In a monumental decision, Target announced that it will pull out of the Canadian market less than two years after a much hyped entry. The magnitude of the loss is staggering: 133 stores, more than 17,000 associates and a write-off that is being estimated at over $5.4 billion.
Coming relatively soon after Tesco’s rather disastrous foray into U.S. retailing with Fresh & Easy, the obvious question is why did this happen and what impact will it have on future global expansion plans for retailers. There are a number of already published commentaries on what went wrong, as this business struggled from the very outset. We’ll boil it down to a few key points:
An overly aggressive approach. In Canada, Target acquired the leases from local chain Zellers and spent about a year upgrading the stores. It opened more than 125 stores in 2013, its largest single expansion ever. There was no testing and no learning—just the presumption that Target would get it right the first time.
Adjusting to Canadian tastes. Despite Target’s Minnesota headquarters being not too far from the border, Canadian consumers are different than U.S. consumers. Target had no roadmap for the new market and came in with the wrong merchandise assortments, with less selection and often higher prices than at its U.S. stores, which many Canadian consumers are very familiar with. Markdowns were a huge problem that impacted margins even as stores radically under-performed their U.S. counterparts.
Supply chain and systems. Target’s Canadian stores were painfully impacted by out of stock products and higher prices due to poor supply chain planning and systems that did not fully integrate with U.S. operations. The result were stores that felt underwhelming to Canadian consumers and ones that Target could not efficiently plan for or supply.
Competitive conditions. Target’s main competitors in Canada, Loblaw and Wal-Mart, were aggressive in upgrading their operations, store bases and competitive positioning in advance of Target’s entry. They made certain to not let up as Target’s struggles mounted.
What’s the lesson? International expansion is an extremely difficult proposition. The playing field is littered with failures, from companies large and small, that were unable to navigate expansion into a new country.
Two years ago at the National Retail Federation conference, we delivered a keynote speech on this very topic. After studying successes and failures across the world, we were able to create an approach dealing with four key aspects of expansion success:
Have a clear reason for being there.
Really listen to the customer and have leadership flexibility.
Partner (acquire/joint venture) with local leadership and talent; respect local culture.
Execute on great retail: have a well-defined real estate strategy, marketing, systems and infrastructure.
A clear reason for being there
In order for a retailer to succeed in a new country, there needs to be a point of difference being offered to the local consumers. These may include: better product selection, lower prices, a more exclusive brand, quicker fashion trends, safer food, innovative service, a unique offer, etc.
In every instance, the clear winners are able to define differences in their offer that is unique to the country they are entering. Incumbent retailers have the luxury of simply being there. They have an established brand and a set offer. New global competition cannot simply “show up,” it must have a reason for coming.
Listen to the customer
While it sounds obvious, companies often assume that consumers in similar cultures (same language or geographic proximity) will behave the same. It is simply not true. Really listening to the customer might sound like a cliché, but it represents a fundamental starting point for any company that wants to succeed globally. At a minimum, listening means doing extensive market research before entry, being able to quickly adapt once there and staying on top of the market over time.
While this might be a fundamental truth for retail success anywhere, it is more vital the further away from home a company goes. It also requires leadership flexibility. Global retailers must have executives who understand their company’s culture while being nimble enough to understand the need to adapt it to local market conditions.
Partner with local leadership and talent
Whether through acquisitions, franchising, establishing joint ventures or hiring locals in key leadership positions, establishing local partnerships is a must. All of the macro data, market information and customer research in the world won’t arm you with the local knowledge necessary to succeed in a new country.
The best companies understand this and have been extremely innovative in adapting their models to include local partners. This helps speed the learning curve and provide the critical on-the-ground knowledge that can’t be replicated.