CA So Target

316-0323-1
(A) SHOULD WE STAY OR SHOULD WE GO?

TARGET AND THE QUESTION OF INTERNATIONALIZATION
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Johann Fortwengel (johann.fortwengel@kcl.ac.uk) is Lecturer in International Management at Kings College London. He wrote this case
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INTRODUCTION
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In the winter of 2010, Target Corporation was at a crossroads: the retail industry in the U.S. home
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market was highly competitive and increasingly so, as new competitors continued to enter an already
saturated market, including foreign competitors as well as online retailers, such as Amazon.com. At the
same time, Target was very successful on its home turf, due to its strategic assets and competencies in
product and store design (see Exhibit 1 for financial numbers). This raised two key issues for top
management: Is now a good time to go abroad? And what foreign market promises to be most suitable
for Targets distinct set of competencies and resources?
Targets top management team around Chairman and CEO Gregg Steinhafel had to focus on three main
aspects: (i) its position in the home market; (ii) potential target countries for foreign expansion; (iii)
developing a strategy on how to enter, if at all.
COMPANY HISTORY: FROM TARGET TO TARZ-HAJ
In 2010, Target was a large player in the U.S. retail industry. Its headquarters were based in
Minneapolis. Target was originally founded as a department store in 1902 by George Draper Dayton,
who had identified Minneapolis as the region within the U.S. that offered the greatest growth potential.
Originally from banking and real estate, George Draper Dayton founded the Dayton Dry Goods
Companythe predecessor of Target.
The company quickly developed strong capabilities in supply chain and inventory management. In
1920, for example, a freight-handler strike risked that merchandise would not arrive in time in the stores.
Dayton developed a creative and innovative response: he used airplanes to get the merchandise from
New York to Minneapolis.
The Dayton Dry Goods Company was a family-run department store for a long time. After George D.
Daytons death in 1938, the company was run by a number of family members. The department store
continued to grow in reputation and business operations, and in 1954 Dayton made its first move out of
downtown Minneapolis by setting up a location in Rochester, Minnesota, located about 80 miles south
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Page 2
of Minneapolis. In the 1950s and 1960s, further expansion involved opening stores in the suburbs of
Minneapolis-St. Paulthe Twin cities.
The 1960s also saw Targets first major strategic shift from being a department store to becoming a
discount store, but one that caters to value-oriented shoppers seeking a higher-quality experience1.
The rationale was to transfer the strategic assets and competencies Target had acquired over the years
by being in the department store business to the emerging discount industry. In 1961, then-president
Douglas J. Dayton announced this plan, and said that the new store will combine the best of the fashion
world with the best of the discount world, a quality store with quality merchandise at discount prices2.
The strategy for the coming decades was born: Target would follow a cheap chic business strategy.
1962 saw the official birth of the Target brand, when a team of public relations and marketing staff
came up with Target as brand name and the classic bullseye logo. In May 1962, Target opened its first
discount store, one that combined cheap prices with high quality and fashionable products in a unique
and innovative way. It is perhaps no coincidence that Sam Walton founded Walmart in the very same
yearthe discount market segment was born, and with it two players that would dominate it for the
coming years and decades.
Target continued to grow and leverage its competitive advantage in cheap chic. In 1966, Target looked
beyond the Twin cities and expanded into the Denver area. From 1967 onwards, Target increasingly
became a national player in the U.S. retail industry, and on October 18 it had its IPO (Initial Public
Offering) worth $15 million, to raise the capital required for broad-scale expansion. To better manage
its supply chain and logistics, Target built its first distribution center in 1969, located in Fridley,
Minnesota.
In 1969, the Dayton Corporation merged with the J.L. Hudson Company of Detroit, to form the Dayton-
Hudson Corporation. With this deal, the corporation became one of the 15 largest retailers in the nation.
It took until 1975, however, for Target Stores to finally become the most important division of the
Dayton-Hudson Corporation in terms of revenue. Four years later, in 1979, Target stores achieved a
landmark by having annual sales of $1 billion. Growth was not only organic, but partly occurred through
strategic acquisitions. In 1978, for example, Target had bought Mervyns, a mass merchandise retailer
from California.
Target Stores were at the technological forefront when Target was the first merchandiser to introduce
the Universal Product Code technology in 1988. This new technology enabled better and more efficient
stocking and supply chain management, as well as an improved shopping experience due to significantly
reduced waiting time for shoppers.
In subsequent years, Target continued to grow, mostly organically by opening new stores from coast-
to-coast, but also by acquiring Marshall Fields in 1990, an upscale Chicago-based department store.
As such, Target continued to combine organic with inorganic growth to expand its business.
To further establish its image as upscale discount store with superior competencies in design and
fashion, Target created the Expect More. Pay Less. brand promise in 1994. In the following year,
Target expanded its portfolio by offering financial services through the Target Guest Card. This store
credit card was later to be replaced with the Target Visa Credit Card. Also in 1995, Target opened its
first SuperTarget store, which targeted consumers looking for a one-stop shopping experience. This
SuperTarget store concept was designed to offer a section with groceries and perishables too. It was
based on the underlying assumption that shoppers had little time and wanted to do much of their
shopping in one spot.
1
Target, Target Through the Years, https://corporate.target.com/about/history/Target-through-the-years, accessed July 29, 2015.
2
Ibid.
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Perhaps not surprisingly, groceries were found to increase the frequency of store visits, and it was hoped
that once in the store grocery shoppers would shop for non-food items as well. Meanwhile, Target was
looking to increase the profit margins for its grocery produce. This was even more stressing given that
Target had been outsourcing much of its grocery value chain, due to little experience and competence
in the segment and the need to limit risk and exposure in this difficult market. One challenge with
groceries is that much produce is perishable and requires a closely monitored supply and inventory
management. To increase profit margins and slowly build up and develop own competencies in-house,
it created the Archer Farms line of premium grocery products in 1995. This was also meant to gain
further control over product development and branding.
In 1998, the Dayton-Hudson Corporation acquired the Associated Merchandising Corporation to

strengthen its capabilities in global sourcing activities; this division was later to be renamed Target
Sourcing Services. Target launched its online presence in 1999, allowing consumers to shop on its
website, Target.com. In the same year, Target started to collaborate with a total of 75 designers to create
exclusive product lines for Target. These products came with a higher price and profit margin, and thus
helped Target to further differentiate itself from Walmart, in addition to further emphasizing its brand
image. Increasingly, Targets brand name was pronounced Tarz-haj by its consumers and the broader
publica welcome linguistic play, for the French ring to it was to associate Target with famous French
luxury brands, and more generally reflected Targets success in and reputation for fashionable products.
In the year 2000, the Dayton-Hudson-Corporation was officially renamed Target Corporation. This step
was long overdue, given that Target constituted the core business and was responsible for the biggest
part of revenue. A year later, Target introduced Market Pantry as its exclusive private label, in order to
further increase profit margins and more soundly establish itself in the grocery segment.
Target took a number of additional steps to strengthen its grocery segment. In 2004, Target coined the
brand phrase Eat Well. Pay Less. Target states that it is our promise to provide a great selection of
unique, affordable grocery items as a complement to the hip and fashionable low-priced merchandise
for which Target is known3. However, Target entered a highly competitive market, and it was a
latecomer, lacking significant experience and competence in sourcing, storing, and disposing of food.
This made it a risky step, not least because it would bring Target closer to its main competitor, Walmart,
in terms of the products offered and segments catered to.
In the same year, Target Corporation tried to further focus on its core strategy in the discount segment
and divested Marshall Fields and Mervyns. Having sold these profitable department store businesses,
Target was ready to focus on the discount retail segment as represented by the Target stores.
Meanwhile, Target continued to grow and expand its business, and in 2005 Target surpassed the $50
billion mark in annual sales. In the same year, Target introduced exclusive premium brands for meat
and chocolate, by launching Sutton and Dodge and Choxie, respectively.
In 2006, Target tried to capitalize on the movement towards organic produce in an increasingly health-
and environment-conscious setting when its SuperTarget store became a USDA certified-organic
produce retailer.
Also in 2006, Target launched GO International, which was an innovative and limited-time-only fashion
program, developed to offer affordable fashion products designed and created by emerging designers.
Targets increasing focus on grocery products was also reflected by erecting an own food distribution
center in Florida in 2008. This marked an important strategic decision towards internalizing more steps
in the food value chain. Target already had internalized food product development and testing before.
Similarly, in 2009 Target expanded its fresh food offerings to stores across the nation.
3
Ibid.
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In 2010, Target Corporation employed about 350,000 full-time employees, and it had 1,395 Target
stores and an additional 218 SuperTarget stores. Combined, Target had more than 200 million square
feet retail space in the U.S.
It was a healthy business, and it had quickly recovered from the recent downturn due to the economic
and financial crisis in 2007-2008 (see Exhibit 1). Target had a sustained competitive edge vis--vis
competitors through its cheap chic approach, which was particularly appealing to the American middle
class. Compared to other domestic retailers, Targets consumer baseor what Target personnel called
guestswas relatively more affluent, tended to be better educated, and was disproportionately
composed of female shoppers. Also, Target had strategically increased its offers of groceries and fresh
produce, in order to increase the number of store visits per customer (see Exhibit 2). Would this business
model be something that could be equally successful abroad, thereby generating further growth and
profits for Target Corporation?
Target had been pressed to consider internationalizing for quite some time, yet management repeatedly
made clear that it saw further potential for growth at home. In 2005, for example, Target said Because
of the considerable potential for continued profitable growth in the United States, we are not currently
pursuing opportunities for international expansion (Annual Report, 2005: 8). They held onto this
position, and even in 2008, in light of the economic and financial crisis in the U.S., they stated We
remain confident in our long-term domestic growth prospects and believe we have ample opportunities
to continue to grow profitably for many years to come (Annual Report, 2008: 10). Was now, in 2010,
the right time to change position on this core strategic question?
THE U.S. RETAIL INDUSTRY

In 2010, the retail industry in the U.S. was characterized by fierce competition and rather high degrees
of concentration. The main competitors for Target were Walmart, Costco, and Kroger, which all were
bigger than Target itself. In addition, CVS and Walgreens, which mainly were in the health and beauty
business, offered a quite substantial portfolio of groceries and household items as well, thereby making
them competitors for Target also, not least because they were often located in inner cities and thus
catered to single and small-family households. Walmart was the dominant player in the industry,
generating $417 billion in revenue. Walmart had also already spread its risk across markets to some
extent, as can be seen from the fact that it generated about 75 per cent of its business in the U.S., while
the remaining 25 per cent came from foreign operations. This buffered Walmarts exposure to the U.S.
market and the recent economic downturn to some extenta clear advantage vis--vis its competitors,
which were more dependent on the U.S. economy and consumer confidence there for sales and profits.
Walmart was known for its aggressive pricing strategy through which it was building and defending its
competitive advantage in the marketplace, in particular at the low-end of the pricing spectrum. In
particular, the sheer size of Walmart provided it with unique advantages vis--vis competitors in terms
of buying power and creating a powerful inventory and supply chain system, enabling it to respond very
quickly to shifts in consumer demand in different stores. Kroger was the second largest competitor for
Target. Kroger had revenue of about $80 billion. It was thus not only much smaller than Walmart but
also hadnt internationalized its operations at that point. Finally, Costco was the third main competitor.
In 2010, Costcos warehouse stores generated revenue of about $76 billion. Most of its revenue was
generated within the U.S., but Costco did operate stores also in Canada, the U.K., Mexico, and in Asia.4
Given that Walmart clearly was number 1 in the industry, the competitor from Arkansas served as main
benchmark for the whole industry (see Exhibit 3 for a comparison of stock price development).
Importantly, Walmart had already made some experience with internationalizing and operating
businesses in foreign countries. As such, looking at Walmart offered an opportunity for Target
4
IMAP Retail, Retail Industry Global Report 2010,
www.imap.com/imap/media/article_documents/IMAP_Global_Retail_Industry_Report__BEDF5F30C7201.pdf, accessed July 29,
2015.
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management to learn how to perhaps go about this and draw inferences for their own strategic roadmap
ahead. However, Walmarts brand image Save money. Live better. contrasted starkly with Targets
Expect More. Pay Less. brand promise. It thus remained an open question to what extent Walmarts
experience could meaningfully inform Targets strategic decision in this regard.
LEARNING FROM FIRST-MOVING COMPETITORS?
Walmart was a couple of steps ahead of Target in terms of expanding its business across borders (see
Exhibit 4 for an overview). Walmart began its venture abroad in 1991, when it entered Mexico through
a Joint Venture with Cifra, the largest Mexican retailer at the time.5 The low local labor costs as well as
Mexico entering the North American Free Trade Agreement (NAFTA) in 1994 proved conducive to
replicating its low-cost strategy competing on price. In 2010, Walmart had a market share of about 50
per cent in the Mexican market.
Walmart then entered Canada in 1994, this time by acquiring Woolco discount stores. The stores,
operated by the Woolworth Corporation, were similar in store design and format, and thus were
considered to be a good match for Walmarts envisioned strategy. In 2010, Walmart was the fourth
largest retailer in Canada.
In the following years, Walmart entered a set of additional foreign countries, sometimes using Joint
Ventures (Brazil and China), but mostly using acquisitions. In Argentina, Walmart entered the foreign
market by erecting and operating its own stores, thus having opted for a greenfield-type of wholly-
owned subsidiary investment.

While Walmarts international expansion had been very successful in some cases (for example, Chile,
Mexico, and the U.K., where Walmart acquired the local retailer Asda in 1999 and kept its name to
appeal to local consumers), the giant discount retailer also has experienced setbacks in the past,
including a disastrous market entry into the German retail market which resulted in a significant defeat.
Walmart had entered the German market in 1997 by acquiring a total of almost 100 stores from
Wertkauf and Interspar (which used to belong to the SPAR Group). Part of the reason for the failure
was that the German market had already been very competitive, in particular in the low price segment,
which is why Walmart struggled a lot in trying to transfer its competitive advantage in terms of pricing
and cost leadership to this market environment. More specifically, domestic discounters such as Aldi
and Lidl had already secured a strong position in the market by having built up a loyal customer base
as well as close relationships to suppliers, which both proved significant barriers to market entry. For
Walmart as latecomer to this particular marketplace, there did not seem to be much space left. Also, the
U.S. corporate culture did not sit easy with the German social market economy, where labor unions and
more cooperative practices between employees and employers play a much bigger role. As a result,
much of Walmarts fierce and aggressive negotiating practices with suppliers as well as the customer
experience it offered faced headwind and opposition by a broad set of stakeholders. For example,
German consumers were irritated when Walmart staff smiled at them in the stores or tried to help them
pack their groceries. Also, Walmart came under public scrutiny for some of its business practices, which
were considered inappropriate, including its aggressive dealing with labor unions. In 2006, Walmart
gave up and left Germany by selling its stores to the Metro Group, having lost about $1 billion in less
than a decade. More generally, Walmart made the painful experience that its model which worked and
was highly successful in the U.S. seemed to fit the German market much less. In fact, Walmart had to
make a similar experience in South Koreaalbeit there the main problem was that its low price strategy
was not successful, largely because South Korean customers demanded higher quality and were actually
prepared to pay somewhat higher prices for that too. Low prices often were viewed as signaling below-
average quality, and thus were not appealing to many South Korean customers. As such, there remain
doubts whether South Korea was a suitable target market for Walmart in the first place, given that there
5
I. Barmash, Wal-Mart in Venture with Mexican Store, The New York Times, July 11, 1991,
www.nytimes.com/1991/07/11/business/wal-mart-in-venture-with-mexican-store.html, accessed July 31, 2015.
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seemed to be a significant mismatch between Walmarts cost leadership strategy and the demands and
preferences of local consumers in that particular market. In any case, the eight-year visit to South Korea
came with a bill of almost $10 billion, before Walmart exited in 2006.
The Walmart experience suggested to Targets top management team that internationalization strategies
were difficult to design and implement, in particular for supermarket chains and the retail industry more
broadly, for success abroad hinged upon a good and sound understanding of the preferences of
consumers in the particular foreign market. A mere transfer of business models and strategies that work
in the U.S. to a foreign market did not seem to always work. Also, most of the foreign markets showed
a rather high degree of saturation already, perhaps with the exception of emerging markets in parts of
Africa and Asia, where, however, consumer preferences could be assumed to differ greatly from those
of U.S. guests. The retail industry thus was a highly interesting industry from an international
management and strategy standpoint: where was potential for further growth? And how could it be
achieved? These are key strategic decisions to be made by top management of any Multinational
Corporation (MNC). However, in the retail industry in particular, they were particularly stressing,
complex, and challenging. And in the winter of 2010, Targets top management team was confronting
them.
THREE KEY DECISIONS: IF, WHERE, HOW?
Targets top management team had to develop answers to three key strategic questions:
1. Should we internationalize?
2. If so, what foreign countries constitute promising markets for us, given our unique capabilities in
store and product design?

3. How should we enter a foreign market?
Basically, there were two main options available to Target: Option (1) was to not internationalize, but
to rather focus on the domestic market and try to increase its market share and/or profit margins here
at home. Within this option, Target could choose any one of the two following general routes: a)
continue push the food segment of its store business, b) go back to the roots by offering high-value
apparel and household supplies. While the grocery segment was increasingly successful, there were
concerns that it might undermine Targets original brand promise and reputation for cheap chic. Also,
it would bring it closer to Walmart and other competitors, including foreign competitors in the discount
segment, and it seemed questionable whether Target could compete with them on this basis in the long
run.
The second broad option available was to internationalize. If this option was chosen, Target
management would have to make two additional decisions: a) what country to enter, and b) how to
enter. With regard to identifying promising target countries, a recent study by the consulting firm A.T.
Kearney could prove helpful. Their Global Retail Development Index ranked a number of countries in
emerging markets according to attractiveness for retailers from developed markets. For this purpose,
A.T. Kearney gave each country a score for market attractiveness, country risk, market saturation, and
time pressure, and then weighted them equally at 25 per cent to arrive at a combined score, ranging
from 0 (low attractiveness) to 100 (high attractiveness).6 Market attractiveness was measured using
indicators such as retail sales per capita, while country risk was calculated on the basis of political risk
and economic factors. Market saturation involved indicators for the share of modern retailing and the
number of international retailers already present in that particular market, amongst others. Finally, time
pressure was calculated using the Compound Annual Growth Rate (CAGR) of modern retail sales
6
AT Kearney, Expanding Opportunities for Global Retailers,
https://www.atkearney.com/documents/10192/371654/2010_Global_Retail_Development_Index.pdf/c00fc581-e576-4186-a18f-
4eaa6defa84b, accessed July 29, 2015.
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weighted by the GDP development of the country and the CAGR of the retail sales area weighted by
newly created retail sales areas.
Based on these calculations, China emerged as most promising emerging market for retailers. However,
Targets cheap chic business approach might not be a good fit for China. Canada, the neighbor to the
north, looked like a better fit. However, Canada did not promise the high growth numbers of emerging
economies with their massively increasing middle class and their healthy demographics, meaning a
rather high proportion of young people. Mexico could be a compromise solution, for it was a middle-
income country with significant growth potential, but a sufficiently large customer base that could
afford Targets slightly higher prices. India and South Africa also offered promising market
opportunities, and as previous colonies they shared English as official language, which might make
internationalization to these countries easier for a U.S.-based firm. Exhibit 5 provides the figures for
Canada, China, India, Mexico, and South Africa (see Exhibit 5).
However, this left a final yet important aspect unaddressed: how should Target enter a foreign market?
Target could try to team up with a local player by creating a Joint Venture, or they could buy an equity
stake in an existing domestic retailer, and potentially acquire it including its stores and other key assets.
Alternatively, they could set up their own wholly-owned subsidiary, using a greenfield investment
approach, meaning that they would erect their own stores, including making investments in distribution
and logistics. Which one would match the foreign market environment and the business model of
Target?
In winter 2010, Target faced three key strategic questions: if Target should internationalize at all, and
if so where to and how?

EPILOGUE (WHAT HAPPENED NEXT?)
Please consult Part (B) of this Teaching Case.

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Page 8
EXHIBIT 1: TARGETS FINANCIAL FIGURES, 2004-2010
2004 2005 2006 2007 2008 2009 2010

Total revenues (in millions) $46,839 $52,620 $59,490 $63,367 $64,948 $65,357 $67,390
EBIT (in millions) $3,601 $4,323 $5,069 $5,272 $4,402 $4,673 $5,252
Net earnings (in millions) $3,198 $2,408 $2,787 $2,849 $2,214 $2,488 $2,920
Diluted earnings per share $2,07 $2,71 $3,21 $3,33 $2,86 $3,30 $4,00
Source: Own compilation, based on numbers given in Annual Reports 2005-2011.
EXHIBIT 2: SALES SEGMENTS, IN PER CENT
Segment 2005 2006 2007 2008 2009 2010

Consumables & Commodities 30% 32% 34% 37% 39% 41%
Electronics, Entertainmennt, Sporting Goods & Toys 23% 23% 22% 22% 22% 20%
Apparel & Accessories 22% 22% 22% 20% 20% 20%
Home Furnishing & Dcor 20% 19% 19% 21% 19% 19%
Other 5% 4% 3% N/A N/A N/A
Source: Own compilation, based on numbers given in Annual Reports 2005-2011.
EXHIBIT 3: STOCK PERFORMANCE, TARGET VS. WALMART

Source: Computation based on data from Yahoo!Finance.

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Page 9
EXHIBIT 4: WALMARTS INTERNATIONALIZATION PATHWAY
Target country/region Year of market entry Type of market entry strategy

Mexico 1991 Joint Vemtire
Canada 1994 Acquisition
Argentina 1995 Greenfield
Brazil 1995 Joint Venture
China 1996 Joint Venture
Germany 1997 Acquisition
South Korea 1998 Acquisition
UK 1999 Acquisition
Japan 2002 Acquisition
Central America* 2005 Acquisition
Chile 2009 Acquisition
Source: Own compilation. * = Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua.
EXHIBIT 5: SHORT-LISTED POTENTIAL TARGET COUNTRIES
Disposable
Real Expected
Market Market Rank income in
GDP real GDP Country Time
attractive- satu- in 2010 (per

growth growth risk pressure
ness ration GRDI household,

2009 2010
$)
Canada -2,5% 3,1% N/A N/A N/A N/A N/A 40,764.8

China 6,9% 9,4% 50.6 85.8 32.9 86.6 1 4,809.8
India 5,7% 9,7% 35.4 51.3 62.2 97.8 3 3,140.2
Mexico -6,5% 5,0% 64.3 69.6 11.1 20.9 25 13,000.8
South -1,8 3,0% 52.4 73.0 25.2 16.0 24 12,252.9
Africa
United -2,6% 2,6% N/A N/A N/A N/A N/A 61,028.4
States
Source: Own compilation, based on IMF, World Economic Outlook, October 10, 2010,
https://www.imf.org/external/pubs/ft/weo/2010/02/pdf/text.pdf, accessed July 28, 2015; AT Kearney, Expanding Opportunities for
Global Retailers, https://www.atkearney.com/documents/10192/371654/2010_Global_Retail_Development_Index.pdf/c00fc581-
e576-4186-a18f-4eaa6defa84b, accessed July 29, 2015; Euromonitor, World Consumer Income and Expenditure Patterns, 2012,
www.euromonitor.com/medialibrary/pdf/book_wciep.pdf, accessed July 31, 2015.

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316-0323-1

(A) SHOULD WE STAY OR SHOULD WE GO?

COMPANY HISTORY: FROM TARGET TO TARZ-HAJ

Distributed by The Case Centre North America Rest of the world

In 1998, the Dayton-Hudson Corporation acquired the Associated Merchandising Corporation to

THE U.S. RETAIL INDUSTRY

LEARNING FROM FIRST-MOVING COMPETITORS?

owned subsidiary investment.

store and product design?

if so where to and how?

EPILOGUE (WHAT HAPPENED NEXT?)

Please consult Part (B) of this Teaching Case.

EXHIBIT 1: TARGETS FINANCIAL FIGURES, 2004-2010

2004 2005 2006 2007 2008 2009 2010

Source: Own compilation, based on numbers given in Annual Reports 2005-2011.

EXHIBIT 2: SALES SEGMENTS, IN PER CENT

Segment 2005 2006 2007 2008 2009 2010

EXHIBIT 3: STOCK PERFORMANCE, TARGET VS. WALMART

Source: Computation based on data from Yahoo!Finance.

EXHIBIT 4: WALMARTS INTERNATIONALIZATION PATHWAY

Target country/region Year of market entry Type of market entry strategy

attractive- satu- in 2010 (per

ness ration GRDI household,

Canada -2,5% 3,1% N/A N/A N/A N/A N/A 40,764.8

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