There are lessons to be learned from the recent experiences of two major U.S. retailers – one is Target (TGT, Financial) and other is Costco (COST, Financial). Recently, Target decided to shut down its Canada operations, while Costco tasted stupendous success as it entered China. Both the retailers attempted expanding beyond their home country. But unlike Costco, this was the first time Target attempted to expand its reach internationally. In my latest article on the sector, I spoke of reasons for which Target’s run in Canada came to an end. In this article, let’s focus on the lessons from both the retailers by analyzing what moves they took under similar situations.
Analysis of moves
While Costco’s expansion efforts were in China, Target was dealing with Canada. To be sure, the two countries are absolutely different in terms of consumer behavior and preferences, and the dynamics of dealing with them are very different. But looking beyond those differences, and purely from the perspective of managing growth, analysis of the moves undertaken by these two companies makes it very clear why Target failed and Costco flourished.
From the very beginning, Target was more into rapid growth by pouring millions of dollars into building retail outlets and distribution centers. In contrast to this, Costco didn’t spend on opening one single store. Instead, Costco focused on the e-commerce potential of China. The retailer partnered with Alibaba (BABA, Financial) and used its Tmall Global site to reach out to the consumers. China is the world’s second largest economy and its retail market is as big a $3 trillion. Within the first month, Costco booked $6.4 million in online sales. China’s Singles Day alone contributed $3.5 million in a span of 24 hours. Costco scored on understanding how to channelize the growth, while Target was blinded by its aspiration of making it big in Canada.
After opening the initial round of stores, Target didn’t stop and evaluate its moves – a step that’s as basic as breathing. It’s very important to analyze one’s growth from time to time to understand if any deviations are occurring or if a change of strategy is required. Target forgot this and went ahead with opening more stores. In a span of two years, Target opened 133 stores and employed more than 17,000 people. Now that its Canada operations have been closed, all these people have been left jobless - a huge loss to the economy. Costco made a conscious effort not to commit this mistake. Its entire strategy to adopt e-commerce was to assess the Chinese consumer’s behavior and preferences at the lowest possible risk. Now that its foray into the Chinese market worked out, it can easily understand what to focus on.
The third big difference in functioning was related to logistics. Starting a business in a foreign country can be tough, and managing the supply chain by effective logistics management is of utmost importance. For Target, the entire supply chain was in a mess where the distribution centers had no idea what the retail outlets required and the retail outlets had no idea what was going to be delivered by the distributor. Despite having ample stock, the shelves were left empty since the right products weren’t available. Instead of being flexible and managing operations as per the situation, Target continued to be rigid with its plans. Costco was again smart to understand that managing supply chain could be difficult. Tmall Global, which unlike the original Tmall site doesn’t need the seller to maintain a distribution center in China helped Costco hugely. The retailer made arrangements with Alibaba that helped in managing the inventory and product delivery. Costco would take between five and 20 days to deliver the item purchased online. This was a great cushion that Costco enjoyed. It didn’t have to bother about filling up shelves and making items look attractive to buyers.
Key takeaways
Both Target and Costco were aiming for similar expansion activities. But the difference in the approach did all the making and breaking. Had Target carefully analyzed its steps and evaluated its growth at regular intervals, things could have been different. To drive home the discussion, lessons from the two cases are pretty simple – plan, do, check, act (PDCA), a powerful tool that Costco was able to put to use.
