Why Americas Retailers Like Target Fail Abroad | CNBC Marathon

The opening of the franchise kinda symbolized in Iceland at that time entering into a global community. I definitely give them credit for trying new things and trying to attract new riders. You know, the question will be, will it be successful? I would say that Canada was really Target's to lose. They'd fix one problem, but that would create another problem. And it just became something that nobody

could really figure out. People inside Target were saying, look, the writing is on the wall. This is going to be a disaster. These images are from the inside of a Target. Not in America, but in one of 133 Canadian stores that began opening in 2013. Empty shelves, mediocre atmosphere, and all in all, a surprisingly dull and unfamiliar experience. It is not the target Americans know and

love, and it was not the one Canadians were eagerly anticipating either. Despite all of the excitement, Target's Canada launch was a rushed messand an expensive one at that. It ended up costing the retailer $4.1 billion in after tax losses for just one year. Major supply chain issues, poor real estate decisions and fatal merchandizing errors left the retailer unprepared and ill equipped to handle the fallout. Target

gave up on its Canadian dreams in 2015. So what happened? And why couldn't it translate to a country that largely spoke the same language and whose consumer preferences were presumably similar? Target's launch in Canada was its first real foray in international expansion. The company had been eyeing the country for its close geographical location and its mostly English-speaking consumer base. Even the colors of the Canadian flag

matched the company's official colors, influencing the red maple leaf imagery in its ad campaign. An opportunity to purchase leases from failed Canadian discount retailer Zellers was also appealing, which altogether was a 1.825 billion CAD transaction in 2011. In the context of the aftermath of the 2008 recession, Target saw a lot of economic potential up north. Even by 2011, the consumer economy in the US was struggling

to return to any semblance of vitality or normality. That's Doug Stephens, author, retail veteran and founder of Toronto-based consultancy Retail Prophet. At the time, Target was interested in pursuing physical avenues for its international expansion rather than online. By 2013, the establishment and construction of its Canadian stores, merchandizing systems and supply chain were in full swing. And it was a big deal. It was to be Target's

largest single year of store openings, with the expectation to open 124 stores across all ten provinces. But it would not turn out to be the massive success Target was anticipating. Consumers were pleased at the idea of Target Canada. I recall going to a pop up shop in downtown Toronto that Target was holding and there was a line up around the block. People were extremely curious. It

really requires a lot of expertise of the target market in all its facets, you know, not just customers, but competitors, the local community suppliers, laws and customs and so forth. The company launched a multi-platform ad campaign which used the verbiage "neighbour" with a "u" in order to appeal to local culture. The launch generated decent buzz. People were talking about it. Canadians who had experienced Target in

America were eager. I think that there may be this assumption, particularly on the part of American companies, that Canadian consumers are essentially just carbon copies of American consumers. But as soon as you start making some of those assumptions incorrectly, they can add up to a problem. I would say, though, in this particular case, I would say that Canada was really Target's to lose. But there was

also, I think, a level of arrogance. With such a tight time frame, 124 locations in ten months, its supply chain was not properly structured and riddled with data errors. It grew to be one of the biggest hurdles as it continued opening. Those hurdles heightened alongside major technical issues and a flawed merchandizing system. They had overstocks in their warehouse of goods while stores were empty. I mean,

that I think was really the biggest problem. And had Target simply put a moratorium on it right away and said, Look, we can't afford to fail here, they were really well known for their product alliances and their designer alliances and a great store environment, they weren't necessarily up to scratch when it came to operational efficiency and enterprise management. And despite clear systemic shortcomings, Target assured consumers

their experiences would be remedied. The company even issued an apology video on YouTube. We had some disappointments when we opened. Certainly we think we've disappointed our guests. But here at headquarters and at our store teams, we're working really hard. If you were to trace this back to the decision that changed everything, it would be that decision to persevere through these inordinate systems challenges. And it became

like a game of whack-a-mole. You know, like they'd fix one problem, but that would create another problem. And it just became something that nobody could really figure out until it was too late. Alongside major renovation needs within buildings previously occupied by a discount retailer, aka Zellers, it led to an unsightly physical store experience. I mean, I was going into stores in the Toronto area and I

was looking around at, you know, running feet of empty shelves, merchandizing where you would have products one deep but 20 across because they were trying to fill space. And this is just not not normal, right? There was something dreadfully wrong, but they just kept denying it. Oh, you have these available stores and you're fitting your business into that instead of the other way around, really controlling

the location, the layout of the store. That is really a big barrier. The underestimation of Canadian retail competition was also fatal. Much of the budget market had already been captured by Walmart, Costco, giant Tiger and Sears. Target's poor leadership in the north also exacerbated its issues. A president of the Canadian business whose forte was not systems, not operation, not inventory management, but merchandizing, so the skill

set really didn't match the challenge. With the launch going south, May 2014 saw the exit of two Target executives, US CEO Gregg Steinhafel and the President of its Canadian operations, Tony Fisher. Steinhafel had resigned. Fisher was fired. Amidst already piling issues, Target was also facing even more challenges at home. An infamous 2013 data breach incurred $191 million in gross expenses and was one of the biggest

data breaches to hit a US retailer. Data from up to 40 million credit and debit cards were stolen, a scale that ultimately evolved into a damaging and lasting breach of customers' trust. By 2014, Target had determined its Canadian operations were so costly it would not be profitable until 2021 and finally called it quits. Its full year after tax losses in 2014 due to discontinued operations amounted

to a massive $4.1 billion. 17,000 employees lost their jobs. While an obviously difficult outcome, Targets narrative trying its hand at an international expansion and failing is hardly anything new. In 2006, Home Depot attempted an entrance into the China market. It misunderstood consumer culture and trends and closed all stores by 2012. In the case of Walmart's expansion in Canada, the retailer enjoyed a much better reception, even

love for Walmart in Canada. I don't know that the Canadian market was necessarily as receptive to the idea of Walmart coming into the country, but Walmart did a tremendous job and in the ensuing years they really managed to make themselves a part of the retail fabric of Canada. In the immediate aftermath of the Canada exit, the entrance of Brian Cornell's leadership helped the company recover and

maintain its beloved reputation back home. So he brought a lot of, you know, fresh air to Target. He had a focus on merchandizing, on building, you know, the digital business. Urban stores and as well as management style is very data driven but also being out within the company, but also out in the marketplace to really listen to his team but also to customers. And Target has

invested a lot since then in its stores, store remodeling and design. Also the digital operations, not just the website, but also integrating online with the stores for pickup or for d rive up for delivery, same day delivery. It's private label brands have been a particularly strong area, with a whopping 48 labels, ten of them boasting billion dollar value. Right now, in 2022, Target is no longer

pursuing its past international interests and is focusing entirely on the US market for the foreseeable future. It has plans to completely renovate 200 stores at home and open 30 more this year. They have even little initiatives thinking about their customer experience. They are now trying to expand that people that pick up online orders at the store, they can even add Starbucks orders and they also make

it easier to return with these drive up options. Its expansion strategy is in its brand partnerships, branching out into brands like Ulta, Disney, Levi's and Apple. The company is also leaning into its advertising offerings, using Roundel to optimize ad placement on its digital platforms. Inflation has wrought havoc upon the economy, and Target's profits sunk a striking 90% in Q2 2022 from last year due to an

excess of unwanted inventory. There has been a distinct change in consumer behavior. You know, it has been an extremely inflationary time and consumers have adapted. So they are buying less in discretionary categories. So Target is now shifting more on focusing more on the essentials again. And in the meantime is clearing this inventory of discretionary goods. So that has led to discounting. For now, Target's stay at

home plans are locked in place as the aftershocks of the pandemic ripple into a taxing inflationary wave. When you think of global fast food titans, you probably think of McDonald's. The chain has restaurants in more than 100 countries and has been a household name in America since the 1950s. But there is one European state where McDonald's failed to capture national attention: Iceland. Mcdonald's tried for over

15 years to make it in Iceland, but in 2009, the local franchise closed its three remaining stores with no plan to return. So what went so wrong for McDonald's in Iceland? To answer that, let's go back to when McDonald's first entered the market in 1993, at a time when the isolated island nation was shifting toward a free market economy and becoming more globalized. Then Prime Minister

Dav Oddsson took the first bite of an Icelandic McDonald's hamburger at its grand opening. It was seen as a sign of the country finally entering into the modern globalized world. When McDonald's opened up in 1993, I have never, ever in my life seen such an opening in one restaurant. There were lines for days outside the restaurant, and they were selling thousands and thousands of burgers every

day. But then, you know, after honeymoon is over, people started, it was just a usual thing. Locals welcomed the American fast food chain because it symbolized the country pulling away from isolation and nationalism. The opening of the franchise kind of symbolized in Iceland at that time, entering into a global community. And some scholars have pointed out that in relation to marginal countries or countries that feel

themselves a little bit marginal, getting international franchises can be important as kind of affirming that you are part of a global community or a community of nations. But in 2008, the global economic collapse hit the small country of roughly 300,000 people. The stock market and its three biggest banks collapsed, and almost every business in the country nearly went bankrupt. Thousands of people lost their savings and

Iceland erupted in protests. The krona lost roughly half its value and higher tariffs translated into much higher import prices. That made it difficult for foreign brands that were dependent on imports to maintain its profit margins without drastically raising its prices. According to the owner of the McDonald's Iceland franchise, the chain imported its raw ingredients from Germany. The franchise owner told the media that prices spiraled so

out of control that for a kilo of onion imported from Germany, he was paying the equivalent of a bottle of good whiskey. In contrast with McDonald's and also Burger King, which closed at a similar time as McDonald's closed, both were sourcing materials from outside Iceland. And the two restaurants in question closed in 2008 and 2009 following the economic crisis. So it simply wasn't cost effective to

have such a large share of materials for the fast food. Mcdonald's Icelandic franchise owner said that in order to remain in business and make a profit, McDonald's would have had to hike up its Big Mac price by 20% to $6.36. That would have made it the most expensive Big Mac in the world at the time. Switzerland currently holds that title with its $6.82 cent Big Mac.

In 2009, the franchise announced that it would be closing its three outlets with only a week's notice, blaming high operational cost. Mcdonald's local franchise partner in Iceland was a firm called List. The managing director of the McDonald's franchise told media that business had actually never been better at the time it pulled out of the country. He told media that the restaurants had never been this busy

before, but at the same time profits had never been lower. Icelandic media reported that 10 to 15,000 people patronized McDonald's daily in its final days of operation. 2008 marked a time when several businesses decided to exit Iceland, including McDonald's' rival Burger King, and Pizza Hut, which closed all but one outlet. Just like McDonald's, Burger King sourced their products from abroad. The fast food giants that did

exit Iceland had trouble competing with restaurants that sourced their ingredients locally. But other analysts say high import costs affected everyone, even the businesses that used homegrown ingredients. And the difference between the chains that succeeded in Iceland after the crisis and the ones that failed all boils down to management. Companies that survived were companies that had usually either financed themselves in a more conservative manner and/or maybe

simply got better assistance from the bank than other companies. So in the case of, for example, McDonald's, that company was highly indebted with foreign currencies when they went bankrupt. Iceland has long been known for its overpriced food and its high cost of living. In 2018, Iceland was ranked the second most expensive country in the world. A typical sit down meal will cost you around $20 to

$40. Local fast food owners say keeping prices consistent is the key to surviving in Iceland. Keep your prices reasonable. And if you keep your quality good, if you have the consistency, which is the key, consistency, consistency, consistency, then you can survive in almost any business. After closing, McDonald's' Iceland franchise lost the McDonald's signage and renamed the stores Metro. This new chain uses locally sourced food to

keep costs low and is still operating today. And not all American fast food chains left Iceland during the financial crisis. We've seen places like KFC, they did not close. They survived the economic crisis and the main difference is that they have most of the raw materials for their food is grown in Iceland. So I guess they were better off because of that. And things are getting

better in Iceland. Its economy is bouncing back and it's proving to be an inviting place to do business. According to the Economic Freedom Index, which looks at a country's business and investment freedom, Iceland ranks fifth among European countries and Icelanders are opting to eat out. Young Icelanders eat fast food on average every other day, spending an average of 220 USD a month. Iceland has also become

a hot destination for tourism. As of 2017, the number of foreign visitors to Iceland has more than quadrupled since 2010. With Iceland's economy looking bright, tourism climbing and residents enjoying the multiple fast food options, there might be hope for McDonald's to make a comeback in the Nordic region. India is the largest motorcycle market in the world. About 13% of Indians own a two wheeler of some

sort. For a rough comparison, about 8% of US households own a motorcycle or scooter. There are almost 170 million motorcycles, scooters and mopeds on Indian roads. That is enough bikes for over half the US population. And American motorcycle maker Harley Davidson wants in on the action. The struggling firm bets that spreading into other markets will help it survive declining sales on its home turf in America

and pervasive fears over its future. But Harley Davidson has only a small slice of the Indian market, and sales there declined 21.6% in the 2019 fiscal year and fell about 7% the year before. Total sales in India of motorcycles excluding scooters and mopeds, were 13.6 million inches 2019. Out of that, Harley Davidson sold only 2676. That prompts the obvious question: what is going so wrong for

Harley in the world's biggest motorcycle market? Two-wheeled transportation has long been a common sight on Indian roads, but the motorcycle market really started to take off in the 1980s when Japanese manufacturer Honda entered the country through a partnership with the Indian company Hero. In terms of volume, the market is still dominated by Japanese brands such as Honda and Yamaha. Harley Davidson entered the country about ten

years ago, but it has struggled to ramp up production, build out its dealer and service network and connect with customers in a crowded environment. India only became the world's largest motorcycle market in 2017, finally surpassing China. But Harley Davidson just doesn't make bikes Indians can afford. In fact, the machines are too expensive for 95% of motorcycle buyers in India. They cost too much up front, are

too expensive to maintain and get worse gas mileage than some of their competitors. The cheapest Harley Davidson in India sells for about 578,700, or just over $8,000. That is about eight times higher than the median price of a mass-market motorcycle. But Harley Davidson is a widely known brand, and many Indians consider its motorcycles something to aspire to. And not every buyer is choosing a bike solely

based on cost or practical need. There is definitely a subset of consumers who would gladly trade up to a Harley Davidson if they could afford it. But most of them settle for a cheaper bike made by a competitor. One of them, perhaps the best known, is the India-based brand Royal Enfield, which is the largest seller of heavyweight motorcycles in the world, including in India itself. Though

its biggest bikes are still smaller than the typical Harley, the brand has a large fan base with about 3.5 million motorcycles on the road. It has riding groups all over India, which are inspired by Harley Davidson, and the company conducts regular weekend riding programs. Royal Enfield motorcycles might not quite have the same prestige as a Harley, but they have their own illustrious history and have been

long used by the Indian military. They can also be had for much less money. A Royal Enfield Classic 350 mid-size bike costs only about $2,600, and the larger, recently launched Interceptor 650 goes for less than $4,300. Those lower prices have been a boon to the company's volumes. Royal Enfield grew about 23% in the fiscal year 2018. It grew another half a percent in fiscal year 2019,

selling about 805,300 units. Other motorcycle manufacturers, such as Germany's BMW, are taking note and making smaller, more affordable bikes tailored to local tastes. Harley Davidson has begun manufacturing some of its motorcycles outside the US in recent years to take advantage of cheaper labor, lowered shipping costs and local trade relationships among countries. Besides India, several of the world's largest motorcycle markets are located in Asia. That includes

China, Indonesia, Vietnam and Thailand, where Harley Davidson has a factory. This international push is part of a larger strategy to revitalize its business. The general consensus is that the company needs to do something to secure its future. While the company's global net income grew a slight 1.86% in 2018, it declined almost 25% in 2017, nearly 8% in 2016 and almost 11% in 2015. In the United

States, Harley Davidson has an extremely strong brand and a huge share of the market. The problem is that market is shrinking. At home, it is making a number of investments in new products, such as electric motorcycles. It's also stepping up efforts to attract new young riders and dabbling in concepts such as electric bicycles and venturing into international markets could provide tremendous opportunity for the company. I

definitely give them credit for trying new things and trying to attract new riders. You know, the question will be will it be successful? And I think to me, the jury is definitely still out and I'm very skeptical that they'll be ultimately successful on that. Harley Davidson wants half of its business to come from its international units by 2027, up from a bit more than a third

in 2018. That would help it weather a declining market at home. And beefing up its presence in Asia's massive motorcycle markets could help hedge the risks from US trade disputes with the European Union, which many say threaten Harley Davidson's business. But ramping up in Asia brings a new set of worries. Selling cheaper bikes around the world could do wonders for volume. But it could also drive

down the amount of money Harley-Davidson makes on each of its bikes. The brand currently has perhaps the most enviable margins in the business. So I think the question will be: what does this do to margins? Because I would argue that you're going to make less money on a smaller bike. And you also have a lot of entrenched competitors in some of these markets who've been operating

here for years, if not decades. So it's not like Harley-Davidson is going to walk in and say, hey, we're Harley, give us 10% market share. It's going to be a lot harder than that, clearly. And I think it's going to be a lot more expensive than some people might think. Harley-Davidson declined to comment to CNBC for this story, but the company has said it plans to

release two new middleweight motorcycles in 2020. Harley shipped 132,868 motorcycles to customers in the United States in 2018. It only shipped 2600 motorcycles out of the 21,000,002 wheelers sold in India in the same year. So the opportunity to grow its business and stay alive is tremendous. And Harley-Davidson needs a win.