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Pride took down a giant: How Target’s corporate hubris was its Canadian undoing

 

Treat us like Americans — or else. That’s what Canadians kept telling U.S. retailer Target Corp., by staying away from its sparsely stocked and overpriced stores for almost two years. But the Minneapolis-based giant, which had staked its celebrated name on its first expansion foray outside the U.S., seemed determined to continue forging ahead with an ill-fated experiment that never gained traction in the diverse Canadian market.

Less than four years after announcing its imminent arrival, and two years after opening its first stores in the northern frontier — a place that should have been the easiest and friendliest market for the second-largest U.S. discount chain to gain a foothold — Target announced it will exit Canada by mid-year.

That the company’s brand, so revered and lauded in the U.S., had been beaten and tarnished in Canada was a given. But just how badly came to light Thursday when the Canadian subsidiary filed for protection from its creditors under the Companies’ Creditors Arrangement Act (CCAA) in Toronto. It showed more than $2 billion in operating losses since 2011, when Target acquired 220 locations from now defunct Zellers Inc., a subsidiary of Hudson’s Bay Co., and announced its expansion into Canada with much fanfare.

The company was hemorrhaging millions daily, enough that it would have taken until 2021 to earn a loonie in profits. The bottom line: 133 stores across the country are closing; 17,600 employees will be out of work. And the cost of the Canadian misadventure to the U.S. parent? A cool $5.4-billion write down.

Such a needless waste. Rarely has there been a company to enter this country with more brand recognition than Target had. Canadian shoppers accustomed to cross-border shopping waited with great anticipation for its arrival in March 2013. All we wanted were U.S.-style Target stores in Canada, slightly retrofitted to adapt to our national idiosyncrasies, namely frugality and politeness. Instead, what we got were empty shelves, higher prices, sketchy customer service, and apologies.

“You can’t think of a retailer that had a more positive image even before it was launched in Canada than Target. If you can’t expand into Canada, where can you?” asks David Soberman, professor of marketing at the Joseph L. Rotman School of Management at the University of Toronto.

Was Target’s demise in Canada an extreme example of internal mismanagement? Did the brain trust in Minneapolis vastly underestimate what it takes to create and build a new business in a new country? Those were clearly part of the problem.

But it’s likely the bigger culprit was hubris. After all, excessive self-confidence and pride has forced the retreat of many corporations from markets before Target — and will afterward.

Mighty Walmart, the world’s largest retailer, was forced to exit the German market US$1 billion poorer in 2006, despite the fact that — being Europe’s largest market, with more than 80 million people earning high incomes, robust spending, and excellent infrastructure — Germany looked like a no-brainer on paper.

But apparently, Walmart’s mistake was thinking Germans liked to shop just the same way Americans do. By the time executives figured out that the one-size-fits-all business model doesn’t always, it was too late to fix the damage. After eight years, the Arkansas-based chain waved the white flag and beat a retreat.

Home Depot learned its own hard lessons in China in 2012. After six years, the home-improvement giant gave up trying to replicate its winning formula in the world’s second-largest consumer market, citing cultural differences.

And Canadian Tire, a national retail institution here, had a disastrous foray into the U.S. in the 1980s that left the company on shaky financial ground for decades. Expanding into the hyper-competitive U.S. market is tough enough, but the retailer didn’t stand a chance selling hockey sticks and snow tires in its Texas-based Whites stores.

In Target’s case, the warm and fuzzy goodwill Canadians felt for the retailer before it opened shop here was its undoing, once shoppers grew annoyed that they were being given far less than what they had come to expect from outlets across the border.

“I don’t think they brought their ‘A game’ to Canada,” said Michael Mulvey, assistant professor of marketing research at the University of Ottawa. “They compromised who they were. Canadian shoppers figured it out and punished them for it.”

Even before Thursday’s announcement, Target’s protracted woes here were already having a chilling effect for other U.S. retailers planning moves into Canada. Nordstrom Inc. had announced it was delaying the debut of its discount chain Nordstrom Rack until 2017 to “ensure we understand how to best serve Canadians.” But that part’s easy: Just treat us as well as you do the Americans.

Financial Post

January 16, 2015

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