In January 2015, Target announced it would close all 133 of its stores and exit the Canadian market after only two years of operation. With the original goal of turning a profit within a year of opening, CEO Brian Cornell declared that Target wouldn’t become profitable until at least 2021 and would need additional funding to keep the company operating. Target decided to pull-out of the Canadian market and re-focus its attention on the US market by pursuing smaller stores in urban areas and by improving its e-commerce model [i]. Target withdrew from the Canadian market amassing a write-down of $5.4 billion and a total net loss of $2 billion [ii].
How did this happen? How did the company known as Tarzhay, manage to thrive in the US economy, but fail miserably in the Canadian market? To understand this better, we should look at Target’s core business model and see how the operating model failed to execute.
Expect more, pay less
Target was similar to other retailers such as Walmart and Kmart, as they centered their business models around the traditional discount retailer value chain. Target differentiated itself from the competiton by offering unique and higher quality products affiliated with designer brands and sold alongside standard discount store products [iii]. Unlike Walmart, Target attracted customers across varying income levels and presented their products in a clean upscale environment that further enhanced their image of being a quality provider.
Target charged the same price for discount goods as found in competing stores such as Walmart, and then offered upscale products primarily in the home furnishings, apparel and kitchenware areas. While these products were more expensive than the standard fare found in discount stores, they were significantly cheaper when compared to offerings found in department stores or fashion boutiques.
Operating Model (Canada)
Inventory planning: Target swiftly opened 124 stores in the first two years of operation and never implemented a proper supply chain system. As a result, its shelves were overstocked with certain products, and was severely under-stocked in other areas thus leaving its shelves bare [iv].
Pricing: Canadian shopper sentiment was truly and deeply affected when Target introduced the same products available in the US at a markup in their Canadian stores. About three-quarter of Canadians live within 160 km (100 mi) of the US border, and with increasing allowances of bringing back products, Canadian’s frequently visited Targets south-of-the-border and generally viewed the company with high regard. The clean, upscale environment with quality offerings at discount prices, provided a breath of fresh-air when compared to local Canadian discount retailers [v]. Canadian shoppers were eagerly optimistic when news of Target’s foray in to Canada first broke. For numerous reasons, one of which is pricing, Target broke the hearts of Canadian shoppers, who would have otherwise guaranteed the company great success!
Location, Location, Location: The reason Target was able to launch over a 100 stores in two years is because they had taken over the lease of now defunct retailer Zeller’s. The Jan. 2015 Fortune article states, “But the reality is that most Zellers stores were dumpy, poorly configured for Target’s big-box layout, and were in areas not frequented by the middle class customers Target covets.” Travelling to Targets was a hassle for urban Canadian shoppers and hence making the stores easier to avoid.
Anticipating Target’s arrival, various discount retailers with an established presence in the Canadian market such Walmart, Loblaws, Canadian Tire, etc. improved prices on offerings and introduced a wider variety of selection thus squeezing Target out of what was already a competitive space [vi].
Ultimately, poor execution on various fronts, and increasing losses forced Target to withdraw from the Canadian market as quickly as they had entered it.