Target in Canada: What went wrong? And can the retail giant recover?

October 21st, 2014

Jenny Hall

We spoke to Professor David Soberman of the Rotman School of Management in 2011 when Target first announced it was coming to Canada. Three years later, the American retail giant is here — and bleeding red ink as it faces criticism over inventory and prices. We caught up with Soberman for his thoughts on what went wrong in Target’s great northern expansion.

What went wrong with Target in Canada?

To begin with, it seems that Target did not assess consumers’ expectations to the degree they should have. Many companies that enter new markets don’t really appreciate the challenge. I think the mentality Target had was that this was basically another U.S. state. A number of the things that Target has found challenging are things it could have understood through careful market research in advance.

Are Canadian consumers that different than Americans?

Canadians tend to be quite loyal. In the U.S., shoppers tend to be more price-sensitive. Some Canadians will, for example, go to Canadian Tire to get something, even if it possible that it can be found more cheaply at Lowes or Wal-Mart. This is a unique characteristic of the Canadian market. If you’ve got that loyalty, then you’ve got somebody coming into your store. Your job is to ensure that they have a good experience if you want them to come back. That’s where Target made some mistakes.

That’s just part of it. Target also had a number of important internal management problems.

Let’s talk about those. It does seem shocking that, more than a year after they opened, you go into the store and many of the shelves are empty.

I have gone into Target stores looking for things, and the product line is not where it needs to be. You want certain things, but you can’t find them. You can find them at Wal-Mart. I just took my child down to school at Queen’s, and I was trying to buy things. I got 95 per cent of what I wanted at Wal-Mart. The other five per cent I got at Canadian Tire. I did go into Target, but I couldn’t find what I needed.

It has to do with supply side problems, inventory management and product line management. These problems mean that Target Canada has not created the shopping experience that U.S. Target shoppers have. The experience that Target shoppers have in the U.S. is what makes it such a tough competitor for Wal-Mart there.

Can you give an example of what they did wrong?

There are stories about them having different inventory numbers for products by province, whereas in the U.S., they have one inventory number for the entire country. Think about what this means for order quantities. Stores are either going to be paying much higher prices because order quantities are smaller, or they’re going to be ordering so much that they have overstock. And if you do that — if you have huge amounts of certain items — you’re sacrificing breadth for depth and you don’t have the selection you need. They lost a lot of efficiency this way. It makes you wonder how they could have possibly done that. This seems to be a basic managerial problem. Probably what happened is some stores were ready to order and others weren’t, so they created different inventory numbers without thinking about what the implications would be.

Another thing is that it’s very important to know what products people use to do price comparisons. Obviously, one of the things that people are doing is comparing the prices of products at Target to the prices of the same products at Wal-Mart. There are certain products that people will use to make those comparisons. In grocery stores it’s typically milk, eggs, and bread. I don’t know what they are in this arena, but Target should. This is something you need to know, and it’s got to be specific to Canada. It could even be specific to the region of Canada. Target was 10 to 15 per cent higher in these comparisons. Does that mean all your prices have to be lower? No. But it certainly means that for the key items where you’re being compared, your prices have to be competitive.

Has Target suffered because people are expecting their Canadian prices to be the same as in their U.S. stores?

If people are expecting the same prices in Canadian Target stores as in U.S. stores, that is not going to happen. You don’t get the same prices in Wal-Mart Canada as you do in Wal-Mart U.S. But people are using it as a comparison, and that creates a hurdle for Target. You’ve got to get people thinking, “Okay, I should be comparing these prices to Wal-Mart Canada, not Target U.S.” That’s why the basket of goods that people use to compare is so important.

But the degree to which this is a problem is overstated. Less than 10 per cent of the Canadian shopping population has been to Target in the U.S.

Target has tried to differentiate itself on more than just price, hasn’t it?

Wal-Mart is like the Mike Tyson of retailing. You do not want to get into the ring with Wal-Mart because Wal-Mart will beat the heck out of you. And they beat the heck out of you by having low prices. With Target, you have a company that has gotten into the ring with Mike Tyson in the U.S. and has done pretty well. That’s actually pretty impressive.

What made Target a top competitor in the U.S. is that it’s basically Wal-Mart with style. It has named designers doing product lines. Certain of their private labels, like Mossimo, have brand equity. They’ve got nice logos and nice store décor.

So they’re stepping up to the plate in Canada with all that going for them. But if they’re not able to deliver on what they’re known for, they’re going to be vulnerable.

Is Target going to make it?

People forget that when Wal-Mart came into Canada 20 years ago, it wasn’t a walk in the rose garden. It took them a couple of years before they were able to get going. But the financial markets are harsher these days. People expect results a lot more quickly. The pressure on Target to start turning things around is higher than it was on Wal-Mart 20 years ago.

Another difference is that back when Wal-Mart came to Canada, they were clearly a discount store. Today, Wal-Mart and Target are also competing against grocery stores. And on top of that you’ve got the warehouse store Costco, which is a big competitor in major markets. The Canada of the 1990s was a very different shopping landscape than it is today.

Target has replaced the CEO, and they have said they’re going to change. A big test is going to be how they perform this Christmas. If they can improve things over the next couple of months, I believe they can right the ship.

A target store. Photo: MBK, Flickr.com.

A target store. Photo: MBK, Flickr.com.