Under the Influence with Terry O'Reilly - S6E03 - Passport Revoked: When Brands Fail Internationally

Episode Date: January 20, 2017

In this episode, we explore why some big brands fail when they attempt to expand internationally. It’s always interesting when massive companies with marketing firepower move into a new country and end up packing up their tents and going back home. Sometimes those companies succeed in other countries, but one just trips them up. We’ll look at how Home Depot and eBay originally struck out in China, why Germany didn’t take well to Walmart and we’ll dive deep into the real reasons Target failed in Canada. Amazing success stories at home, failures abroad. Hosted on Acast. See acast.com/privacy for more information.

Hi, it's Terry O'Reilly. As you may know, we've been producing a lot of bonus episodes while under the influences on hiatus. They're called the Beatleology Interviews, where I talk to people who knew the Beatles, work with them, love them, and the authors who write about them. Well, the Beatleology Interviews have become a hit, so we are spinning it out to be a standalone podcast series. You've already heard conversations with people like actors Mark Hamill, Malcolm McDowell, and Beatles confidant Astrid Kershaw. But coming up, I talk to May Pang, who dated John Lennon in the mid-70s. I talk to double fantasy guitarist Earl Slick, Apple Records creative director John Kosh. I'll be talking to Jan Hayworth,

who designed the Sgt. Pepper album cover. Very cool. And I'll talk to singer Dion, who is one of only five people still alive who were on the Sgt. Pepper cover. And two of those people were Beatles. The stories they tell are amazing. So thank you for making this series such a success. And please, do me a favor, follow the Beatleology interviews on your podcast app. You don't even have to be a huge Beatles fan, you just have to love storytelling. Subscribe now and don't miss a single beat. We'll see you next time. new locations. What matters is that you have something there to adapt with you, whether you need a challenge or rest. And Peloton has everything you need, whenever you need it. Find your push. Find your power. Peloton. Visit Peloton at onepeloton.ca. From the Under the Influence digital box set, this episode is from Season 6, 2017. You're not you when you're hungry.

You're a good hand with all the teeth. You're under the influence with Terry O'Reilly Back in 1963, something happened on the Billboard music charts that had never happened before. A song sung in Japanese went to number one. The song was originally titled Ue o Muturukau, which, when translated, meant, I look up when I walk. The tune had been written after the song's writer had attended a protest against the U.S. Army presence in Japan. He was sad the protest had failed,

and, on the way home home wrote the lyric that said, I look up when I walk so the tears won't fall. The song was sung by Kiyo Sakamoto in 1961 and stayed at number one in Japan for three months. A British music executive traveling in Japan heard it one day

and secured the rights to have an English instrumental group record a version of it. He knew no DJ would be able to pronounce the original title, so he renamed it Sukiyaki, the only Japanese word most people knew. Sukiyaki is a Japanese beef dish. As one critic said, it would be like renaming Moon River Beef Stew. Around that time, an American disc jockey heard the British instrumental

and began playing the original Sakamoto version, but used the title Sukiyaki. Capitol Records secured the American rights and released it. Then, Sukiyaki did the impossible. The all-Japanese song went to number one on the North American Billboard Hot 100 chart for three straight weeks. It had never been done before,

and it has never been done since. Because crossing borders is tricky business. It had never been done before, and it has never been done since. Because crossing borders is tricky business. The world of marketing has its own version of Sukiyaki. Many big, smart, successful corporations decide to expand across borders. It's a decision fraught with issues and the problem of trying to understand the cultural nuances of the new country. And many of those big, smart, successful corporations get their passports revoked when it all goes wrong. Because crossing borders is tricky business. You're under the influence.

There are many reasons why corporations choose to expand internationally. Sales may be flattening because the company has saturated the home turf. Or maybe a smart corporation spots an emerging opportunity in a foreign country and wants to exploit it. But even with vast resources, deep pockets, and impressive know-how, the number of failures is surprising. Surprising. The Home Depot is a massive corporation. Founded in 1978, the big box retailer now has over 2,000 locations.

And last year, revenue topped 83 billion U.S. Looking to expand internationally, the Home Depot spotted a big opportunity in China. In the 1990s, laws in China were changed to allow people to own their own homes for the first time. A strong economy had created a middle class with money to spend, all of which led to a housing boom. Home ownership had gone from virtually 0% to 70% in just 15 years. Research predicted a $50 billion per year home improvement market, with annual growth pegged at 20%. And many of the houses people were purchasing in China

were in a state of disrepair. That, in a nutshell, was the opportunity the Home Depot wanted in on. Millions of Chinese couples in need of home renovation products. So, in 2006, the Home Depot purchased a 12-store chain in China. The plan was to convert the locations into Home Depots, bring the company's vast home renovation experience to China, change the distribution channels, get rid of middle managers, and get products directly from the many Chinese vendor relationships it had established long ago, as many products

sold in its American stores were made in China. But it didn't take long for the problems to start. First, it turned out that its Chinese vendors were not licensed to sell their products in China. They could only export. Suddenly, the Home Depot realized it had no supply chain. It actually had to ship the Chinese products to the U.S., then ship them all the way back to China, which was not cost-effective.

And when they did find Chinese vendors that were licensed to sell in China, the Home Depot discovered that the vendors had their own selling rights inside the stores. In other words, if there were 100 Home Depot staff at a big store, there could be as many as 200 Chinese vendor reps in the store trying to hawk their own products. And Chinese customers like to haggle when buying goods, and that wasn't part of the Home Depot model. But all these issues paled when it came to the biggest problem. Unlike North America, where labor costs are high, it's incredibly cheap in China.

So people hire contractors to do everything. Therefore, cheap labor eliminated the do-it-yourself culture that the Home Depot was built on. Instead, it was more like a do-it-for-me culture in China. Because Chinese customers don't do handiwork themselves, they weren't interested in tools, ladders, and lumber. Plus, many of the homes in Chinese cities were small condos, so there was no room for tools, ladders, and lumber, even if the owners were feeling a little ambitious. That's when a realization hit the Home Depot like a punch in the chest.

The Chinese market was interested in decorating, not renovating. As a result, business suffered. In September of 2012, in spite of its vast resources, deep experience, and consummate know-how in home improvement, the Home Depot pulled out of China. The company made the classic mistake when expanding internationally. It had failed to fully grasp the local culture. If the experience wasn't painful enough for Home Depot,

the exit was even more so. Even though it offered severance packages and outplacement services for its 850 staff members, not everyone took the news well. One group of employees commandeered four locations, locked themselves from the inside, and squatted on the floors for an entire weekend to protest the closures. In another instance, Chinese installers stormed the Home Depot headquarters

and took the head lawyer, head of human resources, and head of operations and held them hostage for 80 hours. In the end, the Home Depot learned an expensive and agonizing expansion lesson. The Chinese may like Western decor, but they don't like Western business practices. Understanding local culture is job one. It seems China has many lessons to teach the West. Like the Home Depot, eBay saw a very attractive market in China, over 1 billion people and a growing middle class with purchasing power. eBay's global strategy was to grow via acquisition.

So the online auction company entered the Chinese market in 2004 by purchasing a local online trading company called eachnet.com, which enjoyed a 90% market share in China at the time. eBay took over the site, redesigned it to conform to eBay's look and functionality, then spent millions of dollars on advertising to maintain the previous site's market share. Meanwhile, the Chinese business-to-business auction site called Alibaba worried that eBay would start eating into its business. So, it decided to defend its turf

by launching a competing consumer auction site. They called it Taobao, which was Chinese for digging for treasure. The company had a deep understanding of its culture

and it knew one critical thing. In China, goods are bought and sold based on personal bonds and mutual obligation. The Chinese call this guanxi. So Taobao's auction platform offered guanxi in the form of a chat feature that allowed buyers and sellers to get to know each other. Then Taobao went one step further.

It promised to stay fee-free for the first three years. Between the built-in guanxi and the lack of fees, Taobao captured 90% of the online auction market by 2006. It was an interesting battle of company strategies. eBay didn't appreciate the importance of Guancy and had no mechanism for encouraging it. On Taobao, buyers spent an average of 45 minutes using the instant messaging to ask sellers about themselves and their products before purchasing. By dropping the fees, Taobao encouraged first-time

online shoppers to try its site. At first, eBay refused to drop its fees, and when it eventually did, it was too late. eBay had been extremely confident going into China. And why not? It had deep pockets, it walked into the market with a 90% market share, and above all, it had pioneered online auctions. But just two years later, that market share had shrunk to 10%. Like the Home Depot, it had tripped over the most important commandment of marketing. Know thy customer. The 800-pound gorilla in discount retailing is undoubtedly Walmart. It generates over $480 billion in revenue and is the world's largest retailer.

In 1998, American sales were starting to flatten, so Walmart looked to Europe. Specifically, Germany, because it had the third largest economy in the world at the time. Walmart's expansion strategy was to start big, as it had done in Mexico and the UK, by buying the largest and best-run retail chains in each country. So Walmart bought out two local retailers in Germany, giving them a total of 95 locations. With that purchase, it set about renovating the stores, overhauling the distribution network and supply chain, and began implementing Walmart's proven methodology. The problems started almost immediately.

First, when a company buys an existing chain, it usually gets saddled with some undesirable locations. Which happened to Walmart, as some of the stores were located in areas near sex shops. Next, Walmart shut down the headquarters of one of the chains it had purchased. The senior staff there were angry at the decision, and instead of transferring within Walmart, decided to go elsewhere. That left a big hole of vital local knowledge in Walmart's management. Germany also has a law that prohibits merchants from selling products at below cost,

so one of Walmart's key pricing strategies was eliminated immediately. While Walmart staffed up, competitors slashed customer service, allowing them to undercut Walmart prices by 10 to 25 percent, a market condition Walmart was not used to. Initially, Walmart offered a shopping experience that annoyed Germans. It simply took too long to shop and cash out. It offended the famous German efficiency. Then came the staff problems.

The mandatory morning calisthenics were not popular with the Germans. And you can only imagine how the mandatory morning chants of Walmart, Walmart, Walmart went over. The retailer insists on smiling staff, but in Germany, sales clerks smiling at customers was interpreted as flirting. Walmart offered grocery bagging,

but Germans don't like strangers handling their food. And the retailer clashed with local unions. Walmart is traditionally non-union, whereas Germany has a strong union culture. After nearly a decade of problems and low revenue, the mighty Walmart folded its tent, sold its stores, and exited Germany. It was a sobering lesson for the giant retailer. Despite the fact it had enjoyed big success in other countries, its formula for success

low prices, finely tuned inventory controls, military-like distribution, a large array of products and a smiling, well-trained staff did not translate to all foreign markets. Even the most successful retailer in the world can trip

across a border. It was a lesson Starbucks would soon learn. We'll be right back to our show. If you're enjoying this episode, why not dip into our archives, available wherever you download your pods. Go to terryoreilly.ca for a master episode list.

With 23,000 locations in 50 countries, you could easily assume that Starbucks has conquered the pitfalls of international expansion. So when it set its sights on Australia, Starbucks took a page from the Walmart playbook and chose to use a shock and awe strategy. It quickly opened 85 locations across the country. But the response from Australians was tepid at best. It was an interesting scenario. The sudden arrival of so many Starbucks locations was off-putting to Australians.

They saw it as an unwelcome invasion. As it turns out, Australia has a very mature coffee culture. They are self-professed coffee snobs. They drink between three to four cups of coffee a day and are very discerning when it comes to Java. Many felt Starbucks charged high prices for an inferior product. By the time Starbucks arrived in Australia, there were already 6,500 established coffee cafes.

Aussies prefer independent cafes over large chains. They have a strong sense of buying local, and the various cafes offered many different experiences. Starbucks offered one experience. The consistent store design, one of Starbucks' defining characteristics, devalued the cafe experience in Australia. And because Starbucks tends not to advertise, it didn't differentiate itself

or give Aussies a reason to switch. After a 14-year battle, Starbucks finally waved a white flag and sold their locations to the owners of the 7-Elevens in Australia, who now licensed the Starbucks name there. Like Walmart in Germany, the concept just wasn't that country's cup of tea. As everyone knows, Target's expansion into Canada was a very quick hello-goodbye. Many postscripts have been written about that debacle, and most settle on two main missteps. That Target didn't recreate the American shopping experience here

and that it didn't understand the Canadian market. But that wasn't it. When Target decided to expand into Canada, it chose the Walmart-Starbucks strategy. Open big and open fast. The only thing holding it back was real estate. Then, 220 Zellers leases became available in 2011. With Walmart sniffing around,

Target made a quick decision to purchase 189 of those leases for $1.8 billion. With the problem of real estate solved, Target then set an ambitious goal of opening 124 stores by the end of 2013. With that declaration, the clock started to tick. The retailer began the enormous undertaking of renovating all the locations. It needed to hire over 17,000 employees. Target decided to build brand new distribution centers from scratch. Normally, building one would take a few years.

Target set out to build three in less than two years. Target's finely tuned logistics technology in the U.S. wasn't set up for a foreign country. It wouldn't accept the Canadian dollar, metric measurements, or French language requirements. So, the decision was made to go with brand new software that could be implemented faster. The new software was considered best in class,

but it was a difficult system and unforgiving. Sobeys had tried it, but abandoned it. Loblaws started to transition to the same software and projected a three- to five-year timeline. And it still took two years longer than planned. Target wanted to have this system up and running in less than a year. While Target was renowned for training its employees in the U.S., Canadian staff only

got a few weeks of training due to the crush of the launch date. So, well-intentioned but inexperienced staff trying to launch over 100 stores in a very short period of time began inputting data into an unfamiliar software system that not even U.S. head office really understood. 75,000 different products had to be entered, with up to 80 fields of information for each. That resulted in thousands of errors. When those flaws hit the system, the result was disastrous. Items coming from overseas were stalled.

Tariff codes were missing. Products weren't fitting into the right shipping containers. But the worst part was this. Merchandise was piling up at the distribution centres, causing Target to rent additional storage facilities, yet the store shelves were empty. The incorrect data meant the merchandise couldn't be processed from the distribution centres to the stores.

An article in Canadian Business Magazine estimated that only 30% of the data was correct. That's when Target management decided to stop everything and take two full weeks to manually correct the thousands of mistakes. Staff worked around the clock, but even that massive undertaking was complicated because all the new data had to be sent to a target office in India before it could be loaded into the new software. Meanwhile, the clock ticked loudly. At daily meetings to monitor progress,

senior staff started to have crippling fears the launch date couldn't be met and that Target would fumble its critical introduction with Canadian shoppers. But nobody wanted to be the one to call off the Canadian venture, and the Target CEO made it clear he didn't want to be paying rent on locations

that weren't operational. Even with the launch date thundering towards Target like a charging bull, the decision was made to stick to the timetable. It would turn out to be Target's biggest mistake. When the first three stores opened as promised in March of 2013, anticipation was high as shoppers lined up outside Target's doors. But shortly after those doors opened,

the complaints started on social media, the biggest of which was, please stock the shelves. Target responded by saying it was overwhelmed by the demand, but in reality, it was still struggling with its logistics nightmare. The software said the item was in stock, but the shelf was empty. Target resorted to manually replenishing shelves, a Herculean task for the already exhausted staff. Then,

the checkouts went glitchy. Cash terminals froze up. Items wouldn't scan or the prices were incorrect. Transactions would be completed, but the payments never actually went through. At one point, Target printed a flyer in which nearly every item was out of stock. Customer sentiment started to take a very nasty turn. If you're looking for flexible workouts, Peloton's got you covered. Summer runs or playoff season meditations, whatever your vibe, Peloton has thousands of classes built to push you.

We know how life goes. New father, new routines, new locations. What matters is that you have something there to adapt with you, whether you need a challenge or rest. And Peloton has everything you need, whenever you need it. Find your push. Find your power. Peloton. Visit Peloton at onepeloton.ca. When Target released its annual results in February 2014, it was revealed it had lost US$941 million on the Canadian launch so far. Three months later, the US CEO stepped down.

Two weeks after that, the Canadian president resigned. In June, Target Canada released an apology video. The biggest challenges I think we face have been with our systems and how that's affected our ability to get inventory into our stores. We're just making sure that we're taking that feedback each and every day to try to resolve it, and we're getting new systems to try to make sure that it's working better. Maybe we didn't put our best foot forward

when we entered into Canada. We had some disappointments when we opened. Certainly we think we disappointed our guests, but here at headquarters and at our store teams, we're working really hard to give everybody that unique Target experience. But when the new CEO did the math and realized Target wouldn't become profitable until the year 2021, he pulled the plug. Target Canada filed for creditor protection after just two years.

Total losses? $2 billion U.S. But it wasn't that Target didn't create an American shopping experience, and it wasn't because Target didn't understand the Canadian shopper. In the end, Target was felled by one thing, a leasing deal that created an impossible timeline. Possible Timeline When my company expanded to New York City, I remember walking down Fifth Avenue one day with my business partner. He looked around at the bustling street and said, you'd have to be an idiot not to make money in this town.

Yet, making our New York office work was the most difficult challenge we faced in our company's 25-year history. Expanding across borders is not for the faint of heart. The biggest sin is not taking the appropriate time to understand the local culture, or the sub-sin of forcing your ways on another country. The Home Depot learned that lesson the hard way

when it brought its home renovation knowledge to a country not interested in home renovation. eBay watched its 90% market share dwindle to 10% when a Chinese rival launched a site that was in tune with the culture. Starbucks believed it could bring its armada to a country that loved coffee, but in the end, Australia just didn't seem that interested in one of the world's most successful brands. Even the mighty Walmart got taught a lesson

when Germany didn't warm up to calisthenics or bag groceries. Then there was Targé. Already beloved by many Canadians, it set itself up for failure by imposing an impossible deadline to make a real estate deal work. There are dozens of tripwires in the business of crossing borders, and it can be painful for even the most successful companies in the world. Maybe the original lyrics to Sukiyaki sum it up best when they said, I look up when I walk so the tears won't fall. When you're under the influence.

I'm Terry O'Reilly. Under the Influence was recorded at Pirate Toronto. Series producer, Debbie O'Reilly. Sound engineer, Keith Ullman. Theme music by Ari Posner and Ian Lefevre. This episode brought to you by... It starts at the first look. This episode brought to you by... She begins... Hey, I like your style. I'd like your style even more if you were wearing an Under the Influence t-shirt. Just saying. You'll find them on our shop page at terryoreilly.ca slash shop.