The Decision to Leave an Unprofitable Business (A Case Study of Target Canada)

Target Canada

The decision to leave an unprofitable business is always a difficult one. It is believed to be one of the most difficult decisions to make in business. Brian Cornell joined Target as the new CEO, in August 2014 after the resignation of Greg Steinhafel. Brian Cornell was an outside hire by the board. He was faced with the difficult decisions of either Target Corporations should continue operation in Canada or leave. It was evident that Target Canada needed a change because of present operational challenges. Though the projections show Target Canada would be profitable from 2021, Brian Cornell made a recommendation to leave Canada. The decision was considered as painful but brave that business leaders across the globe need to lean from.

Target Corporation and Canada Expansion

Target Corporation had operated for more than a century under different names in the United State. The most notable was in 1967 when the new brand was unveiled, “Expect More. Pay Less”. By December 2013, Target had grown to be the second-largest general merchandise retailer in the U.S with over $72.5 billion in revenue, $4.2 billion in earnings before interest and tax, and the market share grew from 0.1% to 2.5%. With this growth, Target Canada was launched in 2013 as anticipated by both consumers and competitors. Target Canada launched 133 stores within the first 2 years of its operation.

Target Canada (What Went Wrong)

Though the customers anticipated its arrival, the launch of Target Canada was seen as an impossibly tall order and aggressive. The company acquired the 220 Zellers’ stores earlier in 2011 but failed to take the opportunity to retains its local employees. The Zeller stores were not sited in the primary locations and that affected the traffic to the Target Canada’s stores. The price of many items rose by about 15% compared to what was being sold in the U.S. This contradicts the motto of “Expecting More. Paying Less”. By 2012, more consumers (10% increase) crossed the border to the U.S to buy at a cheaper price. Things got complicated when the inventory system was badly managed due to data errors. Stores were out of stock of many items while others were excessively supplied and heavily discounted to clear excess inventory.

Brian Cornell Findings and The Decision

Brian Cornell made the decision to discontinue operation in Canada with understanding that Target Canada had failed to meet customer expectations and retained earnings in negative of over $2.2 billion due to the reoccurring losses. The debt was over $4.4 billion from which about $3.4 billion was owed to about 1,790 suppliers. The total debt accounts for 81% of the Total Asset. It was obvious that the investment required to turn the business around would be too hard to crack. The investors were growing agitated as Target’s stock price continued to fall behind Walmart and the S&P market index. Brian Cornell did not see any indication to make Target Canada profitable until 2021 without much potential for sales growth. He made his recommendation to the board to leave Canada and concentrate resources on more profitable businesses to grow Target.

The Thought Process of Great Decision Makers

The mindset of great decision-makers in the business world is to provide solutions to identified problems based on set objectives. They conduct an in-depth analysis of the situation, creatively evaluate the available option(s), and make their recommendations or decision. It is safer to review the thought process before making the final call. It was a brave and wise decision to leave Canada as many investors and business analysts applauded the new CEO. Target management estimated the impact of the decision to lead to a pretax loss of $5.4 billion in 2014, and $275 million in 2015 but the U.S operation would improve in earnings and liquidity by 2015. Every business leader must learn to cut a tie with an unsustainable unprofitable business. It is always a difficult decision especially when much consideration is put on the unrecouped investment.

Joshua Adeyemi (LBS, EMBA27)