Photo: Target
Will hundreds of small stores produce big results for Target?
Target CEO Brian Cornell sees big opportunities for the chain to grow by moving into densely populated urban areas and college towns. That’s why the company is focusing on opening smaller stores that can work within limited real estate spaces in places around the country that fit that bill.
To be sure, Target’s smaller stores are not of the cookie cutter variety. The chain, which refers to the units as “flexible format” stores, has some that are similar in size to convenience operations, while others are more in line with traditional grocery stores. This year, Target has opened 30 of these stores, including one in Cupertino, CA (21,000-square-feet) and another in Manhattan’s Tribeca neighborhood (45,000-square-feet).
Speaking earlier this week on his company’s third quarter earnings call with analysts, Mr. Cornell said the smaller stores are proving successful because each has customized its “assortment and operations” to meet the characteristics of the neighborhoods they serve.
“Based on their performance, we are increasingly confident and the opportunity for Target to profitably operate hundreds of urban and flex format stores over time, reaching new neighborhoods where consumers have a strong affinity for our brand,” said Mr. Cornell.
In answer to an analyst’s question, Target’s CEO acknowledged that running smaller stores is different than operating its larger 100,000-square-foot plus locations.
“We’re really focused on making sure we build the back end capabilities, in supply chain, in assortment management, the in-store operating capabilities it takes to run these smaller stores,” he said (via Seeking Alpha). “But we think the unique opportunity we have is bringing the best of Target to these individual neighborhoods, making sure that we custom tailor assortment; we bring the right assortment of apparel and home, baby and kids that’s right for that neighborhood, complement it with convenient boots, and household essentials that really make that local Target run impactful for the guests.”
Discussion Questions
DISCUSSION QUESTIONS: Do you agree with the perception that Target has a competitive brand edge in the urban areas and college towns where it is opening its new flexible format stores? Does Target have the right approach to assortment in opening hundreds of flexible format stores across the country?
Poll
BrainTrust
Paula Rosenblum
Co-founder, RSR Research
Ron Margulis
Managing Director, RAM Communications
I’ve learned from my daughter (now in her fifth year at university) that retail attraction of post-secondary students depends upon easy access and low pricing as their time and money are at a premium. One shopping stop makes the visit worthwhile, even an outing with friends, so Target appears to have a winning formula if products suit the location.
Target’s recent hirings and departures suggest that it’s still struggling with how to manage its supply chain and IT more effectively, especially in its grocery business. But fixing those issues shouldn’t prevent Target from moving along a parallel track of new format development and expansion.
Small-footprint stores are a big opportunity, especially as Walmart appears to have abandoned its own plans. For example, I can think of a two-level vacated Sports Authority store in a nearby “town center” development that would be an ideal location — but only if Target sticks to its core assortment and shifts the focus away groceries, given the Trader Joe’s right next door.
I do think Target will succeed in this approach. Walmart has done similar moves in recent years with Neighborhood Markets. However, Target has picked out a better demographic in urban areas and college towns. Smaller-format stores are also a good way for them to compete with all the dollar stores. Target has proven time and again that while they may move slowly they do it right every time.
As Mr. Cornell noted there is a lot of differences between operating their typical 100,000 square foot location and ones ranging from 20 percent to 45 percent of that size. One advantage is that Target brings a strong brand awareness to its smaller-format stores. However, with that brand awareness comes certain expectation include a wide variety of departments and a depth of selection that the smaller formats cannot fulfill.
The consumer success side of the equation will be determined by Target’s ability to customize its mix to meet local needs and maintain its pricing strategy. Target’s success side of the equation will be met if it can adapt its supply chain to handle the smaller (and likely more frequent) deliveries, find a pricing formula that generates sufficient profit on lower total sales and still meet customers’ pricing expectations.
Lyle is right. Target should just track the stores they have in the major college towns — pick the best 10 towns based on turns and open the College Target store. Add a mini-Starbucks or a local coffee shop vs. the Target food stop and bank the money. College kids LOVE Tarr-Jay.
Target has been off-base with parts of their assortment and lots of their logistics (i.e., out-of-stocks) in recent years. This raises the question of what they will do differently with these small stores to overcome that.
If Target can get the localized assortments right, I think they’ll have a home run. It’s early to call big box retailing “dead,” but I don’t think it’s going to have a happy Millennial run.
Target enjoys positive brand perceptions in both the urban and college town markets. The key will be its ability to organize and execute against these customized operations. Reconfiguring stores into smaller spaces will be a challenge. These reconfigured stores can fill the demand for convenient, manageable shopping experiences.
The days of expansion for big box retailers and large food/drug combo stores are coming to an end. In essence, this latest Target initiative represents its urban equivalent to Walmart’s expansion of the Neighborhood Market. Small is beautiful!
We see other retailers having success with smaller formats targeting urban areas, notably IKEA and Lowe’s, so Target isn’t trying something new. Also, as e-commerce sites like Amazon start opening brick-and-mortar locations they are likely to focus on these same areas, so this can be seen as a competitive move. The end run seems to be smaller footprints for traditional big boxes going forward and an even smaller footprints for the pickup/shopping facilities of the e-commerce companies.
College towns and urban areas are smart moves for Target. Anyone that has dropped their kids off at college knows that a trip to Target is part of the plan. The crowds at that time of year prove it. Urban areas will be a good move as well, as long as they accurately plan the store layout, assortment and shopability. One is going in near my neighborhood in Manhattan and there is no reason why most typical categories will not be welcomed, especially if it saves having to make a trip to the far reaches of NYC where there may be a larger-format Target, especially as the location where this one is being built was the site of one of the few remaining gas stations in Manhattan. Perhaps, this factor alone is what has prompted Brian to execute on this strategy, at least in NYC. I wish him luck as this would be welcome.
Many Millennials have grown up with Target especially when it was known as Tar-chic or whatever you may have called it! Given this is a brand they have known and loved, smaller formats, on campuses and with the right assortment will certainly be a winner.
For my 2 cents.
Target does have a competitive brand edge, especially with the Millennial demographic. I think if they are able to successfully customize the assortments to each neighborhood their operation could be successful. However, I’m worried they will face many of the same challenges that Walmart did with their “Express” concept (which was abandoned earlier this year). It will be difficult to keep the low prices shoppers expect in an urban environment. It will also take some time to really get the right product assortment, not to mention iron out the difference in logistics from their traditional stores. Target’s brand edge and reputation will give them an advantage over Walmart in this type of experiment, but if they open too many of these stores too quickly there’s a good chance they won’t get it right.
It is an interesting idea but Target needs to wake up. Target needs to recognize that the Target brand is not a destination target. Walmart owns cheap. What does Target own? The chain is struggling with same-store sales and yet it sees its future in acquiring more real estate?
Why does retail fail to see the inherent brand meaning problems they ALL have and continue to see merchandising as its solution to everything?
Soon they can look like pharmacies … you know, build stores at every intersection and directly across the street from competitors.
One of the key questions about this strategy is how Target will translate the “brand” experience of shopping a tight and very local assortments into a longer-term preference for the big format. Are they thinking that a divergent brand strategy is part of long-term plan to split into two separate operating companies? It’s hard for retailers to fire on all cylinders with multiple formats (think Walmart), so what part of the business is the profitable core?
Don’t get me wrong, I’m a big fan of the experience-oriented urban concept. But as others have said, Target had had issues that seem to suggest this urban expansion focus could be bifurcating and stressful for many parts of the operation!
I agree with all the positive comments about why this should work for Target — brand awareness among urbanites and students, localized variety and a smaller footprint. What would put this home run out of the park would be to add a digital commerce component.
It is absolutely a winning strategy at the macro level. The key, of course, lies in the details of execution. They have to solve the supply chain problem for all stores, so that’s a given. The key in smaller formats is their ability to actually prioritize and edit for productivity — best use of space, weekly sell-through, turn. I keep thinking thinking this is a simple concept. Space and capacity are finite — flexible but ultimately finite. But some retailers keep wanting to violate the laws of nature. If Target exercises the right level of focus and discipline, this sounds like a winning strategy.
Check with Walmart about smaller stores. You’ll never make up for the sheer revenues of the big box, with even 20 smaller stores, so, it’s not apples to apples. BUT, if Target is planning on most of their business traveling to online (which they should), then having a physical presence within consumer reach for pick up, ship to home and brand experience is a great idea. Just ask Amazon about that, they’re doing it, and it’s working.
Making the Target experience available in areas that can’t support a full size store because of real estate cost or population size is a smart strategy. Most people that live in urban areas and college towns grew up with Target and many are loyal fans. Target already has the brand awareness and consumer familiarity, so it should be a logical extension of the brand to drive incremental revenues.
Since the stores will be considerably smaller with less room for inventory, it will be essential for Target to optimize the assortment and the inventory levels (both front and back stock) on an individual store level based on the demographics and omnichannel demand of each local market.
“Small” seems like an exaggeration, maybe “less big” would be a better description.
Back to basics: while I think it’s nice that Target, despite all its recent travails, still has sufficient self-confidence that it sees its brand equity as able to carry the day, I’m not so sure. Much of that equity came from its reputation as “cheap chic” — i.e. trendy household and soft goods — but how much of that will be carried in these pared-down stores? With 20K gsf stores, we’re beginning to approach the size of stores like Walgreens or Rite-Aid, and if all Target does is carry an assortment that mimics these, then I think any “competitive edge” will quickly be lost.
Nevertheless, I’ll hope they can figure it out and wish them well (we’re approaching the giving season, after all).
One of the challenges of this strategy is the economics of smaller, urban based stores versus the traditional Target model. Beyond the fact that you need several of these stores to do the same sales volume of a traditional full-sized Target store, there is the operating reality that these stores carry higher real estate costs (urban, higher density locations), higher fixed costs as a % of store operating costs and higher overall operating costs due to the more complex logistics requirements of smaller sites that, in urban areas, often come with different delivery and restocking requirements.
Target will need to deliver a higher sales per square foot performance coupled with a higher contribution margin rate in order to improve their financial performance. Neither of these are easy to do and, in Target’s case, driving sales per square foot is not something they have been good at.