Target makes $1B bet on digital
On last week’s earnings call with analysts, Target CEO Brian Cornell said the company’s first priority was "to drive industry leading digital sales growth" and "become a leading omnichannel retailer." Yesterday, Mr. Cornell and his team began to provide analysts with some answers on how they intend to achieve those goals.
For one, Target announced it would allocate roughly half of the company’s $2.1 billion capital expenditures budget for technology, supply chain and inventory management upgrades to help connect more effectively and efficiently with digital consumers.
According to an announcement released yesterday, the company is looking to drive the total experience across stores, online and mobile. Target’s research has found that shoppers who make purchases from its stores and website spend three times as much as those who shop in its stores alone.
Target.com had a really good fourth quarter, with sales growing 36 percent. The company expects to improve on that pace with 40 percent growth in digital revenues this year. Sales at physical stores are expected to grow between two and three percent in 2015.
Target’s investments in technology and e-commerce is a clear departure from the company’s past practices in which the majority of capex dollars went to opening new stores and remodeling existing locations. The retailer plans to continue expanding on its store base, but shifting its focus to "more flexible formats like TargetExpress and CityTarget, which cater to guests in rapidly-growing, dense urban areas."
Target is also looking to cut roughly $2 billion in costs through a restructuring plan that will mean the elimination of several thousand jobs at the company’s headquarters in Minneapolis as well as its tech hub in Bangalore, India.
- Target’s CEO Brian Cornell on Q4 2014 Results (Earnings Call Transcript) – SeekingAlpha
- Target Shares Roadmap to Transform Business – Target Corporation
- Target to cut $2 billion in costs, including several thousand jobs – The Associated Press/Tulsa World
- Target to shift big chunk of spending to tech from store – Fortune
Discussion Questions
Do you think Target CEO Brian Cornell is correct in making “industry leading digital sales growth” the company’s first priority? What will Target need to do to become one of the leaders in omnichannel retailing?
I don’t think that’s quite right, honestly. I think Target’s first priority should be to sell things people want to buy that carry a respectable gross margin.
Omni-channel is every retailer’s priority, because you get more productive inventory as part of the deal, and the customer just wants what she wants, when she wants it.
But if you’re not selling what she wants, or if you’ve got a major focus on grocery, which is neither high margin or omni-channel ready, then my reaction is “meh.”
The messages coming out of Target are certainly the things we would expect to hear a new CEO saying, but how are we supposed to believe any of this? First, they are cutting costs to the tune of $2 billion—how bloated was their staffing that they can generate this much savings? Then they tell us it’s all about grocery, just the other day. Now they’re telling us it’s all about digital. When you have a broken grocery business with mediocre assortment, service levels and prices, digital isn’t going to fix that.
With sales not growing in stores, Target has decided to focus on digital. That may hold some promise, but the move to omni-channel could be hindered by problems that plague their stores: out-of-stocks and poor selection. How can stores be used for BOPIS if the products are not in-stock in the stores?
I like the continued expansion of smaller-format stores. With the proper selection of products, this effort could add profit to Target’s bottom line.
Overall, it seems as if Cornell is trying to take Target in a number of directions at once. With so many priorities, will management and employees know where to allocate time and resources?
Yesterday we heard that Target was going to grow its grocery business as a 2015 priority. Today it is omni-channel retailing. Can they do both in the midst of what is a major restructuring? Having lived through several restructurings in my corporate career I know how hard it is to keep the current businesses on track let alone move them in new directions. Accomplishing these objectives will require major management focus and direction.
This sounds like a company flailing to find a way. Yesterday they were going to grow their grocery business. Today they are going to go omni-channel. What is tomorrow?
The first thing this company has to to is get their house in order. If they don’t, no strategy will work. Target was a customer of mine 10 years ago. Their answer to why Walmart was always beating them was that vendors always sold to Walmart for less. (Not true on my part).
The same kind of thinking went into the Canadian invasion. All top-line decisions, no nitty-gritty and a disaster. They didn’t even know how to sell milk to Canadians. They never took a moment to check it out.
Now they have a new CEO, but the reports aren’t changing my mind. Here are the steps for Target:
Get your house in order.
Forget the grocery expansion. It is going to be difficult, take up time and resources and you are pushing against a no-growth market.
AFTER you get your house in order, focus on omni-channel. That is where the growth is. Become a major player. Do it better than anyone else. And most importantly, don’t let your current infra-structure and thinking drive your omni-channel decisions. Start with a blank piece of paper!
In Target’s own announcement “Roadmap to Transform the Business,” the company states four focus areas: 1. Channel-agnostic approach to growing the business, 2. Prioritizing style, baby, kids and wellness categories, 3. localized assortments and 4. opening more flexible formats.
I see investment in digital—inclusive of investments in technology, supply chain and inventory management—to be integral to Target’s ability to deliver an inspired and enjoyable shopping experience. An equal effort on the other fronts is needed, especially to infuse excitement and freshness to their assortments. This will get Target on a path to catch up to its brand promise as well as differentiating the shopping experience and enhancing guest loyalty (and spending).
So maybe the actual top priority, or better yet the Guiding Growth Principle for Target is to deliver an inspired and enjoyable shopping experience no matter how and when their guests wish to do so. Digital by itself is necessary but not sufficient to achieve the company’s growth goals and they need to hit on the other cylinders as well (including having the internal energy and alignment to drive this multi-year transformation). It’s all about execution and it starts now.
Paula’s right. The old Target, the one that didn’t sell commodity products, had a truly compelling value proposition for customers—great style at a good price. The new Target tends to sell items that customers can find elsewhere, which only fuels a pricing race to the bottom. It’s time for Target to bring back the magic.
Didn’t we just recently read that Target was going to focus on growth through the grocery silo? And today it is omni-channel retailing? Stand by for tomorrow’s latest and greatest revelation about how Target is going to get feet in the door and the cash register ringing.
It is interesting how shelves stocked with what buyers want and a trained smiling face of someone willing to assist you can make a business healthier. I was in a Walmart Supercenter this morning and saw neither stocked shelves or a smiling face. Typical. Somehow these big box folks just don’t get it.
Target has an advantage in that they have a strong physical store presence and a somewhat successful digital presence. From what I read, the store sales are soft and the obvious place for growth is digital. This isn’t a reinvention. It’s just running faster in a lane they are already in.
I am a retail expert and a past 20 year executive of Target (then Dayton Hudson Corp.) I believe the ideas are correct. A strong digital position will not only help this iconic brand compete, but it will move it quickly back to the innovative leadership position in the view of customers.
I have studied, visited and reported on the City Target and Target Express. Both concepts can be great competitive positions as well. To open stores in city centers, in high population areas will work for Target, bring operating cost down, reduce capital outlay per location and improve sales per square foot.
My challenge to Target is go faster on the store openings. It’s something you know how to do, efficiently, with little risk and can help pay for your other retail initiatives, like omnichannel.
I must also say that closing Canada Target is more of a Wall Street pleasing move than an investing in the future move. Admittedly, Canada was very poorly executed, but the profit losses could have been reduced quickly and the institutional learning would have helped Target take on other countries and help the brand grow as a global brand.
The Canada failure could keep Target from moving outside of US boarders for a dozen years. There is profit to be made and stakeholders value increased when Target becomes an international retailer.
Target opened Target California some thirty years ago. The region operated at a major loss for many years. Once the operations and merchandising issues were solved, the California region became its most profitable. Opening and solving a new area of the US, moved Target, a small mid-west only company at the time, to understand how to open in other regions of the country.
Target moved from a $2 billion revenue company to now over $80 billion.
Amazon spends a great deal on the future. That is sometimes an issue with Wall Street. However, when your business is not competing for growth and results are just average, Wall Street moves on. Amazon seems to get this.
Target, if you consider these actions when building your plan for the future, all shareholders will win. The layoffs you’re facing today will not have to be your priority in the future.
Target is right to do anything they can to achieve sales while they are in this transition period. The problem is, omnichannel may increase sales or reduce lost sales, but these sales have a lower net profit. All one has to do is look at the increased inventory carrying cost caused by the inventory multiplier to see cost increase expenses—although this may reduce store out-of-stocks. Further, additional handling to fill the order and shipping also increase expenses.
The real value for a brick and mortar retailer from e-commerce is sales outside the service area of the store. This is truly a plus, not cannibalization sales.
There seems to be a disconnect here in using the phrase “omnichannel,” and then right away breaking out and talking excitedly about how much the online channel is growing: the bottom line—literally—is that sales are expected to grow 2-3% annually (“comparable” sales are a half point lower, though it’s become increasingly meaningless to use that phrase as sales shift away from physical stores).
So that’s what it is: not terrible—especially nowadays—but not great either. Target: expect more, get “meh!”
It should bring great skepticism and pause for any company when a brand new CEO declares they are going to “transform” their business.
It should also bring great pause when the first thing done is cut $2 billion in staffing. While I’m not saying it may or may not need to be done, it does however create immediate churn which can instantly and negatively impact an organization’s ability to focus on any strategy, digital or otherwise.
The work of several thousand associates doesn’t just disappear or suddenly become instantly more efficient. That is to say, a large ship doesn’t turn on a dime. It may in fact cause it to stand up straight with no wind in the sails and just stop all together.
Both are interesting moves in conjunction with one another. It will be sure to make things interesting for punditry.
Short answer: YES. Hidden truth: DUH. If he would’ve said, “we’re putting all our focus on opening more stores,” hopefully, the board would’ve fired him.
Missing from this conversation SO often though is investment towards store level associates. Hiring, training, educating, informing, morphing, wiring, etc., etc. All of our studies say that store associates are actually a hindrance when it comes to customer perception and brand impact. This needs to be fixed as well.
Dear Brian: take some of that whiz-bang “omni” money and improve the sales staff in stores for the sake of all of us customers and good old fashioned retail in general. Please!
I think the key is not to grow the channel, but to grow wallet share of the customer by whatever channel necessary. The problem with focusing on growing digital is that it invariably lets the eyes off the ball in the store which is where the bulk of purchasing is still being done.
Target’s CEO is making exactly the right decision in putting digital at or near the top of the investment priority list. Where else should he invest in terms of driving sales and the brand? Digital, mobile, social, is/are the fastest changing and revolutionary (a word I hate and use only in extremely rare cases) agents transforming how we live, communicate, behave—and of course shop today. I am not sure he had any other real choice to make to stay ahead.