Target International Expansion in Canada

Target: The Retailer

2nd Largest retailer in US. First Minneapolis Target Store in 1962.

1,742 Stores with $63 Billion in Sales.

Stores added at pace of 21% per annum since 1962. Gross Margins 31% to 33%. Net Profit 3.5% to 5%.

Target: Strategy
Implements Best Cost Strategy. Slightly higher priced stylish products than WalMart.

The wealth and size of U.S. market gave Target strong incentive to develop unique upbeat charming retailing concept Echoes Raymond Vernons Product Life-Cycles theory

Competes successfully against Wal-Mart.

Target: Growth Secret

Revenues Growth of 6.89%.
Total Retail Square Footage Growth 7.05%.
Target Sales (in Millions) Trend With Relative to Store Size
70,000

60,000

50,000 Total Revenues 40,000 Net Profit 30,000 Retail Square Feet (0,000s) Gross Profit

20,000

10,000

0 2004

2005

2006

2007

2008

2009

Target Key Financial Figures

Key Findings
Revenues Growth Rate has slowed down 12% to 7% from 2005 to 2009.

Net Profit Growth Rate declined from 28% to 6% in same period. Becoming more difficult to grow in U.S..
Factors:
Increasing Retail Saturation in U.S. The ongoing recession, which started in 2008.

Current Status: Slower Growth

Target Key Financial Figures Growth Rate Change
30%
25% Growth Rate Percentages % Sales Total Revenues Gross Profit

20%
15% 10% 5% 0% 2005 -5%

Net Profit Revenues per square foot

2006

2007

2008

2009

Solution
Extract further efficiencies from value chain. Grow More by adding More Stores. Expand at the rate of 8% to have a growth rate of 7%. Where? U.S.? Difficult in U.S.

Go International. Where?
Canada first and other countries later.

Why?
More American Corporations earning bigger shares of profits internationally.

Knickerbocker: Firms will use overseas profits to compete against Target within U.S.. Wal-Mart Canada has $15 billion of revenues from 317 stores. Not to lag behind competition. Obtain valuable International Experience and economies of scale.

Why Canada?

Canada Close to Existing Target Stores and Distribution Centers.

Canada Closest to U.S.: As per Cage Theory.

Closest as per Country Portfolio Analysis.

Toronto suburbs 12th largest market in world of 22 Million people valued $550 Billions

Canada & U.S. Comparisons

Ethos match
Canada is one of the world leaders in social welfare program.

Matter of immense pride for Canadians.

Target has policy of donating its 5% profits. Such policy resonates well with Canadian national ethos.

Country Specific Advantages

Lowest Corporate and Payroll taxes among G7 countries. Lowest debt-to-GDP ratio in the G7 and fastest economic growth in the G7 (2.6% for 2010 and 3.6% for 2011).

11th largest economy with worlds soundest banking system.

Canada allows full repatriation of investment earnings.

Country Specific Advantages

The highest proportion of post-secondary graduates in the OECD. High quality of life with a commitment to the rule of law and a strong justice system. Canadian Real Estate Prices most competitive in the world. Canada leads the G7 in low business costs, with an overall cost advantage of 5.0% over the U.S..

Rich History of FDI:

Canada ranks on top in FDI as percentage of GDP (30%) in G-7. U.S. is the top investor with $288 billion dollars of FDI. 20.9% of Retail industrys ownership is through FDI.

Retail Market in Canada

The retail sector is a vital part of Canada's economy and society. The direct contribution of retail trade to the economy was $74.2B in 2009 (6.2 % of GDP) Employs 2.0 million people, or 11.9 percent of the total working population in 2009.

Retail Market in Canada

The Canadian retail market has been evolving rapidly since last decade
o Emergence of big box stores o Everyday low pricing

o Greater Concentration in the retail market

Retail Market in Canada

Retail Market in Canada

Customer Reaction
o Liked Everyday Low Prices o Liked One-stop Shopping o Older Customers Responded Negatively

Retail Market in Canada

Impact of Economic Downturn

Retail Market in Canada

Canadas Workforce
o Canadas Workforce is highly educated

o Ranked 2nd in the G7 for its university completion rate o More than half of all Canadians between the ages of 25 and 35 have received postsecondary education

Retail Market in Canada

o Canadas Workforce is Multi-cultural

Mode of Entry
Establish a wholly owned subsidiary by acquiring an existing enterprise in Canadian market
o Target can rapidly build its presence in the market
o Less riskier than Greenfield investment o Gets immediate access to logistics, and managers local knowledge of the business environment

Mode of Entry
Acquire Zellers

Mode of Entry
Acquire Zellers
o Established in 1931 by Walter P. Zeller o Second largest retailer in Canada with about 280 stores o Zellers stores carry a variety of items, from apparel to groceries and furniture. o $6 Billion in revenues, with a Growth rate of 9%

Mode of Entry
Why Zellers?
o Zellers introduced better quality merchandise and different customer service concepts. o Zellers strategy is similar to Target's

o New and remodeled Zellers stores are often compared to those of Target Corporation in the United States.

Mode of Entry
Potential Issues
o Financial Resources o Hidden Surprises o Cultural Clash

Political Risk
Tradition of Democracy Sovereignty of Quebec NAFTA

Business Risk
Exposure to loss of capital Vast distances between major cities Bi-lingual labeling and marketing Scale of Entry Wal-Mart has been here for 15 years! Distribution center locations Exchange rate flux

Risk Mitigation
Use CAGE Theory Look to acquire Zellers infrastructure in place for seamless operational startup Possible Joint Venture due to M&A fail

rates
Proper Screening and auditing

Implementation
Launch either small scale Greenfield or Zellers M&A Renovate while you wait Build 10 new stores in US

Gain approval from The Foreign

Investment Review of 1973

Non Financial Investments

Update stores to perform as LEAD certified Employee Motivation Team Building Customer Satisfaction

Financial Investments
Initial Screening and Research legal fees and permitting Cost of acquisition or build Geocentric Staffing Localized Marketing campaigns Integrating IT

Control Systems
Implement Data mining via reward cards and Target Visa Incentivize mangers based on performance metrics Code of Ethics reward social responsibility and sanction the rest

Milestones
Greenfield
Launch 5-6 stores mid
decade 90 Day (Lean MFG) 2 year review of financials

3 year plan to fully

integrate Target Culture

Zellers Acquisition 90 Day Lean 18 month alignment to integrate culture Anticipating 5 years to fully integrate culture 10 years look to surpass $8 Billion in sales

Performance Metrics
US population = 301 Million Per Capita Income = $43,730 Target Sales = $63 Billion Per Capita Target Sale = $ 209.30 Canadian Population = 32.6 Million Per Capita Income = $39,010 Potential Per Capita Sale= $186.71 Potential Target Canada sale= $6.1 Billion Improving the per capita Target sale by 50% would generate approximately $9 Billion in sales

Exit Strategy
Exit based on the following criteria:
Insufficient Demand Political and Economic instability Fixed costs > Revenue

Stopgap with best practices Divest stores to clean up financials Fully divest stores and distribution centers

Any Questions?