• by Kurt Jetta , February 4, 2015

Target is finally handing Canadians the deep discounts they crave. These discounts, though, are only due to the store liquidations associated with Target’s humiliating exit from a market they entered only two years ago.

Scrambling to eulogize Target's disaster, pundits have harped on supply-chain snafus, poor store locations, stiff price competition and differing consumer tastes in Canada vs. the U.S.

"You can't just cookie cutter a strategy into the market and have it play out the way you want,” Sears Canada CEO Ron Boire told one interviewer, noting that shoppers even differed by market.

In fact, Target's problems in Canada had less to do with cutting cookies, and everything to do with cutting prices. Namely, it never learned how to do it, Canada-style.

The postmortems fed two big myths about the Canadian retail market: first, its shoppers are dramatically different than the U.S., and second, that it is highly price competitive.

Let’s debunk the myth of distinct shopper preferences first. If we looked at brand market share data in most categories between the two countries, they would be remarkably similar. Furthermore, we would see that the size of Canadian categories is consistently 10 to 13% of the U.S. market.

There is, in fact, one major difference between shoppers of the two countries, but we need to debunk the myth of intense price competition. There are far fewer sizable retailers in Canada than the U.S. It is a fundamental law of economics that less competition leads to higher pricing. So with less competition and higher distribution costs from a less-populated country, it stands to reason that pricing will be significantly higher in Canada than in the U.S. 

There's a catch to this, however, and it's a big one: Canadian chains are ruthless when it comes to the sheer depth and frequency of their promotional discounting events. Pursuing a high/low pricing strategy, retailers like Loblaw’s stage promotions more than twice as often for like items, according to TABS Group research. Upping the ante, the discounts are deeper — 30 to 45% off during a sale, versus the typical 15 to 25% discounts seen in the U.S.

If all of this sounds like madness, it's a distinctly Canadian brand of it. As a result, Canada-based retailers typically derive almost 40% of their revenue from these promotions, compared to less than 20% for U.S. retailers. Using these norms, Target sacrificed about 25% of their potential sales due to not promoting at competitive levels.

Why was one of the most successful retailers in U.S. history cowed by a retail market a tenth the size of its home turf? It's worth noting that Target's new CEO, Brian Cornell, had a stint as CEO of Walmart's Sam's Club division for several years. Was he too steeped in Walmart's "Everyday Low Pricing" (EDLP) model to stomach what is necessary in Canada?

That would be ironic, given that Walmart Canada itself has done a good job learning how to dangle deals. They recognized that a high percentage of Canadian consumers is unable to absorb the high everyday prices.

Of course, it could also be that Cornell saw more fundamental problems that need fixing. The shortcomings of Target's supply chain have been well documented. Indeed, the dirty little secret is that Target has always had logistics issues. In the U.S., it used Band-Aid solutions, such as stuffing their shelves with excess inventory to reduce, but never eliminate, out of stocks. Target exported these nagging difficulties to a country that has more land but far fewer stores and shoppers. Not good, considering that deft logistics are crucial for keeping shelves properly stocked for splashy sales events. 

To many, this seemed like a temporary problem with an inevitable solution. But Target never recovered. Maybe Target, which has always been a self-hating promoter in the U.S., did not have it in their DNA to do what was required to succeed.

The Canadian market requires sophistication in concocting sales promotions that will grab shoppers' attention. That's a different kind of sophistication, it turns out, than the kind that built "Tar-zhay" in the U.S.

In Canada, more now than ever, "Tar-zhay" just sounds like phony French.