Ravi AnupindRavi Anupindi, professor of technology and operations at the Ross School of Business at the University of Michigan, shares his thoughts on Target’s plans to pull out of Canada where it has 133 stores and 17,000 employees.

Q: Target is known in the U.S. for getting it right on merchandising and supply chain management. How could it get these things so wrong in Canada?

Anupindi: Canada is different in many ways and Target bit off more than it could chew. Launching at scale within two years with 125+ stores in a country that was different in many ways was a daunting challenge.

• Geography: Sparse population, concentrated in a few urban centers with large distances between them. Canada is bigger than the U.S. in land mass with a population less than that of the state of California.
• Heterogeneity: Population is more heterogeneous and varies across these population centers. Quebec is predominantly French speaking whereas Toronto and Vancouver have significant ethnic populations. Canadian consumers are also much more value-conscious. As a result, Canadian customers expect much more local customization in the store offerings.
• Cost of doing business is higher: Labor costs are higher; Target incurred significant costs in finding and training labor to deliver to its standards of customer service. Higher regulations that are not harmonized across different provinces also increase the cost of doing business. Transportation costs are higher due to higher gas prices and longer distances to be traveled by trucks trying to replenish stores. Packaging has to bilingual (English and French), adding to costs.
• Price inequity: Brand manufacturers price goods differently in the U.S. and Canada and, in general, charge higher prices in Canada. But large portions of the Canadian population lives along the U.S.-Canada border and several shop across the border. So when customers observe price differences across the border in stores of the same retailer, they feel cheated.
• Scale Challenge: In 2011, Target entered Canada acquiring the 220 leases of the failing chain Zellers. In the next two years, Target consolidated this footprint and opened 125 stores by 2013 that increased to 133 by end of 2014. Several locations needed significant remodeling. Target ended up building its own distribution centers to supply these stores. Overall costs of remodeling, building distribution centers, putting a team together, hiring staff, etc., exceeded Target’s cost estimates.
• Empty Shelves: But apparently two years was not sufficient to get the supply chain up and running at full speed to supply 125+ stores leading to empty shelves. Lack of sufficient products on the shelves with the pricing and cost to serve challenges meant that Target’s motto “Expect More, Pay Less” rang hollow for the customers.
• Competitors’ Response: At the same time, the two-year ramp-up gave sufficient time to established competitors to respond, and Target found it difficult to match their pricing and assortment.
• Fighting two battles at once: The last two to three years have been challenging for Target in the U.S. as well. It was beginning to lose its “chic” appeal with customers. And then the 2013 Christmas data breach put significant pressure on management and led to the resignation of its then-CEO, ultimately costing Target $150 million. It becomes harder to fight battles on two fronts—U.S. and Canada—without a leader at the helm for several months.

Thankfully, last fall, Target was able to find a new CEO and the situation in the U.S. is improving.

Q: Do you think the company is throwing in the towel too soon?

Anupindi: I don’t think so. I am sure the new CEO has done his due diligence and decided to focus on improving the company’s performance at home and not have Canadian operations become a drag. The scale of Canadian operations was sufficiently large and would take much longer to fix.

Q: How can Target and other similar retailers ensure this doesn’t happen on the next multistore launch on foreign soil?

Anupindi: Go slow. Do a gradual launch perfecting the model one region at a time. As I said, Canada is not the U.S. Retailers need to understand the Canadian customer better and develop a business model that is appropriate for that context.

Contact: 734-615-8621, anupindi@umich.edu Bio: bit.ly/15r2bmX