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Expanding North of the Border: Full Steam Ahead or Proceed With Caution?

STEVE WARTECKER

shutterstock_280590275In the 1950’s it was Sears. McDonald’s in the 60’s. In the 70’s it was Burger King, Wendy’s and 7-11. Toys ‘R’ Us, Costco, Starbucks and The Gap in the 80’s and Home Depot and Wal-Mart entered Canada for the very first time back in the mid 1990’s. These are some of the key American retailers that helped pave the road north of the border. With the exception of Sears, these retail pioneers are still relevant and thriving in Canada today.

 

In the last few years, Canada has seen a new wave of US-based chains set up shop. Some of the more recent companies to successfully expand north include Nordstrom’s, DSW, Chico’s, Cabela’s, Panera Bread, Five Guys and Chipotle Mexican Grill. Although there are many factors fueling this trend, many believe the global recession of 2008 sparked this renewed interest in the Canadian market as Canada’s economy remained quite stable throughout the downturn.

 

So why Canada? Canada’s geographic proximity and many commonalities with the US is very reassuring for US companies contemplating international expansion. In addition to sharing a border, Canada and the US also share a common language (except Quebec) and a similar culture.

 

Canada is also seen as an attractive and logical foreign expansion destination for US companies because existing supply chain networks can be used which significantly minimizes both cost and risk. Canada receives high levels of American advertising and marketing courtesy of American cable television networks broadcasting in Canada and U.S. periodicals and publications distributed in Canada. This is a real bonus as the brand may already be well known to most Canadian consumers.

 

In addition to all that, Canada’s retail sector is much less competitive and therefore more productive than the US. The US has approximately 23 square feet of shopping mall area per person compared to only 14 square feet per person in Canada. On average, shopping malls in Canada do $580 per square foot in sales compared with $309 in the U.S.

 

What Can Go Wrong?

Being successful in the great white north however is not always a guarantee as we have all just witnessed Target Corp’s failure in Canada. When most predicted a slam dunk for Target, the reality was a bankruptcy filing and a massive $5.4 billion write-down. On January 15, 2015, Target officially announced plans to pull out and close all 133 Canadian locations.

 

How did the biggest retail failure in North American history happen in less than 24 months? What went so terribly wrong for Target? The honest answer, everything. The failures of Target’s first attempt at international expansion are well documented; higher than expected prices, empty shelves, unexciting merchandise, an overly ambitious launch, poor locations, the list goes on and on.

 

Although certainly the worst case, Target is not the only example. In February 2009, after just 5 years in Canada, Wal-Mart announced it would close all six of its Canadian Sam’s Club locations. At the time, Walmart claimed the decision was to shift focus towards its supercenters, but most industry experts believed Sam’s was struggling to compete with Costco and the non-membership Real Canadian Superstore (owned by Loblaw), which both enjoyed a well-established history in Canada.

 

Both Sam’s Club and Target’s failed forays into Canada demonstrates the value of customer intelligence, especially when entering a foreign market. Companies should see these examples as cautionary tales. Although many similarities exist between Canada and the US, this does not always translate into success.

 

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