Tuesday, September 10, 2019

Case Study: The $2.5 Billion Cross-Border Expansion Mistake by Target

Case Study: The 2.5 billion dollar cross-border expansion mistake by Target
Less than two years after entering Canada, Target shocked the retail world by pulling out. After accumulating $2.5 billion in losses, the Minneapolis-based company shut down all of its 133 Canadian locations and laid off 17,600 employees.

In a blog post, Brian Cornell, Target’s chairman and CEO, said the decision to exit Canada was the best option available to the company. “After extensive internal due diligence and research, paired with counsel from outside experts, we fulfilled our obligation to do what was right for our company and our shareholders, and made the decision to exit Canada,” he wrote.

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

What most Americans with three Target stores right in their neighborhood don’t realize is that Target isn't a worldwide thing. Walmart, by contrast, operates 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.

Target was a careful, analytical and efficient organization with a highly admired corporate culture. The corporation’s entry into Canada was uncharacteristically bold—not just for Target, but for any retailer. Under Gregg Steinhafel (Target’s CEO at the time), the company paid $1.8 billion for the leases to the entire Zellers department store chain in 2011 and formulated a plan to open 124 locations by the end of 2013. Not only that, but the chain expected to be profitable within its first year of operations.

That should have been easy, right? After all, Americans and Canadians speak the same language (ignoring the French-speaking Québécois) and most Americans somehow seem to think of Canada as their 51st, more polite, colder state to the north.

But it's not that simple. Take these 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 the people in the U.S., 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 challenges, can't you?

An inventory system that was set up to handle U.S. 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. The products don't all just come from the U.S. A box of small widgets in the U.S. 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.

But let’s start from the beginning.

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Timeline of Events

2010

Everything started with Richard Baker, the executive chairman of Hudson’s Bay Co. (HBC). Although Baker is a retail executive, he is, at heart, a real estate man. His maternal grandfather started buying and selling real estate in New York City in 1932 and helped pioneer the concept of shopping malls. Baker’s greatest business insight was to recognize the value of the property developed by both his grandfather and his father. In the 1990s, he started selling some of it off to various companies, including Walmart.

That relationship proved fortuitous in late 2010, when Walmart approached him and offered to buy the Zellers chain from HBC. Baker realized there was more value to Zellers’ real estate than to the operation itself, since Walmart had soundly beaten the brand. An astute dealmaker, Baker and his team reached out to Target to stoke the company’s interest.

It was an open secret that Target was interested in the Canadian market. But the company had previously decided it wanted to grow as quickly as possible if it were to enter Canada, rather than pursue a slow, piecemeal expansion. The challenge was in acquiring enough real estate to make that possible. The Zellers sale provided just such an opportunity. After Baker’s team let Target know Zellers was on the block—and Walmart was interested—the American company acted quickly to finalize its own offer.

2011

Walmart would eventually back out, but Target put down $1.8 billion. Steinhafel bought everything, essentially committing the company to opening stores as quickly as possible to avoid paying rent on stores that weren’t operational and leaving landlords without anchor tenants. The price Steinhafel paid raised eyebrows. “When the numbers got up as high as they did, we found that pretty surprising,” says Mark Foote, the CEO of Zellers at the time.

Almost immediately after signing the deal, employees in Minneapolis were seconded to work on the Canadian launch. It was considered a privilege to be recruited. “The company was pouring in resources left, right and sideways, so it was palpably exciting in Minneapolis,” says a former employee.

Early 2012

By early 2012, with the planned opening still a year away, the nerve center for the Canadian launch had moved from Minneapolis to Mississauga, Ontario, and waves of American expats settled up north. Hiring was a top priority.

Fall 2012

Strange things started happening in 2012, once ordering began for the pending launch. Items with long lead times coming from overseas were stalled—products weren’t fitting into shipping containers as expected, or tariff codes were missing or incomplete. Merchandise that made it to a distribution center couldn’t be processed for shipping to a store. Other items didn't fit properly onto store shelves. What initially appeared to be isolated fires quickly became a raging inferno threatening to destroy the company’s supply chain. It didn’t take long for Target to figure out the underlying cause of the breakdown: The data contained within the company’s supply chain software, which governs the movement of inventory, was riddled with flaws.

Thus, “data week” was held in the fall of 2012. Merchandisers essentially had to confirm every data point for every product with their vendors. A buyer might have 1,500 products and 50 to 80 fields to check for each one. The more experienced employees had the foresight to keep records of verified information (dubbed “sources of truth”), which made the task a little easier. Others weren’t so lucky.

Complicating matters was the dummy information entered into the system when SAP was set up. That dummy data was still there, confusing the system, and it had to be expunged. “We actually sat there and went through every line of data manually,” says a former employee. “It was terrible.” Target anticipated how awful it would be and designed the week to help keep employees sane. To kick it off and rally spirits, a few employees performed a hip-hop song-and-dance routine on the first day. Ice cream and pizza flooded in to keep employees fueled up; some stayed at work well past midnight that week, squinting at screens through bleary eyes.

February 2013

The grand opening of Target Canada was set to begin in one month, and they needed to know whether the company was actually ready. In February 2013, about a dozen senior-level employees gathered at the company’s Mississauga headquarters to offer updates on the state of their departments. Tony Fisher, Target Canada’s president, was holding these meetings every day as the launch date crept closer. The news was rarely good.

The news at this particular meeting was no different. The company was having trouble moving products from its cavernous distribution centers and onto store shelves, which would leave Target outlets poorly stocked. The checkout system was glitchy and didn’t process transactions properly. Worse, the technology governing inventory and sales was new to the organization; no one seemed to fully understand how it all worked.

The 750 employees at the Mississauga head office had worked furiously for a year to get up and running, and nerves were beginning to fray. Three test stores were slated to open at the beginning of March, followed shortly by another 21. A decision had to be made, and they made it. They opted to go ahead.

March 2013

On March 4, 2013, Tony Fisher led a gaggle of reporters through a new Target location in Guelph, Ontario. The store officially opened the next day, along with two others in the province.

The company had been teasing consumers for a year at this point, starting with a pop-up shop in Toronto featuring designer Jason Wu. There had also been a high-profile ad during the Academy Awards to hype the Canadian launch, and actors Sarah Jessica Parker and Blake Lively were lined up to appear at the grand opening.

Workers were still stocking shelves at the time, and signs throughout the store read, “We’re open (mostly).” The three Ontario stores were part of Target’s soft launch, and the company explained in a press release that the goal was to use them to iron out kinks and “determine operational readiness” before opening 21 more locations as part of its official launch that month.

Fall 2013

In the fall of 2013, hundreds of Target Canada head office staff piled into the auditorium at the Mississauga Living Arts Centre for a state-of-the-union address from their leaders. The employees were weary and frustrated by this point. The bulk of the 124 stores had opened, and it was clear the launch had gone seriously awry.

Consumers were frustrated when confronted with empty shelves, and the media and financial analysts were hammering the company for it. On stage, Fisher stated his conviction that Target Canada was making progress and that 2014 would be a greatly improved year.

A Q&A session followed; one employee bravely asked Fisher what he would do differently if he could do the launch over again. A man in the front row stood up and offered to field the question. Taking the microphone, Steinhafel, Target’s CEO, didn’t hesitate with his answer: He would renegotiate the real estate deal that facilitated the company coming to Canada in the first place.

February 2014

In February 2014 Target headquarters released its annual results, revealing a US$941-million loss in Canada. The company attributed the shortfall to growing pains, expansion costs and—because of all that excess inventory sitting in warehouses—significant markdowns. “As we enter 2014 with a much cleaner inventory position, the team’s number one operation focus is on in-stocks—ensuring we have the right quantity of each item in the right place at the right time,” Steinhafel said on the earnings call.

It was his last as Target CEO. A month prior, Target had disclosed a massive security breach in which hackers stole the personal information of 70 million customers in the U.S. Combined with the bleeding operations in Target Canada, Steinhafel’s position was untenable, and he stepped down in May. (He walked away with US$61 million in compensation.) Fisher, who was hand-picked by Steinhafel, left the company two weeks later. Mark Schindele was his replacement.

June 2014

Target Canada released an apology on YouTube; the video featured employees and executives reflecting on the challenges of the first year and confessing to their sins. “Maybe we didn’t put our best foot forward when we entered into Canada,” said Damien Liddle, the company’s senior corporate counsel. “Certainly we know we’ve disappointed our Canadian guests.” The video was remarkably candid as far as corporate mea culpas go but maintained an optimistic note. “We’re headed in the right direction now,” said another employee in the video. “For sure.”

December 2014

Target employees were beginning to feel like there was a light at the end of the tunnel. The company had a much better handle on its technology, its data and the supply chain, and every day no longer felt like a crisis. Target Canada was at last transitioning into a functional—almost normal—retailer. There were even big plans for 2015, such as implementing online shopping at Target.ca.

January 2015

The news on January 15, 2015 was much different: Target Canada was filing for bankruptcy protection. It had spent $7 billion on the expansion so far, and it didn’t project turning a profit until at least 2021. Early that morning, Schindele’s direct reports broke the news to their teams, who then informed their own departments. A press release went out at 8 a.m. By then, the entire company knew.

All 133 Canadian stores closed by April.

What Went Wrong 

Data quality

It didn’t take long for Target to figure out the underlying cause of the supply chain breakdown in 2012: The data contained within the company’s supply chain software, which governs the movement of inventory, was riddled with flaws. At the very start, an untold number of mistakes were made, and the company spent months trying to recover from them.

In order to stock products, the company had to enter information about each item into SAP. There could be dozens of fields for a single product. For a single product, such as a blender, there might be fields for the manufacturer, the model, the UPC, the dimensions, the weight, how many can fit into a case for shipping and so on. Typically, this information is retrieved from vendors before Target employees put it into SAP. The system requires correct data to function properly and ensure products move as anticipated.

A team assigned to investigate the problem discovered an astounding number of errors. Product dimensions would be in inches, not centimeters or entered in the wrong order: width by height by length, instead of, say, length by width by height. Sometimes the wrong currency was used. Item descriptions were vague. Important information was missing. There were myriad typos. “You name it, it was wrong,” says a former employee. “It was a disaster.”

It was also something the company should have seen coming. The rush to launch meant merchandisers were under pressure to enter information for roughly 75,000 different products into SAP according to a rigid implementation schedule. Getting the details from suppliers largely fell on the young merchandising assistants. In the industry, information from vendors is notoriously unreliable, but merchandising assistants were often not experienced enough to challenge vendors on the accuracy of the product information they provided. (The staff were also working against the countdown to opening.)

“There was never any talk about accuracy,” says a former employee. “You had these people we hired, straight out of school, pressured to do this insane amount of data entry, and nobody told them it had to be right.” Worse, the company hadn’t built a safety net into SAP at this point; the system couldn’t notify users about data entry errors. The investigative team estimated information in the system was accurate about 30 percent of the time. In the U.S., it’s between 98 and 99 percent. (Accenture, which Target hired as a consultant on SAP, said in a statement: “Accenture completed a successful SAP implementation for Target in Canada. The project was reviewed independently and such review concluded that there is no Accenture connection with the issues you refer to.”)

Data loading

There was an entirely different process to ensure the correct data actually made it into SAP. The employees in Mississauga couldn’t add it directly. Instead, the information was sent to a Target office in India, where staff would load it into SAP. Extra contractors had to be hired in India, too. “Sometimes even when we had the data correct, it got mixed up by the contractors in Target India,” says a former employee. (Another former employee disputes this: “Sometimes the quality of their work wasn’t so great, but for the most part they did a good job.”) In any event, uploading took longer than expected, and data week stretched into two. Periodic data blitzes in individual departments became common into the following year.

Empty shelves

The foot traffic in the early days was higher than expected, which was encouraging, but it didn’t take long for consumers to start complaining on social media about empty shelves. “Target in Guelph, please stock up and fill the shelves,” wrote one aggrieved shopper on Facebook. “How can I or anyone purchase if there is nothing left for me to buy?” Target told the media that it was overwhelmed by demand and made assurances that it was improving the accuracy of product deliveries.

The reality was that Target was still struggling with data quality problems that were hampering the supply chain, and it didn’t have time to address the root causes before opening another wave of stores. Problems multiplied, and the public mood continued to turn against Target. Consumers soured on the brand when confronted with empty shelves—the exact scenario some senior employees warned of earlier in the year.

Stock overflow

Ironically, even as consumers encountered barely stocked stores, Target’s distribution centers were bursting with products. Target Canada had ordered way more stock than it could actually sell. The company had purchased a sophisticated forecasting and replenishment system made by a firm called JDA Software, but it wasn’t particularly useful at the outset, requiring years of historical data to actually provide meaningful sales forecasts. When the buying team was preparing for store openings, it instead relied on wildly optimistic projections developed at U.S. headquarters.

According to someone with knowledge of the forecasting process in Minneapolis, the company treated Canadian locations the same way they did operational stores in the U.S. and not as newcomers that would have to draw consumers away from rival retailers. Even if the stores were in out-of-the-way spots—and some of the locations in the Zellers portfolio certainly were—the company assumed the strength of the Target brand would lure customers. There was another element at play, too. “Once you signed up to do 124 Zellers locations, it felt like there was a point where it’s like we have to assume sales will be good,” says the former employee. “It’s very backwards.”

Distribution problems

The distribution depots were hampered by other factors caused by lingering data problems and the learning curve associated with the new systems. Manhattan, the company’s warehouse software, and SAP weren’t communicating properly. Sometimes, the issues concerned dimensions and quantities. An employee at headquarters might have ordered 1,000 toothbrushes and mistakenly entered into SAP that the shipment would arrive in a case pack containing 10 boxes of 100 toothbrushes each. But the shipment might actually be configured differently—four larger boxes of 250 toothbrushes, for example.

As a result, that shipment wouldn’t exist within the distribution center’s software and couldn’t be processed. It would get set aside in what was designated as the “problem area.” These sorts of hang-ups happen at any warehouse, but at Target Canada, they happened with alarming frequency. Warehouse workers got so desperate to move shipments they would sometimes slice open a crate that was supposed to contain, say, a dozen boxes of paper towels but only had 10, stuff in two more boxes, tape it shut and send it to a store that way.

Malfunctioning point-of-sale system

To add even more headaches, the point-of-sale system was malfunctioning. The self-checkouts gave incorrect change. The cash terminals took unusually long to boot up and sometimes froze. Items wouldn’t scan, or the POS returned the incorrect price. Sometimes a transaction would appear to complete, and the customer would leave the store—but the payment never actually went through. The POS package was purchased from an Israeli company called Retalix, which worked closely with Target Canada to address the issues.

Progress was maddeningly slow. In 2014, a Retalix team flew to Toronto to see first-hand what Target was dealing with. After touring a store, one of the Retalix executives remarked, “I don’t understand how you’re using this,” apparently baffled the retailer managed to keep going with so many bugs. But Target didn’t have time to find a new vendor and deploy another technology. “We were bound to this one bad decision,” says a former employee. (Retalix was purchased in 2012 by NCR Corp., the American global payment transaction firm.)

“When entering a new country, it is normal for retail software systems to require updates to tailor the solution to market needs and processes,” NCR said in a statement in response to questions about Target’s experience. “NCR was making progress to customize the solution for the market and Target’s new operations until their decision to exit the country.”

Gaming the system

A small group of employees also made an alarming discovery that helped explain why certain items appeared to be in stock at headquarters but were actually missing from stores. Within the chain’s replenishment system was a feature that notified the distribution centers to ship more product when a store runs out. Some of the business analysts responsible for this function, however, were turning it off—on purpose. Target's business analysts (who were young and fresh out of school, remember) were judged based on the percentage of their products that were in stock at any given time, and a low percentage would result in a phone call from a vice-president demanding an explanation.

But by flipping the auto-replenishment switch off, the system wouldn’t report an item as out of stock, so the analyst’s numbers would look good on paper. “They figured out how to game the system,” says a former employee. “They didn’t want to get in trouble and they didn’t really understand the implications.” Two people involved in the discovery allow that human error may have been a component, too. Like SAP, the replenishment software was brand new to Target, and the company didn’t fully understand how to use it.

When Schindele was told of the problem, he ordered the function to be fully activated, which revealed for the first time the company’s pitifully low in-stock percentages. From there, a team built a tool that reported when the system was turned on or off, and determined whether there was a legitimate reason for it to be turned off, such as if the item was seasonal. Access to the controls was taken away from the analysts, depending on the product.

How Target Could Have Done Things Differently

The obvious recurring theme through all problems and wrong decisions with Target's entry into Canada is the immense time pressure. From the very beginning, a clock was ticking … and that clock was absurd. The company did everything it could to remove barriers that might slow progress and to ensure decisions could be made quickly. Timelines were hugely compressed. Building a new distribution center from scratch, for example, might take a few years. Target was going to do it in less than two years—and it planned to construct three of them. Introducing a new SAP system within two years? Hiring and training 15,000 employees? They never had a chance.

But aside from the obvious there are some additional lessons learned in this story.

Technology

One of the most important decisions Target made concerned technology—the systems that allow the company to order products from vendors, process goods through warehouses and get them onto store shelves promptly. In the U.S., Target used custom technology that had been fine-tuned over the years to meet its exacting needs, and the corporation had developed a deep well of knowledge around how these systems functioned. Target faced a choice: Was it better to extend that existing technology to Canada or buy a completely new, off-the-shelf system?

Finding an answer was tricky. By using Target’s existing technology, employees in Canada could draw on the large amount of expertise in the U.S. That plan had shortcomings as well. The technology was not set up to deal with a foreign country, and it would have to be customized to take into account the Canadian dollar and even French-language characters. Those changes would take time—which Target did not have. A ready-made solution could be implemented faster, even if the company had little expertise in actually using it.

The team responsible for the decision went with SAP. Considered the gold standard in retail, SAP is used by many companies around the world, from Indigo in Canada to Denmark’s Dansk supermarket chain. It essentially serves as a retailer’s brain, storing huge amounts of data related to every single product in stores. That data would be fed by SAP into Target’s other crucial systems: software to forecast demand for products and replenish stocks, and a separate program for managing the distribution centers. After implementing SAP in Canada, Target wanted to eventually switch the U.S. operations over as well, aligning the two countries and ensuring the entire company benefited from the latest technology.

While SAP might be considered best-in-class, it’s an ornery, unforgiving beast. Sobeys introduced a version of SAP in 1996 and abandoned the effort by 2000. (It wasn’t until 2004 that the grocery chain tried again.) Similarly, Loblaws started moving to SAP in 2007 and projected three to five years to get it done. The implementation took two years longer than expected because of unreliable data in the system. Target was again seeking to do the impossible: It was going to set up and run SAP in roughly two years.

The company wasn’t doing it alone, however, and hired Accenture (which also worked on Loblaws’ integration) as the lead consultant on the project. Target believed the problems other retailers faced were due to errors in data conversion. Those companies were essentially taking information from their existing systems and translating it for SAP, a messy process in which it’s easy to make mistakes. Target, on the other hand, was starting fresh. There was no data to convert, only new information to input.

Training

Target has a unique, well-established corporate culture in the U.S., which the company views as one of the reasons for its success, and leaders sought to replicate that environment in Canada. Target describes itself as “fast, fun and friendly” to work for and it’s a place where attitude and soft skills are of equal—if not more—importance to experience. “Target’s motto was they could train you for the job, but they couldn’t train culture,” says a former employee.

In the U.S., the company prides itself on its development programs for even junior positions like business analysts, who help coordinate the flow of product, and merchandising assistants, who work with buyers to choose which products to stock and negotiate costs with vendors. Target typically recruits candidates for these positions straight out of school and prepares them for a career in retail. That’s how Tony Fisher got his start—he joined the company as an analyst in 1999, after he was drafted by the Texas Rangers baseball organization and played for two years in the minor leagues. Young employees receive months of instruction and are paired with a mentor. Hiring for culture over experience works, essentially, because Target in the U.S. provides ample training.

In Canada, the company succeeded in hiring people with the right personalities, but young staff received only a few weeks of training, according to former employees who worked at Target in both countries. The Canadian team lacked the institutional knowledge and time to properly mentor the new hires. “Everyone was stretched thin. We didn’t have the manpower to get everything done in the time frame that was laid out,” says a former employee. Another was surprised to see how green his colleagues were. “I was one of the older people there, and I was in my mid-30s,” he says.

Target Canada would eventually learn what happens when inexperienced employees working under a tight timeline are expected to launch a retailer using technology that nobody—not even at the U.S. headquarters—really understood.

Delay market entry

Fisher, 38 years old at the time, was regarded as a wunderkind who had quickly risen through the ranks at Target’s American command post in Minneapolis, from a lowly business analyst to leader of a team of 400 people across multiple divisions. Launching the Target brand in a new country was his biggest task to date. The news he received from his group that afternoon in February 2013 should have been worrying, but if he was unnerved, Fisher didn’t let on. He listened patiently as two people in the room strongly expressed reticence about opening stores on the existing timetable.

Their concern was that with severe supply chain problems and stores facing the prospect of patchy or empty shelves, Target would blow its first date with Canadian consumers. Still, neither one outright advocated that the company push back its plans. “Nobody wanted to be the one to say, ‘This is a disaster,’” says a former employee. But by highlighting the risks of opening now, the senior employees’ hope was that Fisher would tell his boss back in Minneapolis, Target CEO Gregg Steinhafel, that they needed more time.

The magnitude of what was at stake began weighing on some of those senior officials. “I remember wanting to vomit,” recalls one participant. Nobody disagreed with the negative assessment—everyone was well aware of Target’s operational problems—but there was still a strong sense of optimism among the leaders, many of whom were U.S. expats. The mentality, according to one former employee, was, “If there’s any team in retail that can turn this thing around, it’s us.”

The group was riding a wave of momentum, in fact. They had overcome seemingly endless hurdles and worked grueling hours to get to this point, and they knew there were costs to delaying. The former employee says the meeting ultimately concerned much more than when to open the first few stores; it was about the entirety of Target’s Canadian launch. Postponement would mean pushing back even more store openings. Everyone else in attendance expressed confidence in sticking to the schedule, and by the time the meeting concluded, it was clear the doors would open as promised. “That was the biggest mistake we could have made,” says the former employee.

Closing Thoughts 

To say that Target had unrealistic and highly optimistic growth plans for its entry into Canada would be an understatement—in 2011 the company had plans to open 124 locations by the end of 2013 with the expectation that the Canadian company would be profitable within its first year of operations. Not to mention that they also intended to build three new distribution centers in less than two years—a feat that typically takes a couple of years per center. The end result was that Target Canada filed for bankruptcy, wasted billions of dollars, tarnished its reputation and left approximately 17,600 people without jobs. In most cases, this would have completely destroyed a company’s chances of surviving and Target has been lucky to continue to see success among its U.S. stores.

In a nutshell: Unmanageable deadlines and disastrous IT wrecked this top U.S. retailer's attempt at international expansion. Just another proof that nowadays technology can make or break an enterprise.

Other Project Failure Case Studies

> For an overview of all case studies I have written please click here.

> To download all my Project Failure Case Studies in a single eBook just click on the image.

References

> Dahlhoff, D. (2015). Why Target’s Canadian Expansion Failed. [online] Harvard Business Review. Available at: https://hbr.org/2015/01/why-targets-canadian-expansion-failed

> Wahba, P. (2015). Why Target failed in Canada. [online] Fortune. Available at: https://fortune.com/2015/01/15/target-canada-fail/

> Joe Castaldo (2015). The last days of Target. [online] Canadian Business. Available at: https://www.canadianbusiness.com/the-last-days-of-target-canada/
Posted on Tuesday, September 10, 2019 by Henrico Dolfing