Business Strategy

The biggest mistake international companies make when expanding to Canada

The biggest mistake international companies make when expanding to Canada

A $70-billion U.S.-based titan closes its doors just two years after making a splash in the Canadian retail scene. Failing to gain traction among consumers, a large discount retailer exits Canada—also just two years after launch. Unable to beat a rival, a major American retail player is forced to close its wholesale-style brand in Canada.

These cautionary tales provide just a small sample of companies—many of them based in the U.S.—that have crashed and burned in Canada. For many U.S.-based companies, venturing into the Great White North seems, given Canada’s proximity, like a no-brainer. But these stories show that success in the U.S. hardly guarantees success north of the border.

Not that failures are discouraging other retailers from trying their luck in Canada. Plus-size retailer Torrid recently announced plans to open 10 stores in Canada in 2016. Other companies like Kohler and Skullcandy plan on opening their first Canadian stores in the near future.

Companies are flocking to Canada because of the enormous potential for profit. A report from BMO Capital Markets found that Canadian retail sales are equivalent to U.S. sales on a per capita basis. And on a per square foot basis, Canadian sales lead the U.S. There’s also less competition: Canada only has 14 square feet of shopping-floor area per capita—far less than the U.S. figure of 23 square feet.

So why do so many American companies fail in Canada?

One significant challenge is the cost of doing business. “The cost of labor is generally higher [in Canada],” writes Ben Hanuka, a Huffington Post contributor and trial lawyer from Law Works P.C. “Minimum wages are higher in Canadian provinces, coupled with a higher taxation burden.”

Retail real estate and cross-border expenses are also a factor. Explains Hanuka, “Bringing inventory into Canada, dealing with customs and managing the inventory across the land requires significant resources, and reconfigured logistical channels.” Language, labeling and other regulatory requirements multiply the costs.

While it’s hard to deny the impact of higher business costs in Canada, these challenges are not insurmountable. After all, for every story of failed Canadian expansion, there is a counterpart success story. For every Target, there’s a Home Depot. For every Sam’s Club, there’s a Costco. Retailers like Staples and Starbucks have successfully expanded in Canada. Some of these brands had a rough start north of the border, but they also demonstrate that it’s possible to win the hearts and loyalty of Canadian consumers. (TO LEARN MORE ABOUT TARGET’S FAILED CANADIAN EXPANSION, CLICK HERE.)

What companies lack when they fail to thrive in Canada

For many companies, their struggles in Canada boil down to a bigger, more important issue than costs: a lack of understanding of the Canadian consumer. Because many Canadian consumers cross the border to buy from American retailers, some companies wrongfully assume that Americans and Canadians are identical.

“American retailers are not emotionally connecting with Canadians,” Brian Sozzi, a Belus Capital Advisors analyst, tells CNBC. “They need to improve their research.”


“American retailers are not emotionally connecting with Canadians.”


And, indeed, a growing body of evidence suggests significant differences between American and Canadian consumers. For instance, Canadian shoppers tend to be more cautious and spend less on clothes, according to Alan Middleton, assistant professor of marketing at the Schulich School of Business at York University. Another study, released in 2015 by the analytics company Buxton, claims the Canadian shoppers have a higher tendency than their American friends to be value shoppers.

As a result of the differences between Canadian and American consumers, marketing and ad campaigns that work in the U.S. often fail in Canada.

“There is an incredibly low transferability rate between ads that were created in the U.S. and then exported to Canada without any alteration,” Buxton says in a blog post about its study. “In one study, 60 percent of effective U.S. ads resulted in much lower sales effectiveness in Canada.”

How Canadian consumers really differ from Americans

Demographics is one of the reasons why the Canadian market differ from the U.S. According to a 2013 report by TD Economics, Canada’s population is nine times smaller than the U.S. and is slightly older. Canada also has more foreign-born residents. In terms of income and equity, Canadians earn less than Americans and are more indebted, and they’re more likely to own a home.

“For businesses looking to grow on a North American basis, it is important to know your customer,” concludes the TD study. “For those selling goods and services, the characteristics of Canadians and Americans can affect success.”


“For businesses looking to grow on a North American basis, it is important to know your customer.” 


That said, the differences between American and Canadian consumers go beyond demographics. For instance, since the entrance of Saks Fifth and Nordstrom in Canada, some experts have wondered if the appetite for luxury brands in Canada is as strong as it is in U.S. A 2016 study by the Impact Centre at the University of Toronto found significant differences between Canadian and American attitudes in terms of willingness to take risks, independence and potential to earning more money.

To succeed in Canada, companies can’t rely on outdated assumptions about Canadian consumers. Knowing the behaviors, motivations and attitudes of Canadian consumers should be step number one for any international company thinking of operating in Canada. And given Canada’s geographical size, companies must also invest in developing an understanding of nuances across different regions—what works in one province may not work in another province.

Ultimately, companies can’t afford to set up shop in Canada without a comprehensive customer intelligence program that allows them to engage with customers on an ongoing basis. Only by building a solid relationship with Canadian consumers can companies gain the necessary insight to tailor their strategy for this market and avoid the same fate that has met companies that blindly entered Canada and failed.

The Enterprise Guide to Customer Intelligence

 



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