Billion-dollar mistake: How inferior IT killed Target Canada

Unmanageable deadlines and disastrous IT wrecked this top US retailer's attempt at international expansion. The moral of the story: IT drives the enterprise.

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Business school case studies tend to fall into two categories: epic wins and oh-my-gosh-how-could-they-possibly-have-been-so-stupid epic failures. This article discusses a real-world billion dollar story that falls into the second category. As epic failures go, this one is worthy of the history books.

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The Target breach, two years later

Has anything really changed since the breach that rocked retail?

Let's set the scene. Target is one of America's largest and most successful retailers. The 114-year-old company that evolved out of the old Dayton-Hudson company now has more than 1,800 retail locations.

Unfortunately, none of those are in Canada. Anymore. And thus begins our story.

This is a story of hubris, impossible deadlines, and information technology. Yes, as it turns out, if you want to be a worldwide retailer, your information systems are the glue that holds it all together. In Target Canada's case, not so much.

As an American with three Target stores right in our neighborhood, I didn't realize that Target wasn't a worldwide thing. But it's not. Walmart, by contrast, operates something over 11,000 stores in 28 countries. Walmart is a $465 billion company. Target is a $72 billion company, certainly not small potatoes. But Target, it seems, wanted to be more like Walmart.

And so, in 2011, the Target Corporation decided to expand into Canada, as described in-depth by an excellent analysis by Canadian Business. That should have been easy, right? After all, we speak the same language (ignoring the French-speaking Québécois) and most Americans somehow seem think of Canada as our 51st, more polite, colder state to the north.

But it's not that simple. Take two factors as an example. Canada has a different currency. Sure, it uses dollars, but at the time of this writing a Canadian dollar is worth only 72 percent of an American dollar. That conversion rate is constantly fluctuating. Also, Canada uses the metric system. To us in the US, a 2-foot deep shelf is a 2-foot deep shelf. In Canada, that shelf is 60.96 centimeters.

You can already begin to see the IT problem, can't you?

An inventory system that was set up to handle US dollars would need to be updated to handle Canadian dollars. If the system didn't already have a currency field, that would need to be added throughout. Conversion methods would need to be added. And, for an inventory management system that has to fill shelves, knowing the size of product packaging would be important. Software that calculates area for placement would have to be modified to handle multiple measurements and measurement systems.

Add to that issues of sourcing of products and pricing. All the products don't just come from the US. So a box of small widgets in the US might be 12 inches tall. But that same product packaged for the Canadian market might only be 11 1/2 inches tall, or whatever that might translate to in centimeters.

You get the idea. Internationalizing an IT system is a lot of work. For an IT system tracking the amount of data that an enterprise the size of Target needs, you're talking about a lot of development and customization.

It all started with fur

Our story actually goes back to the year 1670. Yes, I'm talking about the 17th century, over 340 years ago.

This is when the Hudson's Bay Company, technically the The Governor and Company of Adventurers of England Trading into Hudson's Bay, was founded under the charter of England's King Charles II. The Hudson's Bay Company was granted a virtual monopoly on fur trading in and around the Great Lakes.

Over the centuries, Hudson's Bay grew and morphed. It operated steamships and funded explorers. It invested in oil and gas operations. The trading posts of the 17th century eventually morphed into the department stores of the 20th century, with Hudson's Bay owning a range of retail outlets.

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In 1978, the Zellers department store chain attempted to buy Hudson's Bay, but as it turned out, Hudson's Bay bought Zellers. Zellers did quite well as a discount store chain up through the 1990s, but competition from Walmart began to cost Zellers market share.

By 2010, it became apparent to Zellers' management that the property and leases of the Zellers' stores were worth more than the actual retailing activity itself. So they set out to sell the chain and, in particular, their very valuable leases.

This is where our story returns to Target, because in 2011, Target's management, under the leadership of CEO Gregg Steinhafel, paid $1.8 billion for the Zellers leases -- a total of 124 stores. Target now had less than two years to build up a distribution system that could keep 124 stores stocked and selling.

That's two years to hire and train staff, build and stock distribution centers, customize and remodel stores, establish vendor relationships, create demand among a new market of customers, customize or write a vast IT supply chain management system, and populate the databases with records and the physical stores with products.

Everything went terribly, terribly wrong

The company built three brand new, Amazon-warehouse sized distribution centers in Canada. For those who haven't spent time in the supply chain of retail, a distribution center is where all the various products intended for the stores come in from thousands of vendors and get sorted and prepared for shipment to individual stores.

Think of the distribution center as a physical switchboard. Stock isn't supposed to stay in the distribution center. These warehouses must be flowing, dynamic organisms, breathing in products from all over the country and the world and breathing out semi-trucks destined for the individual stores.

But Target Canada couldn't keep track of their products. At first, there was too little coming into the distribution centers. Therefore, store shelves were left bare. Canadian customers who visited these first Targets found ghost towns in the form of large, cavernous stores with barely anything on the shelves. It was like a real-life Fallout 3 Super-Duper Mart.

Later, the distribution centers became overwhelmed. The company managed to order goods, so they came into the distribution centers. But because they couldn't properly compute shelving locations (that conflict between imperial units and the metric system), items backed up so much in the distribution centers that Target Canada management had to offload stock to additional area warehouses.

So they had way too much stock in storage and not enough on the shelves.

As it turns out, Target has a well-oiled supply chain operation and IT system in the US. But because of the programming challenges I alluded to earlier, the company chose not to try modifying that system to support entrance into a new, international market. Instead, they brought in an outside supplier, along with subcontractors and consultants, and tried to build something entirely new.

Here are two examples of where that approach went spectacularly wrong.

The company had to track roughly 75,000 products. Each product required a lot of information. It wasn't just the length, width, and height of each object. You needed the vendor, UPC code, other codes, pricing, weight, costs, and more. Essentially, each product required a couple of pages of field data to be entered in.

And, because the company wasn't extending its existing data entry system, the data being used either had to be exported or entered from scratch. Lengths were entered where widths needed to be. The wrong prices were entered. The wrong descriptions were entered. Low-level marketing assistants were pushed on impossible deadlines to enter thousands upon thousands of fields of information.

Is it any wonder that they got 70 percent of it wrong?

Then there was the replenishment system. As you know, stores are designed to sell frequently bought items, for example, Pampers. The idea is that the neighborhood babies will poo, parents will buy Pampers to contain that poo, babies will poo some more, and more Pampers will be bought.

As the Pampers run low on shelves, the replenishment system is supposed to know that, and instruct the distribution centers to send more stock. In Target's case, behind every product's replenishment process was a business analyst, whose job it is to predict just how much pooping the babies of a given region will do.

As you might imagine, each product requires some level of demographic and psychographic analytics in order to build a model for purchase and replenishment for each local store.

But the analysts were compensated (or, more accurately) dinged if too low a percentage of their products was kept in stock at any given time. The replenishment system, by placing automatic orders, would expose when certain products had had an unexpected run, or there were too few in stock. When this happened, the junior analyst would get the equivalent of a demerit put on his or her record.

Not being stupid, the analysts turned off this metric -- because they could. Apparently, the Canadian system made automatic replenishment data an optional switch, so when the analysts started to notice that they were getting criticized for poor stocking levels, they turned off the notification system that would tell people that there were poor stocking levels.

As a result, management reading replenishment reports thought there was plenty of stock, when that was far from the case. Call it productmageddon. It wasn't pretty.

All of this, of course, doesn't operate in a vacuum. Canadian customers were not impressed. Sales never took off. And there were more data errors. For example, the "in-DC" date that described the date an object would arrive in the distribution center was interpreted by some as when the object actually arrived, but by others as when it shipped to the distribution center.

The point of all of this is that Target Canada could not get its act together. Plus, other things were going on at Target as well. You might have heard the name of the company's CEO, Gregg Steinhafel, in another context. In December 2013, Target in America experienced a massive breach, which resulted in the exposure of personal data on more than 70 million customers.

Eventually, Target's board had enough and Steinhafel, a 35+ year veteran of Target, was out. Brian Cornell, who had previously been the boss at Sam's Club, was installed as the new Target CEO. Target Canada, which by this time had lost $7 billion, applied for bankruptcy protection. All 133 stores were closed, and 17,000 employees lost their jobs.

So what lessons can be learned? There were so many mistakes, it's hard to find one unifying thread, but it's there if you look hard enough. Put simply, Target should have never added an entirely new and unrelated IT system for Canada. Instead, Target should have carefully extended their existing IT system to support internationalization, and once that capability was available, only then consider expanding into another country.

Additionally, the idea of trying to open an entire nation of stores, rather than opening them incrementally, was bound to fail. Scaling everything at once doesn't allow for flaws to be discovered and mediated, but instead leads to cascading failures like the ones that overtook Target Canada's supply chain.

The moral of the story is that IT matters. If done correctly, IT should not be an afterthought. IT drives the entire enterprise. Forgetting that leads to dashed dreams and lost billions.

UPDATE: Some commenters have asked about Target Australia. Target Australia is a completely different company, owned by a different company. The naming rights were licensed from America, but no other infrastructure or corporate governance is shared.

By the way, I'm doing more updates on Twitter and Facebook than ever before. Be sure to follow me on Twitter at @DavidGewirtz and on Facebook at Facebook.com/DavidGewirtz.

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