Why Target Failed in Canada?

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Industry Analysis

To deeply investigate Target’s expansion failure, we should focus on Target’s original intention to expanse into Canadian market, therefore we will analyze the industry of department stores in Canada firstly. This industry is defined as selling a broad range of merchandise in one store, such as apparel, jewelry, cosmetics, home furnishings, general household products, toys, appliances and sporting goods (Lerman, 2014). However, big-box retailers and supercenters that offer fresh groceries in their stores and warehouse clubs that operate under membership programs are not included in this industry.

Barrier to Entry

Before Target entered into the Canadian department stores industry, it is a potential competitors since it has capacity to do so. The barrier to enter this industry is considered medium since the existing companies can get benefits from economies of scale and absolute cost advantages but low in brand loyalty and switching cost. In this industry, economies of scale arise from two aspects: the first one is the discounts on bulk purchase of merchandise that are ready for resell. However，high volume of inventory implies that companies would spend significant dollar amount in storages. Therefore, to balance the purchasing cost and the storage cost is an art in this industry. On the other hand, economies of scale also arise from the cost savings associated with distributing, marketing and advertising costs over a large sales volume. The established companies tend to have their own distribution channels and distribution centers. The companies can distribute their inventory through the optimum channel with appropriate volume according to the various demand of different stores. This is one of the reasons that Target lack of its own distribution method so it cannot lower its product prices as its competitors do. A deep analysis will be discussed later.

Also, the established companies have an absolute cost advantage relative to potential entrants. This advantage comes from superior production operations and processes due to accumulated experience and investments. For example, Walmart, invested heavily in its IT system so they are able to check the status of every single inventory and place an repurchase order in time to make sure the products will never out of stocks. However, this barrier is not a big threat to Target since they have successful operations and financial performance. In other words, Target knows how to operate department stores smoothly. In addition, since most customers in this industry are very price sensitive, most of established do not experience high brand loyalty. As long as the price is attractive, the customers will switch to that store since customers are not experience high switching cost as well.

In sum, barriers to entry into the department stores industry are moderate and largely relate to capital intensity and distribution networks. Sears, Walmart, TJX and Hudson’s Bay are top four

companies in this industry, and concentrate 46.2% of the industry revenue (Lerman, 2014). New entrants will need high initial costs for rent and inventory as they strive for the market share.

The Bargaining Power of Suppliers

As the established companies in department stores industry are mostly merchandising companies, therefore what they do is basically resell what they purchase from various products in different industries. The majority products are furniture and household appliances, women’s wear, men’s wear, children’s wear, drugs and cosmetics, toys and hobbies, etc. These products’ parent industries share one common feature: they are all fragmented market, which means that no single companies can influence the product prices or provide poor quality products. Moreover, the products that suppliers sell have many substitutes and are not vital to the established companies in this industry. This weaken suppliers’ bargaining power. What’s more, companies in this industry would not experience significant switching costs if they moved to the products of different suppliers. Also, the profitability of suppliers is significantly affected by the purchase of the companies in this industry since they are purchasing significant amount of products from their suppliers. For example, if Walmart stop selling products for Schiff Nutrition company, which develops and distributes vitamins, Schiff Nutrition will lost $135.6 million annual sale and that accounts for 46.96% of its annual sales in 2012 (Platt & Duronio, 2012). Lastly, suppliers cannot threaten to enter department stores industry because that require significant amount of initial costs and brand recognition. Therefore, the bargaining power of suppliers in this industry is low.

The Bargaining Power of Buyers

As the established companies in department stores industry are selling products that can be directly consumed by their customers. Therefore, the customers for this industry is mostly likely individuals or general households. These customers have moderate bargaining power since they have choice of who to buy from. The department stores industry is in decline of its life cycle, and the most likely outcome of a declining industry is there are several giant are going to consolidate the market. In our case, Sears, Walmart, TJX and Hudson’s Bay are oligopoly in this industry. However, since these customers are very price sensitive, the established companies will keep their products price as low as they can. One other reason that lead the established companies to lower their price is their customers are not experience any switching cost when they choose another company to shop. This enhance buyers’ bargaining power. However, Individual consumers or household customers are not purchasing in significant quantities that enough to further bargain down the products price. Additionally, the revenue that generated from single buyer are taking a small percentage of the total revenue. Losing some customers may not the desire of established companies. However, the company would not suffer significant change if some customers choose to leave for another company. Last but not least, buyers are unlikely to threaten the established company by entering into the industry and independently produce the products, thus supplying their own needs. Therefore, the bargaining power of the buyers in department stores industry is low to medium.

Threat of Substitutes

There are numerous substitutes in the market place. For example, specialty apparel and footwear retailers, supercenters and warehouse clubs, hardware stores, furniture stores, home