TAR
Expect more. Pay less.
It seems a simple enough directive to consumers. But in
a year when national unemployment hovers just under
the double-digit mark and the rate of personal savings
has reached a 10-year high, convincing those consumers
that the local Target store can answer both needs has
become frustratingly sticky for the Minneapolis-based
discount-store chain.
At one time considered a pioneer in providing design to
the masses, Target has since been tripped up by the same
“cheap chic” caché that made it the envy of the competition,
including its nemesis, Wal-Mart. While consumers have
come to expect more stylish housewares and clothing at Target, they also anticipate higher prices than the competition.
A February 2008 survey by Citi Investment Research analyst Deborah Weinswig found that 87% of consumers
believed Wal-Mart had the lowest prices among retailers.
And while Target undersold supermarkets on groceries by
10% to 15%, shoppers believed its prices were 20% higher.
It’s a price perception partly explained by Target’s
design-focused point of differentiation, a hook that helped
drive up same-store sales during the financial heydays of
2006 and early 2007 but helped drag them down as the
economy tanked.
“I think the biggest problem Target has is not so much
that strategy; it’s that strategy in a down economy,” says Neil
Stern, a partner with McMillanDoolittle LLP, Chicago. “I
don’t think they’ve failed to deliver; it’s that that resonates
less over the past year. It is more fashionable product at
slightly higher prices, and the consumer has been very resistant to the higher-price piece of it.”
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RGET
in the
Bull’s-EyE
As value trumps aspirations during recession,
discounter attempts to reconnect with consumers
By Samantha Oller
soller@cspnet.com
“Retailers who came into a recession with an emphasis
on something other than price—whether it’s quality, service,
unique attributes about what they carried—have tended to
have a decline in sales,” observes John Rand, director of retail
insight for Management Ventures Inc., Cambridge, Mass.,
citing similar trends for grocer Safeway and departmentstore chain J.C. Penney.
“It doesn’t mean their business will perish; it just means
they’ll have a bad year,” he continues. “Target and Wal-Mart
is the same story. Target came into the recession as a differentiation retailer, while Wal-Mart came in as a price retailer.
Wal-Mart’s stronger than Target right now.”
Combined with an overreliance on discretionary categories, this strategic one-two punch has pummeled Target’s
financial performance:
䊳 The company has suffered negative same-store sales
for 11 of the past 12 months, with sales down 6.2% the most
recent month reported, June 2009. (Comparably, in April,
the latest month for which financial data is available, WalMart Stores Inc.’s same-store sales rose nearly 6%, not
including gains from the Sam’s Club division.)
䊳 Profits as of first-quarter 2009 had fallen 13%, and
they dropped 22.3% for full-year 2008. Wal-Mart’s profits,
meanwhile, rose nearly 6%.
Target also recently shook itself free of an expensive,
very public proxy fight led by an activist investor who argued
the company’s current board of directors lacked the right
experience to keep Target relevant during the recession. That
drama took precious focus and funds—estimated at $11
million—away from efforts to regain momentum.
Now, Target is attempting to reverse the current with a
value message articulated by marketing, merchandising, private label and store policy. At the same time, it is ramping up
䊳
Company Profile
Target Corp., Minneapolis
No. of stores: 1,719 stores in 49 states
Annual sales: $64.9 billion
Competitive strengths: Design focus grants a “cool” caché to
Target not enjoyed by other discount stores. Private-label expertise
spans food and nonfood categories.
Strategic weaknesses: That “cool” caché is interpreted by
many consumers as higher prices, though Target prices within 2%
of Wal-Mart. Stores overly reliant on discretionary categories; Target
is attempting to shift weight to consumables.
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the nondiscretionary side of its stores
with a new grocery offering. All are crucial maneuvers in an economy in which
price trumps brand promise every time.
“
If you built trust with shoppers [with low prices]
before the recession hit, you were able to
capitalize on it during the recession. If you came
into the recession with a higher-price image, it’s
really hard to change that in a hurry.
Discretionary Tactics
Target’s design focus—its mostadmired trait—has created a premium
halo effect on its retail offering as a
whole. At the same time, this has colored consumer perception of the
retailer’s price competitiveness.
“A lot of things that have worked for
Target over the years—being aspirational, for example—have maybe created an image in consumers’ minds that
they’re too pricey for the current economy,” concurs Richard Seesel, principal
for Retailing In Focus LLC, Mequon,
Wis. Seesel is a former senior vice president for Kohl’s department stores and,
prior to that, was an executive in the
department-store division of former
Target parent Dayton Hudson Corp.
“And there may not be truth in that
perception,” he says. “If you did a side-
by-side price comparison, item by item,
Target vs. Wal-Mart, Target would
come out looking pretty good.”
Indeed, a recent pricing analysis in
the Chicago market area conducted by
McMillanDoolittle found Target and
Wal-Mart priced within 2% of each
other, while both were priced about 15%
to 25% less than Safeway’s Dominick’s
chain and Albertson’s Jewel subsidiary.
While Target declined comment for
this story, the company’s own proprietary research found many items priced
within 2 percentage points of WalMart, but “guest perceptions do not
reflect this reality,” acknowledged Target senior vice president of merchandising Kathryn Tesija in an analyst call.
To change popular perception, Tar-
TOO BIG TO FAIL: The 186,000-square-foot SuperTarget model was meant as Target’s
answer to Wal-Mart’s Supercenter, and features a full-size grocery alongside traditional
housewares and apparel. The success, however, has been mixed, and only 182
SuperTargets have been built, compared to more than 2,600 Wal-Mart Supercenters.
”
get rolled out a national “low-price
promise” guarantee this past July, which
matches the advertised price of any
identical item sold at a local competitor.
Weekly circulars highlight low prices
and feature side-by-side price comparisons of Target’s private-label stable vs.
national brands.
But there’s another wrinkle in Target’s strategy. In 2008, nearly two-thirds
of Target sales came from discretionary
categories, roughly split between electronics, entertainment, sporting goods
and toys; home furnishings; and
apparel and accessories. Consumables
and commodities generated the
remaining 37%, a slowly growing piece
of the pie, and one that the retailer is
focusing on to help nudge store traffic
and insulate it from the erosion in consumer discretionary spending.
In an analyst call, Target’s Tesija said
that customers are simply shopping the
store differently than before.
“Our guest count is up, so we do not
believe that we are losing guests; we
believe that they are choosing to take
fewer of those discretionary trips,” she
said. They are also sticking more closely
to their shopping lists. And in some categories, customers are moving from
“best to better products,” buying regular
produce instead of organic, for example,
or lower-priced hair-care products
instead of salon brands.
Meanwhile, Target’s embrace of
design is losing its potency as a traffic
driver, particularly in apparel.
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On the up and up
M
inneapolis-based
Target Corp. is often
cited as a private-label
master, with 14 brands
including five food labels.
The latter—consisting of
the premium Archer Farms
brand, the value-level
Market Pantry, Sutton &
Dodge beef, Choxie
chocolates and Wine Cube wines—has
expanded the company’s share of privatelabel food sales from 1% only seven years
ago to more than 20% in 2009.
It’s a unique success for a private-label
rollout that developed somewhat backwards.
For most retailers, 80% of the privatelabel business is commodity product, says
Neil Stern, a partner with McMillanDoolittle
LLP, Chicago. “They may have a premium tier,
natural and organic, and that’s all interesting
and helps differentiate the brand, but the real
volume is on equivalency stuff,” he says.
“Target, when it first started, really wanted
to focus on specialty things,” or the “icing”
on the “cake.”
“When Target got into private label initially,
the big push was Archer Farms,” he says.
“They didn’t yet have Market Pantry, didn’t
have a good base of commodity stuff done
cheaply. … Now you’re not only missing the
volume of the business, but that’s also where
you establish your price reputation.”
This recession around, Target is aiming
squarely for the commodity sweet spot with
up & up, a value brand that spans 800
products in more than 40 categories,
including household goods, health and beauty
care, and baby items, and replaces the Target
store brand. According to the company, up
& up products are priced about 30% less than
the national brands.
The decision to retire the Target brand,
with its highly recognizable bull’s-eye logo,
has confused many analysts, including those
interviewed for this article. While it can
certainly make a new value statement, it also
dispenses with highly valuable brand equity.
BEFORE AND AFTER: In June, Target
unveiled its new value brand, up & up, which
replaces the familiar Target brand (above) in
stores. The line encompasses 800 items in 40
categories and dispenses of the iconic bull’seye logo for a simple, clean look.
“The very fact that there’s a controversy
points out the problem,” says John Rand,
director of retail insight for Management
Ventures Inc., Cambridge, Mass. “Did they
think up & up would be a rebranding
statement? If so, I don’t think they’ve been
very clear about it. The bull’s-eye product
was very definitely reflective and price- and
financially driven. From the point of view of
the consumer, it identified Target as an outlet
for an acceptable price alternative to the
national brand. Target doesn’t seem to want
that image, because they’ve separated
themselves from it.”
In a press release, Target’s senior vice
president of merchandising, Mark Schindele,
explained the new brand’s ability to create
a unique identity. “The new packaging
incorporates an element of design, giving us
the opportunity to deliver on both the ‘expect
more’ and ‘pay less’ sides of our brand
promise,” he said.
It’s a promise the company plans to keep
as up & up rolls out nationwide this summer.
“They’re all about designer initiatives,
attracting shoppers in with fresh, new,
exciting collections,” says Jennifer Halterman, senior consultant with Retail
Forward, Columbus, Ohio, and author
of two reports on Target’s grocery and
retail strategy. “And they’re turning out
a lot of collections at a fast pace, almost
so fast that the shopper doesn’t have
time to recognize them before they’re
pulled out of the store again.”
This “fast fashion” mentality is still
there, Halterman says, “but you also
have a lot of other players with designer
exclusives and fast fashion: Forever 21,
H&M. They’re not the only retailer in
that space anymore, but they’re still trying to drive traffic with limited-edition
designer collections, and they also need
to focus on basics, too.”
Food for Thought
With apparel and home décor a conditional draw for consumers’ dollars,
Target has revisited its approach to that
age-old retail balm—food.
“The reason so many people put
food in is because it’s one thing people
need to buy,” says Stern of McMillanDoolittle. “They can defer buying
apparel, home goods and electronics,
but you can’t defer food. It is sort of the
fallback place to be positioned.”
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By the
Numbers
5
According to the National Retail
Federation, Target ranks as the fifthlargest retailer in the United States by 2008
revenue, following Wal-Mart, Kroger,
Costco and Home Depot.
85%
Target owns approximately 85% of the
buildings and land upon which its stores
operate.
97%
According to brand-recognition surveys,
97% of American consumers recognize
the Target bull’s-eye logo.
76%
Approximately 76% of Target shoppers are
female. The median Target consumer age
is 42, with a median annual income of
$60,000. Fifty-one percent have completed
college and 33% have kids at home.
According to Target, customers who
buy food spend nearly 8% more on
every trip and shop more often, ultimately spending four times more every
year than nonfood customers. The company’s grandest statement on perishables
can be found in SuperTarget, a 186,000square-foot concept that dedicates about
one-third of its floor space to grocery.
While the company operates 182
SuperTarget stores in 21 states, it has been
reluctant to build new locations, largely
because of the lack of profitable locations.
Enter PFresh, a grocery concept designed
to act as a less-capital-intensive “bridge”
into the grocery business.
An approximately 800-square-foot
“mini grocery” inside a 128,000-squarefoot general-merchandise store, PFresh
features 90% of the food categories
found in a SuperTarget, with a focus on
perishables: produce, meat and bakery
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items. The plan is to roll it out to 100
stores by the end of the year.
“They’ve always been a reluctant
grocery merchant,” says Stern, who says
Target’s heart has always been in the
nonfood business. This is evident not
only in the slow development of SuperTarget stores but also the retailer’s
patchwork distribution system. While
Target has 26 regional distribution centers to supply stores with general merchandise, it relies on partnerships with
third-party suppliers to handle the perishable side. The company owns four
distribution centers, with two operated
by grocery chain SuperValu.
Contrast this with Wal-Mart, which
first builds distribution centers and
then erects its grocery-focused supercenters around them, according to
Stern. Wal-Mart, which has 2,630
Supercenters—compared to 883 traditional discount stores—also generates
45% of sales from consumables.
The gap to bridge is wide. A November 2008 Retail Forward ShopperScape
survey found that only 30% of consumers shopped for food or beverages
at a Target store during their last shopping trip, compared with 43% who visited a Wal-Mart store. Meanwhile, a
February 2009 survey found that even
among monthly SuperTarget customers, only 11% reported spending
the most on groceries at SuperTarget,
while 21% said they spent the most at
a Wal-Mart supercenter.
While it’s too early to assess the success of PFresh, some already have quibbled about the execution. While the
miniature grocery is meant to provide
a convenience to shoppers, its placement in some stores has worked against
it. “It’s in the back of the store, so it’s
not designed for a quick in-and-out
trip,” says Halterman.
Regardless, Stern considers it a
“smart” move. “If what a discount store
means to a consumer or Target means
needs to be reinvented, that’s what they
need to do,” he says. “They can’t stick
to the same formula and expect it to
work as time changes.”
Resetting the Bar
With Target reconsidering its strategy
GETTING FRESH: In an effort to bridge its past grocery efforts and current consumer
needs, Target is testing the PFresh concept, an 800-square-foot mini grocery inside its
general-merchandise Target stores.
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Reversal of Fortunes
According to the National Bureau of Economic Research, the recession officially began in December 2007, just about the same time Target began
a trend of negative same-store sales growth.
+12.0%
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8
7
6
5
4
3
2
1
0
–1
–2
–3
–4
–5
–6
–7
–8
–9
–10
–11
+6.1% +6.1%
+5.8%
+6.1%
+5.9%
+5.0%
+4.1%
+5.1% +5.7% +3.4%
+4.0%
+3.1%
+2.8%
+2.2%
+3.3% +1.3%
+0.3%
+2.6%
+1.1%
+0.2%
+3.0%
+2.6%
+1.0%
+0.8%
+2.0% +2.2%
+2.1%
+0.6%
+0.5% +0.8%
+0.4%
+0.4%
–0.7%
–1.1%
+0.3%
–1.2%
–3.0%
–2.1%
–4.1%
–4.6%
–3.3%
–4.8%
–4.4%
–4.1%
–5.0%
–6.1%
–6.3%
Target same-store sales
Wal-Mart same-store sales*
J
F
M A M J
J
N/A
A
S
as it hemorrhages budget-minded customers, it’s tempting to think that its
fortunes will improve along with the
economy. This is assuming, however,
that the economy and consumer shopping behavior will snap back to their
prerecession states.
“There’s a lot of conversation about
whether … this is not so much a recession as a reset, and we’ve just reset the
bar 10% to 20% down depending on
the retailer or department or category,” says Ted Hurlbut, principal with
retail consultancy Hurlbut & Associates, Foxboro, Mass. “The recovery can
be we’ve dropped the needle down 20
points and then will grow 1% to 2%
per year aggregately from there, which
means the challenges Target is facing
now won’t be resolved merely by
change in economic climate.”
Hurlbut, who admires Target’s
home-goods and apparel savvy, believes
the retailer is stuck in a “soft space” and
that part of the answer lies in increasing
the productivity of space. He sees
opportunity for subletting space to
other concepts, even banking, to transform the store into more of a full-service destination. Target already has
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–6.1% –6.2%
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N
D
J
F
S e p t e m b e r
N/A
–10.4%
Recession Starts
M A M J
J
A
Sources: Corporate financial reports
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+1.9%
+0.2%
+0.0%
+1.6%
+3.4%
+2.8%
+2.6%
S
O
N
D
J
F
M A M J
* Wal-Mart Stores Inc. only; does not include fuel
“
If you did a side-by-side price comparison, item
by item, Target vs. Wal-Mart, Target would come
out looking pretty good.
”
more than 900 in-store Starbucks cafés,
operated by Target employees, and
enjoys a percentage of the café sales.
Meanwhile, as Target adjusts its strategy, expect its competition—namely,
Wal-Mart—to transform as well.
“Not only is Wal-Mart upgrading
the store experience, they’re also
upgrading their brand portfolio,” says
Halterman of Retail Forward, pointing
to the retailer’s growing private-label
business. “Target has a much more
affluent customer base. But Wal-Mart
has the potential to attract them with
upgraded stores. With the upgrades in
brand assortment, this has the potential
to keep shoppers trying Wal-Mart during the weak economy, and these efforts
have the potential to keep customers
once the economy gets better.”
Seesel sees two questions to consider.
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One, will consumers begin to spend more
discretionary income as the economy
recovers? If so, Target should benefit, she
says. “At the same time, does Target need
to wrestle with food retailing, consumables and frequency of visit—and are
those the types of issues it needs to figure
out in the long run, while maintaining
brand positioning? Yes.
“Target just has to be very careful not
to overreact,” Seesel cautions. “You need
to be nimble in this economic environment and need to manage it, but you
don’t need to overturn strategy and
brand positioning that’s fundamentally
served you very well and really staked
out a clear identity in the marketplace.
“Be true to yourself at the same time
you’re responding to the environment:
That’s not always an easy thing to do.
You can’t always win that game.” ■