Business Strategy

Why Target failed in Canada, and what other companies can learn from it

Why Target failed in Canada, and what other companies can learn from it

Less than two years after entering Canada, Target shocked the retail world by pulling out. After accumulating $2.5 billion in losses, the Minneapolis-based company will shut down all of its 133 Canadian locations and lay off 17,600 employees.

In a blog post, Brian Cornell, Target’s Chairman and CEO, said the decision to exit Canada was the best option available to the company. “After extensive internal due diligence and research, paired with counsel from outside experts, we fulfilled our obligation to do what was right for our company and our shareholders, and made the decision to exit Canada,” he wrote.

When the retailer first announced plans to expand north, most people expected the company to succeed. In fact, using Vision Critical’s customer intelligence platform in 2012, we found that over half (52%) of Canadian shoppers who were aware of Target at that time were excited that the retailer was coming. And of those shoppers, four-in-five (81%) expressed interest in visiting the new Canadian locations. Target’s sterling reputation and brand equity gave them a head start crossing the border.

So what went wrong?

Cornell offered several explanations, including the company’s quick expansion: “We missed the mark from the beginning by taking on too much too fast,” he said. Some experts point to the weak Canadian dollar as a contributing factor. Others believe Target underestimated the power of Wal-Mart Canada.

Target’s struggles in Canada can also be attributed to a miscalculation of what makes the Canadian shopper tick. The company assumed it could coast on its reputation, but its actions in the early stages of the expansion suggests it didn’t understand why Canadian customers loved Target’s U.S. stores. Here are 3 things Target didn’t get right when it comes to meeting the expectations of the Canadian shopper:

  1. Sticker shock

Target Canada’s lack of customer intelligence is most evident in the pricing discrepancy between American and Canadian stores. In January 2015, shortly after Target made the announcement about its Target exit, Vision Critical used its own customer intelligence platform again and asked 1,505 Canadians about their thoughts on the retailer. We found 89% of Canadians thought Target didn’t live up to its tagline, “Expect More. Pay Less.” Fifty three percent thought Target stores in Canada were inferior to US stores when it comes to offering low prices.

In 2012, we warned that Target would need to explain any potential major differences in pricing and promotions to Canadian shoppers if they wanted to avoid disappointment. Target Canada missed the mark in this regard.

  1.  You can’t ignore customer experience

Our 2015 study shows that 70% of regular Target shoppers in Canada have also shopped in the company’s US stores. These customers not only have a perception of what Target is all about—they also already have an experience with the brand. Unfortunately, 40% of the shoppers we engaged said that the shopping experience in Target Canada was not as great as their experience in the US.

Target’s failure in Canada demonstrates the importance of knowing not just perceptions about your brand, but also your customers’ expectations and their previous experience with your company. In this case, Target’s expansion would have been more successful if it engaged Canadian shoppers who were also Target US shoppers and sought to understand more about their experience.

  1. Empty shelves = unhappy customers

Target Canada’s empty shelves didn’t help its venture. It failed to create an adequate distribution system, which prompted customers to complain online about low inventory. The supply chain issues also meant it couldn’t offer online shopping right away, which further frustrated shoppers. Tapping into customer intelligence could have helped Target Canada better anticipate the demand of its core constituency.

Our 2015 study shows 41% of Canadians thought Target Canada was not as good as Target US when it comes to apparel selection. Many Canadians also thought that Target Canada’s selection in home furnishings selection (35%) and home décor selection (36%) was not as good as its US stores. Some insight into what Canadian shoppers visit Target for would have helped the company plan its product selection better.

Conclusion

Target’s failed foray into Canada demonstrates the value of deep customer intelligence before and when entering a new market. But to be fair, Target eventually realized its missteps. “We delivered an experience that didn’t meet our guests’ expectations, or our own,” Cornell admitted. Customers’ negative sentiment became so strong that it proved difficult to reverse.

Companies should see Target Canada as a cautionary tale. Today’s retailers need to truly understand their customers—not just what they are buying but why they are buying. Customer intelligence has never been more critical.

To learn more about building lasting customer relationships, check out our free ebook, The Customer Relationship: Your Last Competitive Advantage

Photo credit: Matt Callow



  • Ellen Woods

    While it is always tempting to point to price, selection and customer service as culprits in failed retail initiative, it’s often a series of smaller issues that drive people from a brand. In this case it is more likely not a question of failed market research but instead a failure of understanding with regard to the reasons Canadian buyers purchased from the US Target stores in the first place.

    A lot of Canadians have purchased in the US over the last few years because they were able to leverage exchange rates and tax rates to their advantage. Sales taxes are also vastly higher in Canada. Not only are U.S. sales taxes typically less than 10 percent, they’re only levied on tangible goods like clothing. Food and services aren’t taxed. In Canada, a 5 percent national sales tax adds to territorial levies, which are imposed on all goods and services, boosting the cost of everything from clothing to car repairs by 13-15 percent.

    It would simply not be possible for Target to maintain an operation in Canada with discounted pricing equal to what is seen in the US. Target, by and large relies on volume sales to offset their discounts and they often have a range of pricing (several similar items with different price points) to accommodate the many income levels seen in the US. In Canada, there is far less striation in income and a more uniform distribution of income across metro areas. In other words, they don’t have the need for as many items and they can’t depend on certain high income, high traffic stores to offset under performance of other stores within a region. Adding to that misery is the fact that many above average wage earners simply have more exposure to International cultures and the ability to purchase many items over the Internet at lower costs than Target’s brick and mortar operation could offer.

    In simple terms, there wasn’t enough traffic in high margin items to pay for larger discounts or to leverage manufacturer perks. That meant they were constantly renegotiating supplier contracts which often results in out of stock items and changes in product selections. Because they were not meeting corporate expectations it also meant a lower and more constrained workforce dealing with disappointed customers.

    So what could have been done differently? Target seems to have made an assumption that Canadians were attracted to their products as unique products, rather than discounted quality. They needed to offer something that provided a unique value that adjusted the value proposition toward attributes and away from commodity costing. Secondly, they needed to understand that although demographics often cluster in their likes and purchases, their reasons for purchase are often quite different. That is information that needed to be established BEFORE they were in market.

    Assuming that was not done and they found themselves in a bleed, they needed to understand if they actually lost customers or if Canadian customers continued to cross boarders. Did the US numbers change before, during or after? I suspect they remained stable. If that was the case, then it a conversion failure, not a market failure. That means the Canadian brand will remain separate in reputation from the US brand. They obviously lost a lot of operational cash but a retrenching of boarder operations can likely help in a recovery. But the bigger question remains, could Target or a new Target brand re-enter Canada at some point and be successful? The answer probably lies in understanding what’s not readily available and wanted, not a mirror image.

    Sometimes in using tools, especially in market analysis, the answers are often found to be more implicit when the timing is a chief consideration of the analysis and the answers often reach below the surface.

    • Dara

      Thanks Ellen for your perspective. I agree with you that Target missed
      the mark in understanding why Canadian buyers purchased from US Target stores
      in the first place, but this to me is
      failed market research. I believe at the root of the issue is understanding
      your current and potential customer base through continuous conversations
      before and during market entry. Your comment around “unique products, rather
      than discounted quality” stuck out for me.
      Another measure in our most recent study evaluated the perception
      of exclusive collaborations with well-known designers, which potentially, if
      executed effectively could have adjusted the value proposition away from
      commodity costing. The data suggest there was a miss in this regard.
      It will be interesting to see if retailers on their way into Canada can
      learn from this and look to embrace an ongoing conversation with their
      customers.

      • Ellen Woods

        I don’t know what research they did but I know they rely heavily on metrics and quantitative assessments. In thinking through this, it seems like their operations folks did not do due diligence on pricing models (which might have led to an investigation of white spaces and gaps) but also that there was too much reliance on manufacturer and third party sales data.

        My guess would be they saw the purchase chains fit their model and knew they were shopping in the US and attributed the same brand equity in CA that is present in the US. Big mistake. Plus brand equity does not equal brand loyalty. Most likely there is some loyalty to existing brands and with similar pricing there was no reason to switch. Classic retail issue and mistake. Retailers assume the newest kid on the block will assimilate the current business and it does happen frequently, but not when there is a better value with the same offerings. They probably boarder cross for more than one reason so it doesn’t eliminate the trip.

        The problem is that mobile polling and general quant studies do not get at the heart of choices and they really aren’t any better than metric data. Qual evaluations are needed. In Canada in particular, I have had problems with sample and with interpretation in the past because there are some many cultures at play. Canadians also take much longer to respond to surveys that consumers in the US. That market is also unique in that qual is typically done AFTER the quant and is expected to refine and differentiate the responses. My guess is that they did the research internally in order to keep the initiative quiet and maybe followed up with a market study.
        The brand equity probably looked good because they were measuring the US version.

        Retailers are bad about linking brand equity with brand loyalty. A close look at purchases might have confirmed that they are buying for value not experience. Pricing is hardly ever a primary reason why people shop a store but it is always a tipping point. What that means in this case is that the experience and offerings weren’t enough to change the pattern. Additionally, it stimulated competition among existing retailers and make the gap even wider with regard to price.

        This is not really anything new but it is interesting that it was such a big fail. Had they looked closer at the data and crafted discreet research around what wasn’t apparent, they might have succeeded.

  • I am surprised you missed the huge problem Target had because it failed to appreciate the consequences of Zellers multi year copycatting of Target’s branding and store colors.

    When Target opened its stores did not look like something different and exciting, rather they looked like refreshed versions of Zellers and this led consumers to lose interest.

  • Nadeem

    Why couldn’t Canadian Target chains feature a Pizza Hut express that would also serve popcorn like their U.S. counterparts did? I’ll never fully understand this.

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