holiday season. I think they reviewed each and every store. The current [U.S.] CEO, Brian Cornell, visited himself. And I think they left no stone unturned to figure out whether they can make this profitable. So even if the previous CEO had stayed, I think the board probably would have pushed eventually to make a bigger change. Whether that is to close all the stores or maybe downsize the operation, I don’t know. But they would have been forced to do something — obviously. They were bleeding every day.

Knowledge@Wharton: Barry, I read an article on the CBC News website about this, and one of the tweets they actually put within the article said that this is a textbook case for MBAs to learn something from.

Prentice: It is indeed. And, you know, one of the things that I think they misjudged was the competitiveness of the environment here. They probably were looking at [how] Wal-Mart had come in. They waltzed in and set up stores, and they were very successful. And of course, Canadian retail was really shaken up by this and I think [Target] thought that they could just do the same. But things had changed…. A lot of the stores here [such as Canadian Tire and Hudson’s Bay] had been shaken up by Wal-Mart and were forced to become more competitive.… So it wasn’t the same competitive market that Wal-Mart had experienced. And I think that’s something that maybe they hadn’t anticipated.

Dahlhoff: Aren’t all those retailers that you just mentioned, Barry, also feeling the squeeze? And I heard that Wal-Mart just laid off 200 people in Canada as well, and I think their performance is pretty flat, if maybe not down.

Prentice: Well, if you are saying that we’re over-served — I would say that yes, we probably are.… I think that one of the other stores that was really on the ropes is Sears. They’re probably breathing a great sigh of relief that Target is exiting the market, because I don’t think there’s that much purchasing power in the country for all the retailers available. Even though … it seems like more stores want to come in. Nordstrom’s and others are making noises about entering the Canadian market.

Knowledge@Wharton: You already had quite a few Canadians that were coming into the U.S. to shop at Target. Consumers are not stupid: They see price differences, and they’re going to understand that they’re getting a little bit of short shrift in Canada.

Prentice: That’s true. And the other complaint was that there was no online marketing of Target in Canada.… The younger generation is so tuned in now to looking online for things that that was a disappointment to them as well. 

Knowledge@Wharton: Why didn’t Target take that approach in terms of marketing online more? It’s not that different a community in Canada — everybody lives on their smartphones these days.

Dahlhoff: As I mentioned earlier, even in the U.S., Target has been lagging [online]. They are catching up right now. Actually they are doing a great job, even implementing the “order online, pick-up in store” [system]. But they didn’t have that before, and my guess is that that was probably an initial thing to take on and implement in Canada, and they probably didn’t want to do that.

Knowledge@Wharton: Wal-Mart’s success notwithstanding, is the Canadian market more philosophically geared toward the smaller store? 

Prentice: No, I wouldn’t say so at all. I think we are very similar to the U.S. in terms of our shopping patterns and big-box stores. People love them, and I don’t think that’s the [root of Target’s] failure. I think it was really back to execution of their plan, and the mere fact that they disappointed a lot of loyal customers. Twitter  And those customers, by the way — I think there’s still going to be a lot of Canadians driving across the border and shopping at Target.

“Costs are different in Canada. The wage rates are different, taxes are different, transportation and distribution costs are different.”–Barry Prentice

Knowledge@Wharton: Usually when you see consumer disappointment like this, it doesn’t seem this widespread. It might be a few customers here and there, but this just seemed to be generally, overall ill will toward how Target approached things.

Prentice: Yeah, [It comes] back to the notion of … “I’m disappointed and I tell five of my friends.” And if they have similar experiences, you start to build up almost an image of a company. And [then it] also hit the media.… So it became a kind of — I don’t want to call it a myth because it wasn’t that — but it was an image that permeated the whole Canadian public about what Target was all about.

Knowledge@Wharton: How do they rebound from this after having the data breach a year earlier?

Dahlhoff: Well, I think that the new CEO, Brian Cornell, is making bold decisions, and I think he’s pleasing the board and the investors. Although, of course, they are incurring losses right now, wrapping up the [Canadian] operations and having the fund for employees that they are laying off. But I do think they are on a good path, … investing into online and mobile, … and also working on merchandise in the smaller, urban formats. That’s all on trend with what we see in retail development. So I think they have a bright future ahead.

Knowledge@Wharton: Is there any scuttlebutt out there about another company maybe trying to come in and fill some of those spaces? A lot of those stores are pretty good size properties.

Prentice: Yeah. There was one here locally that is over 100,000 square feet, and apparently it’s a beautiful store with parking underneath and quite modern. But who is ready to move in there? It’s hard to say. I think the developers in some cases also are sharing some of this pain, because I suspect that [Target] had leases as opposed to outright purchases.… In one case here, Target was the big anchor tenant of a new development, and they’ll be scrambling to find somebody.

Dahlhoff: I actually read that Wal-Mart might take over some of the stores.… I can’t think of anybody [else] suitable right now, but there are big, international retailers that have been successful in Canada, fashion retailers like H&M, for example, or ZARA. [But] I don’t know whether the stores would be a fit for them, because we also know that they were in wrong locations. If the locations aren’t that attractive, it will be hard to find other retailers that would take the chance.

Knowledge@Wharton: The president of the Target Canada subsidiary had been relieved of his duties a couple weeks before Gregg Steinhafel. In terms of what he was trying to do, where was his failure?

Prentice: Now that’s another wonderful question, [and the answer is] I’m sure, locked within the vaults of their head office, because that never became very public. We never heard very much about what the issues were and in fact, there is no single cause. Why they didn’t do their pricing right, I think, is probably the biggest issue, and the answer in part is that costs are different in Canada. The wage rates are different, taxes are different, transportation and distribution costs are different. 

“[Customers] wanted the exact same Target from the U.S., and they didn’t get that. And I think that was the reason why customers didn’t respond the way Target probably expected them to respond.”–Denise Dahlhoff

We’ve often seen Canadians complain that even when the [Canadian] dollar was actually at par with the U.S. dollar, Canadian prices were still 10% or 15% higher in some cases. And people kept asking, “Why aren’t they the same?” Well, the costs aren’t the same. And the market isn’t as big. I suspect it was just those sorts of things they could never get a handle on.

Knowledge@Wharton: When it comes to entering the Canadian retail market, there are ways to do it. Unlike Wal-Mart (which, like Target, made a big splash by snapping up a lot of sites from a failed retailer), other companies that have tried to get into the market have started with a handful of locations in different parts of Canada, and tried to build up and expand from there. Maybe Target needed to think that way.

Dahlhoff: J. Crew is an excellent example of that. They entered Canada in, I think, 2011. And they opened one store in Toronto because they knew they had a fan base there. They tested the waters. In fact, they got feedback early on because also their prices were higher than in the U.S. So people were upset, but they did respond. They actually lowered their dues on their online orders, and they had a flat shipping fee. So they appeased the customers, and then rolled out more stores. They are now up to 16 [stores]. Also, at the beginning they only had the women’s line and now they have men’s [too]. So it’s going really great. They learned the market and expanded from there.

Knowledge@Wharton: Do you think that there’s at least some thought in the back of the minds of executives at Target [to the effect of], “Look, let’s regroup on this. Let’s take a while and really think about this for some time and then maybe, you know, five — 10 years down the road — we can start thinking about maybe going back.”

Prentice: You know, there’s an old expression: “Once bitten. Twice shy.” I’m not so sure whether they would want to risk that again.… Maybe if they had only entered, say the Ontario marketplace, and tried to settle there — they may have been able to establish a distribution center and serve that market effectively and learn. You know, another one of these old expressions is that “When you stand up to hit a home run, it’s pretty easy to swing out.” And I think they were looking for a home run here, and that was part of the problem.

Dahlhoff: I think for now they will just focus on domestic. I wouldn’t exclude [the possibility that Target would try again]. Maybe they can actually start more with online.… But I don’t anticipate them trying again so soon.

Knowledge@Wharton: Let’s talk about the particular value proposition that Target offers the market, and whether or not that particular niche should have been as good a fit in Canada.

Dahlhoff: If you enter as competitive a market as the Canadian discount segment, you have to have something unique and special. And I think they failed to deliver that in Canada. [Customers] wanted the exact same Target from the U.S., and they didn’t get that. And I think that was the reason why customers didn’t respond the way Target probably expected them to respond.

Prentice: It’s certainly interesting … they had the good and the bad at the same time because they had a built-in market. There are a lot of loyal Target customers, [but] the downside is they couldn’t deliver that same product, and a lot of loyal customers were disappointed. You know, prior to Target coming to this marketplace, it was quite common to receive brochures from Target in our local advertising here to come across the border and shop. So they were a very well-known brand long before they got here.

Knowledge@Wharton: With so many consumers coming across the border to spend their money in the U.S. at Target stores, and with a lot of those [Canadian] locations that did not work being close to the border, [perhaps] Target couldn’t get it to work because people know what’s out there, [and could just] go across the border and save themselves a few dollars.

Prentice: Well, it’s true and [to the question] about where they fit in the marketplace — that they were a better quality than Wal-Mart and [offered] prices that were very competitive — they didn’t deliver that. And I think that is the issue that they just did fall down on giving people the experience that they had in the U.S.…. For a lot of people, making a weekend trip across the border is almost a holiday/shopping combination. 

Knowledge@Wharton: Let’s talk about the model that Target has used in the United States and the successes that they have had. They’ve seemingly had success after success, right up until the data breach.

Dahlhoff: Their tagline is actually “Expect More. Pay Less,” and they have executed on that beautifully in the U.S., although the last few years … their performance has been flat and lagging a little bit. That was actually one of the reasons also, I think, why the previous CEO left. It wasn’t just the data breach.… [But] I think the new CEO is great and I think they will be doing well going forward.

Knowledge@Wharton: Let’s talk about other strategies retailers take when entering the Canadian market. Designer Shoe Warehouse, for example, plans an extensive Canada expansion, but it’s partnering with an established retailer, Town Shoes. Is the merger/partnership approach a better strategy here?

Prentice: Well, certainly having an established name already in place helps. [But that’s a] much more focused [niche] — shoes versus general merchandise. I think there’s a lot less risk in terms of attracting people to that, but it’s not like we don’t have fierce competition here.… Payless has done very well in Canada, and they’re getting fairly well entrenched. 

You know, I point out to people that it’s not the first time we’ve seen very successful companies make a venture into another country, and [have it] not work. Marks & Spencer from England — a big retailer there — came into Canada in a huge way and after about two or three years they beat a retreat. We saw Canadian Tire — one of our big consumer retailers here — venture into the U.S., and they couldn’t make it. Sometimes your proposition just doesn’t cross the border.

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