This is a shortened version of a story first published by Canadian Business.
The grand opening of Target Canada was set to begin in one month, and Tony Fisher needed to know whether the company was actually ready. In February 2013, about a dozen senior-level employees gathered at the company’s Mississauga, Ont., headquarters to offer updates on the state of their departments. Fisher, Target Canada’s president, was holding these meetings every day as the launch date crept closer. The news was rarely good. The company was having trouble moving products from its cavernous distribution centres and onto store shelves, which would leave Target outlets poorly stocked. The checkout system was glitchy and didn’t process transactions properly. Worse, the technology for inventory and sales was new to the organization; no one seemed to fully understand how it all worked. The 750 employees at the Mississauga head office had worked furiously for a year to get up and running, and nerves were fraying. Three test stores were slated to open at the beginning of March, followed shortly by another 21. A decision had to be made.
Fisher, 38 years old at the time, was regarded as a wunderkind who had risen through the ranks at Target’s American command post in Minneapolis, from a lowly business analyst to leader of a team of 400 people across multiple divisions. Launching the Target brand in a new country was his biggest task to date. The news he received from his group that February afternoon should have been worrying, but if he was unnerved, Fisher didn’t let on. He listened patiently as two people in the room strongly expressed reticence about opening stores on the existing timetable. Their concern was that with severe supply chain problems and the prospect of empty shelves, Target would blow its first date with Canadians. Still, neither one outright advocated that the company push back its plans. “Nobody wanted to be the one to say, ‘This is a disaster,’ ” says a former employee. But by highlighting the risks, the senior employees hoped they could prompt Fisher to tell his boss back in Minneapolis, Target CEO Gregg Steinhafel, that they needed more time.
The magnitude of what was at stake began weighing on some of those senior officials. “I remember wanting to vomit,” recalls one. Nobody disagreed with the negative assessment—everyone was well aware of Target’s operational problems—but there was still a strong sense of optimism among the leaders, many of whom were U.S. expats. The mentality, according to one former employee, was, “If there’s any team in retail that can turn this thing around, it’s us.” The group was riding a wave of momentum, in fact. They had overcome seemingly endless hurdles and worked gruelling hours to get to this point, and they knew there were costs to delaying. The former employee says the meeting ultimately concerned much more than when to open the first few stores; it was about the entirety of Target’s Canadian launch. Postponement would push back even more store openings. Everyone else in attendance expressed confidence in sticking to the schedule. When the meeting concluded, it was clear the doors would open as promised. “That was the biggest mistake we could have made,” says the former employee.
Roughly two years from that date, Target Canada filed for creditor protection, marking the end of its first international foray and one of the most confounding sagas in Canadian corporate history. The debacle cost the parent company billions of dollars, sullied its reputation and put roughly 17,600 people out of work.
Target’s arrival was highly anticipated by consumers and feared by rival retailers. The chain, whose roots stretch back to 1902, had perfected its retail strategy and grown into a US$70-billion titan in its home country. Target was a careful, analytical and efficient organization with a highly admired corporate culture. The corporation’s entry into Canada was uncharacteristically bold—not just for Target, but for any retailer. Under Steinhafel, the company paid $1.8 billion for the leases to the entire Zellers chain in 2011 and formulated a plan to open 124 locations by the end of 2013. Not only that, but the chain expected to be profitable within its first year of operations.
Why Target Canada collapsed has been endlessly dissected by analysts, pundits and journalists. But the people who know what happened best are the employees who lived through the experience. On the first anniversary of the company’s bankruptcy filing, Canadian Business spoke to close to 30 former employees in Canada and the U.S. to find out how Target, one of the best retailers in North America, got it so wrong in Canada. (Target declined to comment on specific issues, pointing to previous statements it has made on its Canadian venture. The former employees interviewed for this story requested anonymity to preserve relationships in the industry.) Even those employees remain baffled by how Target Canada collapsed. But what emerged is a story of a company trapped by an overly ambitious launch schedule, an inexperienced leadership team expected to deal with the biggest crisis in the firm’s history, and a sophisticated retail giant felled by the most mundane, basic and embarrassing of errors.
(Vince Talotta/Toronto Star/Getty Images)
In the fall of 2013, hundreds of Target Canada’s head office staff piled into the auditorium at the Mississauga Living Arts Centre for a state-of-the-union address from their leaders. The employees were weary and frustrated by this point. The bulk of the 124 stores had opened, and it was clear the launch had gone seriously awry. Consumers were frustrated when confronted with empty shelves, and the media and financial analysts were hammering the company for it. Onstage, Fisher stated his conviction that Target Canada was making progress and that 2014 would be a greatly improved year. A Q&A session followed; one employee bravely asked Fisher what he would have done differently. A man in the front row stood up and offered to field the question. Taking the microphone, Steinhafel, Target’s CEO, didn’t hesitate with his answer: He would renegotiate the real estate deal that facilitated the company coming to Canada in the first place.
That deal started with Richard Baker, the executive chairman of Hudson’s Bay Co. Although Baker is a retail executive, he is, at heart, a real estate man. His maternal grandfather started buying and selling real estate in New York City in 1932 and helped pioneer the concept of shopping malls. Baker’s greatest business insight was to recognize the value of the property developed by both his grandfather and father. In the 1990s, he started selling some of it off to various companies, including Wal-Mart. That relationship proved fortuitous in late 2010, when Wal-Mart approached him and offered to buy the Zellers chain from HBC. Baker realized there was more value to Zellers’ real estate than to the operation itself, since Wal-Mart had soundly beaten the brand. An astute deal maker, Baker, along with his team, reached out to Target to stoke the company’s interest. (Baker, through a spokesperson, declined to comment for this story.)
Wal-Mart would eventually back out, but Target stepped in and put down $1.8 billion. Steinhafel bought everything, committing the company to opening stores as quickly as possible to avoid paying for stores that weren’t operational and leaving landlords without anchor tenants. The price Steinhafel paid raised eyebrows. “When the numbers got up as high as they did, we found that pretty surprising,” says Mark Foote, then CEO of Zellers.
Related from Canadian Business: How Walmart unwittingly helped lure Target to its Canadian doom
Almost immediately, employees in Minneapolis were seconded to work on the Canadian launch. It was considered a privilege to be recruited. “The company was pouring in resources left, right and sideways, so it was palpably exciting in Minneapolis,” says a former employee. But there was also immense pressure. “From the very beginning, there was a clock that was ticking,” says the former employee. “And that clock was absurd.” Timelines were hugely compressed. Building a new distribution centre from scratch, for example, might take a few years. Target was going to do it in less than two years—and it planned to construct three of them.
One of the most important decisions concerned technology—the systems that allow the company to order products from vendors, process goods through warehouses and get them onto store shelves promptly. In the U.S., Target used custom technology that had been fine-tuned over the years to meet its exacting needs. Target faced a choice: Was it better to extend that existing technology to Canada or buy a completely new, off-the-shelf system? The team responsible for the decision went with a system known as SAP, made by the German enterprise software company of the same name. Considered the gold standard in retail, SAP is used by many companies around the world, from Indigo in Canada to Denmark’s Dansk supermarket chain. But while SAP might be considered best in class, it’s an ornery, unforgiving beast. Loblaws started moving to SAP in 2007 and projected three to five years to get it done. The implementation took two years longer than expected because of unreliable data in the system. Target was again seeking to do the impossible: It was going to set up and run SAP in roughly two years.
By early 2012, with the planned opening still a year away, the nerve centre for the Canadian launch moved from Minneapolis to Mississauga, and waves of American expats settled up north. Hiring was a top priority. Target has a unique, well-established corporate culture in the U.S., which the company views as one of the reasons for its success. “Target’s motto was: they could train you for the job, but they couldn’t train culture,” says a former employee.
In Canada, the company succeeded in hiring people with the right personalities, but young staff received only a few weeks of training, according to former employees who worked at Target in both countries. The Canadian team lacked the institutional knowledge and time to properly mentor the new hires. One former employee was surprised to see how green his colleagues were. “I was one of the older people there, and I was in my mid-30s,” he says. Target Canada would eventually learn what happens when inexperienced employees working under a tight timeline are expected to launch a retailer using technology that nobody—not even at the U.S. headquarters—really understood.
(CNW Group/Target Canada)
Strange things started happening in 2012, once ordering began for the pending launch. Items with long lead times coming from overseas were stalled—products weren’t fitting into shipping containers as expected, or tariff codes were missing or incomplete. Merchandise that made it to a distribution centre couldn’t be processed for shipping to a store. Other items weren’t able to fit properly onto store shelves. What appeared to be isolated fires quickly became a raging inferno threatening to destroy the company’s supply chain.
It didn’t take long for Target to figure out the underlying cause of the breakdown: The data contained within the company’s supply chain software was riddled with flaws. Product dimensions would be in inches, not centimetres, or entered in the wrong order. Sometimes the wrong currency was used. “It was a disaster,” says a former employee.
It was also something the company should have seen coming. The rush to launch meant merchandisers were under pressure to enter information for roughly 75,000 different products into SAP. Worse, the company hadn’t built a safety net into SAP at this point; the system couldn’t notify users about data entry errors. A team assigned to investigate the problem estimated information in the system was accurate about 30 per cent of the time. In the U.S., it’s up to 99 per cent.
The team went to Fisher and John Morioka, the senior vice-president of merchandising, with a drastic proposal: Shut down the entire merchandising division and verify every piece of data in the system—manually. Thus, “data week” was held in the fall of 2012. Merchandisers had to confirm every data point for every product with their vendors. A buyer might have 1,500 products and 50 to 80 fields to check for each.
But data week was successful on a number of fronts. It weeded out the worst of the errors and forced Target Canada to realize the importance of accurate data. It was also a bonding experience—as terrible as it was. “The company came together that week,” says a former employee. “We were all in the trenches doing this unglamorous work.”
On March 4, 2013, Tony Fisher led a gaggle of reporters through a new Target location in Guelph, Ont. The store opened the next day, along with two others in the province.
The company had been teasing consumers for a year, starting with a pop-up shop in Toronto featuring designer Jason Wu. There had also been a high-profile ad during the Academy Awards to hype the Canadian launch, and actors Sarah Jessica Parker and Blake Lively appeared at the grand opening.
Workers were still stocking shelves at the time, and signs in store read, “We’re open (mostly).” The company explained in a press release that the goal was to iron out kinks and “determine operational readiness” before opening 21 more locations that month.
At the Guelph store, Fisher, wearing a red checkered shirt and a red tie, pointed out the bright lighting and wide aisles, and promised a quick, convenient checkout experience. “Not only have we brought that same Target brand experience,” he said, referring to the U.S., “but we’ve actually enhanced it and made it better.” Fisher sported a head of thick dark hair and could flash a camera-ready smile when he needed to. Some of his former employees dismiss him as just a media-friendly face, but others describe him as whip-smart, detail-oriented and incredibly dedicated to Target. More than a few people say Fisher “bled Target red.”
His tour of the first store was breathlessly covered by media, and consumer anticipation was running high. In Guelph, customers lined up before the store opened at 8 a.m., and when they were finally let in, floor staff cheered and offered them high-fives. News crews snagged customers as they left and cajoled them into showing off their purchases. (The first items bought at Target Canada? A Tarzan DVD and a Michael Bolton CD.)
The foot traffic in the early days was more than expected, but it didn’t take long for consumers to start complaining about empty shelves. “Target in Guelph, please stock up and fill the shelves,” wrote one aggrieved shopper on Facebook. “How can I or anyone purchase if there is nothing left for me to buy?” Target told the media that it was overwhelmed by demand and made assurances that it was improving the accuracy of product deliveries. The reality was that Target was still struggling with data quality problems that were hampering the supply chain, and it didn’t have time to address the root causes before opening another wave of stores.
(David Cooper/Toronto Star/Getty Images)
Ironically, Target’s distribution centres were bursting with products. Target Canada had ordered way more stock than it could actually sell. When the buying team was preparing for store openings, it had relied on wildly optimistic projections developed at U.S. headquarters. According to someone with knowledge of the forecasting process in Minneapolis, the company treated Canadian locations like stores in the U.S. and not as newcomers that would have to draw competitors away from rival retailers. The company assumed the strength of the Target brand would lure customers. There was another element at play, too. “Once you signed up to do 124 Zellers locations . . . it’s like we have to assume sales will be good,” says the former employee. “It’s very backwards.”
The depots were hampered by other factors, including the learning curve associated with the new systems. Sometimes, the issues concerned dimensions and quantities. An employee at headquarters might have ordered 1,000 toothbrushes and mistakenly entered into SAP that the shipment would arrive in a case pack containing 10 boxes of 100 toothbrushes each. But the shipment might actually be configured differently—four larger boxes of 250 toothbrushes, for example. As a result, that shipment wouldn’t exist within the distribution centre’s software and couldn’t be processed. It would get set aside in what was designated as the “problem area.” By fall of 2013, Target’s three distribution centres—approximately four million square feet in all—were overflowing with goods. Tractor-trailers sat idling in the yards, waiting to be unloaded. The situation got so bad that Target scrambled to rent a handful of storage facilities to accommodate all of the inventory flooding in. One employee recalls feeling shocked when visiting the rental warehouse in Vancouver. “It was the most rickety, Podunk thing you can imagine,” says the former employee. American expats, accustomed to the efficiency of the U.S. operations, were flabbergasted. Waves of senior staff were flown in from Minneapolis, but because they were unfamiliar with the technology, there wasn’t much they could do.
More from Canadian Business: Target Canada had bare shelves—but overflowing warehouses
The issues at the distribution centres caused havoc downstream. Stores might end up with an abundance of some products and a dearth of others. The automatic replenishment system, which tracks what a store has in stock, wasn’t functioning properly, either. Like many other parts of retail, replenishment is an exacting science that can go haywire without correct data. At Target Canada, the technology relied on having the exact dimensions of every product and every shelf in order to calculate whether employees needed to fill an empty rack. Much of that data was still incorrect, and so the system couldn’t be relied upon to make accurate calculations. Fisher made the call to shut off the system and replenish manually. That meant store employees had to walk the floor and check each shelf—a laborious, error-laden process.
The Mississauga head office, meanwhile, didn’t have a clear picture of how bad the situation was inside stores. The merchandising department’s software often indicated items were in stock, but then the team would field angry calls from employees demanding to know why they didn’t have products. “We almost didn’t see what the customer was seeing,” says a former employee. “We’d look on paper and think we’re OK. Then we’d go to the store, and it’s like, ‘Oh my god.’”
To add even more headaches, the point-of-sale system was malfunctioning. The self-checkouts gave incorrect change. The cash terminals took unusually long to boot up and sometimes froze. Items wouldn’t scan, or the POS returned the incorrect price. Sometimes a transaction would appear complete, and the customer would leave the store—but the payment never actually went through.
Meanwhile, after a few rounds of store openings, the status-update meetings Fisher held at headquarters had turned darkly comic. After the regular rundown of crippling operational problems, the president still ended each gathering with a pep talk of sorts, reiterating how proud he was of the team and all they had accomplished. Everyone knew the launch was a disaster and the company had to stop opening stores so it could fix its operational problems, but no one actually said so. “Nobody wanted to be the one person who stopped the Canadian venture,” says a former employee. “It wound up just being a constant elephant in the room.”
In February 2014, Target headquarters released its annual results, revealing a US$941-million loss in Canada. The company attributed the shortfall to growing pains, expansion costs and—because of all that excess inventory—significant markdowns. “As we enter 2014 with a much cleaner inventory position, the team’s No. 1 operation focus is on in-stocks—ensuring we have the right quantity of each item in the right place at the right time,” Steinhafel said on the earnings call. It was his last as Target CEO. A month prior, Target disclosed that hackers had stolen the personal information of 70 million customers in the U.S. Combined with the bleeding operations in Canada, that made Steinhafel’s position untenable, and he stepped down in May. (He walked away with US$61 million in compensation.) Fisher—hand-picked by Steinhafel—left the company two weeks later.
By the end, Fisher was practically a ghost. “He gave every last ounce of himself. He was just done. He had nothing left,” says a former employee. The reality is the odds were stacked against him from the start, given the extremely tight timeline and the thin margin for error. “Everyone was trying to execute Gregg Steinhafel’s deal,” says a former employee, “and once one thing went wrong, it was an impossible achievement.”
But someone else now had to try.
(David Cooper/Toronto Star/Getty Images)
It was Mark Schindele who took over as head of Target Canada. He was a 15-year company veteran and previously served as a senior vice-president of merchandising operations in Minneapolis. At one point, Target Canada had printed a flyer in which nearly every single item on the front cover was out of stock. When Schindele learned of it, according to a former employee, he remarked, “I can’t believe it’s as bad as it actually is.”
A new crop of senior leaders arrived from U.S. HQ, replacing some of the exhausted execs who handled the launch. The biggest difference between the two groups was attitude: The new team had energy. Decisions were made faster. Schindele brought increased focus to the company. He prioritized what he called “mom’s shopping list,” which consisted of basic household items such as toilet paper, toothpaste and detergent. Those products were important because Target needed to lure people away from Shoppers Drug Mart and Loblaws. But it didn’t stand a chance if it couldn’t offer the basics. To further differentiate from other retailers, Schindele wanted to promote apparel and accessories, emphasizing Target’s “cheap chic” image. A massive product revamp was planned for the fall.
In June 2014, Target Canada released an apology on YouTube, which featured employees and executives reflecting on the challenges of the first year and confessing to their sins. “Maybe we didn’t put our best foot forward when we entered into Canada,” said Damien Liddle, senior corporate counsel. “Certainly we know we’ve disappointed our Canadian guests.” The video was remarkably candid but optimistic. “We’re headed in the right direction now,” said another employee in the video. “For sure.”
By that time, the stores were indeed functioning better. Target had a year of sales history from Canada. The company also focused intently on stocking up its top 25 locations, rather than treating all stores the same.
A small group of employees also made an alarming discovery that helped explain why certain items appeared to be in stock at headquarters but were actually missing from stores. Within the chain’s replenishment system was a feature that notified the distribution centres to ship more product when a store runs out. Some of the business analysts responsible for this function, however, were turning it off—purposely. Business analysts were judged based on the percentage of their products that were in stock at any given time. But by flipping the auto-replenishment switch off, the system wouldn’t report an item as out of stock, so the analyst’s numbers would look good on paper. “They figured out how to game the system,” says a former employee. When Schindele was told of the problem, he ordered the function to be fully activated, which revealed for the first time the company’s pitifully low in-stock percentages.
There was another basic error Target didn’t discover until 2014: A misunderstanding about shipping dates between Target and its vendors that resulted in stock arriving late. “It was like, ‘Holy crap, how did we possibly not know this?’ ” says a former employee.
Improvements in all those areas meant that, by the latter half of 2014, Target could finally have some confidence that the right products would arrive at the right times, greatly improving the in-stock position of the stores. Indeed, employees were beginning to feel like there was a light at the end of the tunnel. There were even big plans for 2015, such as implementing online shopping at Target.ca.
Despite the optimism, there was an undercurrent of unease. The parent company installed a new CEO to replace Gregg Steinhafel in 2014. The new head, Brian Cornell, had spent his career at PepsiCo and Wal-Mart and was the first outsider to lead the company. He cast a skeptical eye on the Canadian operations. “To succeed in Canada, we will need a major step-change in performance,” he said on a conference call in November.
There were more worrying signs in January. Schindele was suddenly nowhere to be seen. Meetings that had been scheduled with him were cancelled. Cornell came to Canada that month to tour stores in Ontario. He noted that the shelves were stocked, but he was perturbed by the lack of actual customers.
At Mississauga headquarters, employees braced themselves for a wave of layoffs and store closings. The news on Jan. 15 was much worse: Target Canada was filing for bankruptcy protection. It had spent $7 billion on the expansion so far, and it didn’t project turning a profit until at least 2021. Early that morning, Schindele’s direct reports broke the news to their teams, who then informed their own departments. One of these leaders recalls moving through a fog and hyperventilating while struggling to remember how to dial in to a conference call. After running through the prepared script he was given, he broke down, crying. “These were people I’d hired. I’d impacted their lives. I’d become friends with them. So that was horrible,” says the former employee.
An all-employee meeting was held later that morning, and an emotional Schindele reiterated the reasons for the decision, choking up as he addressed employees. Shock permeated the building. Representatives for the bankruptcy monitor and the liquidators were in the building that day, and started meeting with employees, who were still trying to process the news, to discuss dismantling the operations. “They wanted advice on how to cut apart not only a corpse but my corpse,” says a former employee. For others, there was a sense of relief that the endless marathon that was Target Canada was finally over. “All these insane projects we were working on simply didn’t matter anymore,” says another former employee.
All 133 stores closed by April. Schindele soon returned to Target in Minneapolis, where he’s now senior vice-president of Target properties. Fisher later resurfaced as a senior vice-president at a consumer health care company also in Minneapolis. Steinhafel, the one who put the entire operation in motion and set it on a path toward self-destruction, has kept his head down. His LinkedIn profile simply lists him as a “retail professional.” (He did not respond to requests for comment.)
Curiously, the U.S. retailer has not abandoned this country entirely. In October, Target launched a small pilot project to ship goods ordered online to Canadians. The company that lost billions, suffered a humiliating defeat here and endured an ordeal that left its employees drained, exhausted and ultimately jobless, titled the website for Canuck shoppers “Target loves Canada.”
This is a shortened version of a story that appeared in Canadian Business magazine. The full story is available at CanadianBusiness.com.
The post What really happened at Target Canada: The retailer’s last days appeared first on Macleans.ca.