Multinational Case Study: Target's Failure In
The Canadian Market
Eldar Shakirov [S17004997] &
Mohammed Arman Khan [S00909534]
International Business & Finance
Main purpose of the paper is to analyze retail giant Target Corporation entrance into the Canadian market, its outcome and the reasons of such failure. In order to better understand choices made and possible alternatives that were available, we will look into a brief introduction of the company, the reasoning behind expanding into a foreign market and the analysis of the outcome. The conclusion will comprise results of the events mixed with alternative recommendation viewed under a personal perspective. Multiple sources have been used for this research with the intent to provide a neutral stand on the events described.
Target has been established in United States and present through the greater part of the century, although it entered into discount retailing in 1962 by opening the first Target store in Roseville, Minnesota. Target differentiates itself from other retail stores by combining many of the best department store features — fashion, quality and service — with the low prices of a discounter. It further expanded through 1980s and introduced new store format and new Target brand 1990s which is “Expect More. Pay Less.” to reflect the unique retail experience offered at Target. (https://corporate.target.com/about/history/Target-through-the-years) . Today Target is the second largest discount retailer store in United States and has 1802 retail store locations and 40 distribution centers across 49 states. (Annual Report 2016).
Target has found one of its weakest spots in their supply chain, which consequently it has been under changes for few years now.
Operations are geared to high-volume, low-variety, low-unit-cost production however, at the same time the marketing side of the company may be selling quickness, flexibility and variety to the customers. When putting together these two potential strengths, they actually become weaknesses as they are not in harmony, which is what a value chain requires. These where existing constraints in the home country that found the same unlevelled ground in a horizontal integrated supply chain in the new market.
The company was present solely in the United States prior to the expansion into Canada that we will analyze, leaving us with limitation for comparison or understanding of the company usual desired approach, also suggesting this being a potential factor of their failure.
Target's international expansion to Canada was the first attempt to internalization that backfired heavily. This market seemed to have multiple “similarities” and be an area where the brand was already recognized, Canadians were long doing cross border shopping at Target and the traffic of customers was a great indicator for managers to assume that the brand has been established with Canadian consumers. Seeming as the most obvious choice for ambitions upper managers, who urged that this will be the easy internalization for number of factors.
It appeared that managers urged investors that adaptation to the market will be easier despite that fact hence psychic distance was small (neighbors, Uppsala model of internationalization) and paradigm was that shared English language will break language and cultural barriers, (even though the second official language is French).
Another factor taken into consideration in the choice of new markets is in the ease of business set up given the existing trade agreement (NAFTA), thus reducing the barriers of entry, the general market risks, commercial risks and political risks. In addition, Canada was less affected by the recession than the U.S., increasing the appeal of a Canadian venture (Harvard article). Making internalization go rapidly as they planed it, expecting to generate incredible returns in very few years.
Target upper management can be considered having a very standardized and ethnocentric mind-set, along with expansion inexperience. These characteristics plaid a significant role on how the strategy into the giant neighbor, was planned and executed, adding another layer of complexity to the already challenge task.
In particular, the first Canadian president was an American born, Anthony Fisher which was later replaced By Mark Schindele, Canadian born, along with the hiring of a non-executive chair to better understand this market, in the desperate struggle to fix the Canadian disaster.
Unfortunately, this was still insufficient to turn operations around.
Their approach was rapid expansion into the Canadian marketplace through a brownfield FDI mode of entry (the plan on itself was the replica of the Wall Marts 1994 expansion). They purchased existing Zellers stores, about 220, at a total price of $1.8 billion. This deal helped to acquire pre-built stores, which could speed up and enhance their mode of entry into the Canadian Market, highlighting once more, the urge that was created in making such a hurried entrance.
As previously mentioned, they replicated the same supply chain logic of the home country and also applied standardization to its inventory, without much adaptation to the local markets, highlighting what is so defined, manager's myopia.
The Target Canada story will go down in the history books as one of the great supply chain disasters of Canadian history, he said, pointing to the Canadian operation's $941 million loss before interest and taxes last year. (reuters article) As a result, we recorded a pretax impairment loss on deconsolidation and other charges, collectively totaling $5.1 billion. The Canada Subsidiaries are executing a liquidation through the CCAA process. (10K).
Reasons for failure are multiple and we will concentrate on the major “miss hits” of the company in this foreign expansion.
Not ideal store location
As one of the main leads of mistakes, is their store location and distributions centers. The stores obtained from Zellers were small store formats, unlike the behemoth locations thriving in the United States. They weren't configured to the likes of the Target's product placement or style. Most of the acquired Zeller stores were located in not so-typical potential customer areas, not even considering their replenishing nightmare given distances and wrong unorganized location layouts.
higher prices to an informed consumer who has access to the cheaper alternative
o link to exchange rate chart (exchange rate being almost 1:1 did not permit advantageous savings and tax liabilities with transportation costs) Apendix 2
Product inventory deficiency
Target does much of its own distribution in the United States, although for the Canadian operation, it outsourced to Eleven Points Logistics, a subsidiary of Pittsburgh-based Genco, to run its three warehouses in Canada. http://www.reuters.com/article/us-target-canada/exclusive-target-canadas-supply-chain-gridlock-how-barbie-suvs-snarled-traffic-idUSBREA4K0UL20140521 )
The involvement of a third party and the detached control to part of its supply chain created even greater issues. Stores had very limited selection compared to the big known US locations, with high stocked deficiency, portraying a declining brand due to distribution challenges and self-replenishing issues.
The motto that Target abided by “Expect More, Pay Less”, seemed to look like “Expect Less, Pay More”. At several occasions customers had been presented with ‘empty shelves', and repeated occurrence drives more and more customers away each day. Canadian tourist that have visited America, and seen first-hand, what Target actually is to the South of the border, were disappointed at what had happened to them in Canada. Just backed by three warehouses spread near the border, located in Balzac, Milton and Cornwall. The shortest distance to the nearest store was roughly just above 800 miles. This detail entails on the face that Geographic proximity was not calculated, leading to logistical blunder. These warehouses and the logistics team that were assigned to them faced problems with the arrival of “wrongly” filled boxes. Employees were just appointed and were given basic training, which wasn't the same to their counterparts south of the border. Technology had been updated and it had been used in every single day-to-day operation within the stores and the headquarters. Incompetent training of the employees led to mistakes and improper use of the up to date software that Target uses for stocks and replenishments.
• too many stores too quickly
Having purchased the lease for 220 stores and having opened only 124 stores, Target continued to open further stores, eventually leading to overspending on openings and lagging behind on the rest.
• market saturated with competitors
Unlike the US, the market was over saturated with discount retailers in Canada. Target did not only have Walmat as its competition from back home, but it also had 6 additional competitors present in the market, with more hands down access to the information and the market.
• had to address two different kind of customers accustomed and new to target
A larger scale gives the global player the opportunity to build centres of excellence for the
development of specific technologies or products. In order to do this, a company needs to
focus a critical mass of talent in one location.
Reinstate issues for failure
Any competitor creating direct or indirect barriers to entry?
“The fall appears to correspond with more aggressive price moves among sector heavyweights Walmart's and Target Canada, especially, both of whom are locked in what appears to be a burgeoning price war that's rippled out to affect others, such as grocery chains.”
Walmart Canada almost immediately started to lower its price on the mutual products shared between them. This put Target in slight jeopardy, with the xenophobic reactions and Walmart's increasing competitive edge.
Alternative: What model would Target have benefitted more from to apply into Canada?
Greenfield option of Foreign Direct Investment would have been a more appropriate approach, as it would have to start building its structure store by store, alongside its image while gaining vital information about market. A steady opening of 10 stores, with an ideal location for the Warehouse, would have been able to provide Target Canada with
an insight into the reception of Target into Canada. It would have been easier to navigate through the vast Canadian landmass, and estabilish reasonable network of shops and warehouses. It would have been a reasonable start to the global expansion agenda.
When Zellers' lease was bought by Target, a huge number of Canadians lost their jobs. An approximate of 25,000 people lost their jobs, which could have been a leading reason for slight hatred towards target. Being the Bull's eye for Xenophobia, Target might be out of favor with many Canadian families, essentially blindsiding Target as a whole.
Mexico being a developing country, and an appropriate country for Target's Uppsala school of thought determination, would have been the ideal country to horizontally integrate to first.
Target was fantasized by the Walmart's success in Canada, and hence they took bait and entered a market, that was already saturated with plenty of other competitors.
Bringing Americans to Canada for the high posts, brought a bad image on Target Canada. Losing about 25,000 jobs due to Zeller overtake, had the Canadians expecting more jobs from Target. They should have realised the well they had dug up.
Decentralization should have been a key implementation into the hierarchical system within the company's management. This would help more of the management realize the, market themselves.
Furthermore, the ‘pull orientation' can be applied to observe and derive market information. This would have been ideal to understand the situation of the market and further provide customers exactly what they want, hence supplying the demand already present.
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