September 18, 2019
Over the past year or so, we have noticed a number of companies shifting their strategic focus. While a mild shift in strategy could be a catalyst for improved performance and stock price appreciation, what are the potential pitfalls of a major shift in strategy? How can investors protect themselves from such risk, and how can they educate themselves about what might go wrong in such strategic changes? In this three part series, we will outline three examples of companies undergoing strategic shifts, what ultimately happened to their performance, and what investors can learn from these experiences.
A second example of the risk of changing strategy involves leading retailer, Target Corporation (Tii:TGT). Target had a strong history of success, tracing its roots back to the Dayton Corporation, with its storied history in the department store business and ownership of such famous department stores as Dayton’s, Hudson’s and Marshall Field’s. In 1962, Dayton’s opened the first Target store marking the company’s entrance into discount retailing – a relatively new concept at the time. Target grew rapidly, eventually eclipsing parent company Dayton-Hudson in size and geographic reach with locations in all 50 states.
By 2011, Target was looking for new avenues of growth and decided on expanding beyond the U.S. market into Canada. In January of that year, Target announced its entry into the Canadian market with its CDN $1.8 billion purchase of 220 leasehold interests operated by Zellers Inc. For the initial period, Zellers would continue to operate the stores under their banner, later to be transitioned to the Target banner for 100-150 locations beginning in 2013. While this plan offered a way for Target to quickly ramp up its presence in Canada, there were a number of open questions that raised concerns with investors.
When buying existing properties, such as retail store locations, investors would expect that management had done their homework on those locations to make sure they truly fit the company’s strategy. After all, in the initial press release announcing the move into Canada, Target’s then chairman, president and CEO, Gregg Steinhafel said, “We are very excited to bring our broad assortment of unique, high-quality merchandise at exceptional values and our convenient shopping environment to Canadian guests coast-to-coast.” Investors could be forgiven for expecting that Target’s management team had purchased leaseholds on stores in locations that would fit with the overall image and business model of Target. Unfortunately, investors would be wrong in that assumption.
Benefiting from hindsight, investors might have been curious regarding how a company that prides itself on creating a unique shopping experience for its customers could effectively allow another firm to make the critical decisions regarding store location, size and layout by electing to buy existing stores rather than build their own. It is certainly possible to acquire an international operation that has achieved its own success in local markets and continue to operate that business successfully, but what Target was trying to do was expand the success of Target and its culture and shopping experience to the Canadian market. It would be fair to ask whether a better strategy for expanding into Canada might have been a more organic approach, where Target identified the most ideal markets and store locations and then built stores to fit the company’s image and the experience they were trying to share with consumers. This strategy would be similar to what Target pursued in 2012 with their CityTarget store concept, adapting their core image and shopping experience to locations that met the unique needs of urban consumers.
Ultimately, Target’s expansion into Canada failed to gain traction for a variety of reasons. The stores were not of an ideal layout to fit the Target image and many were located in smaller markets and locations that were not easily accessible to the target consumers. In addition, the supply chain was not developed sufficiently to meet the needs of the classic Target stores, resulting in poorly stocked or empty shelves, further eroding the customer experience. By 2015, Target announced the closure of their Canadian stores, incurring a total loss of approximately $5.4 billion for the effort. For investors, this case is a reminder to ask some of the more common sense questions when companies embark on a significant change in strategy. What are the benefits of the approach that management is pursuing? What could go wrong? Are there potentially better paths with similar potential for success with less risk? Honestly considering such questions might have provided Target investors with advance warning of potential challenges on the path to international expansion.
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