Photo: Target
Will Target’s $7 billion investment pay off in market share gains?
Yesterday financial report from Target tested the glass half full or empty analogy if you’re a stakeholder. The company reported same-store sales and profits were down in the fourth quarter and said it expects more of the same in 2017. Management also announced that Target would invest billions over the next several years to differentiate and gain market share.
Target’s shares fell 12 percent yesterday after the company reported that comparable store sales fell 1.5 percent in the fourth quarter despite the chain seeing traffic improve 0.2 percent. Digital sales, which increased 34 percent, were not enough to offset weak performance in the chain’s stores. The retailer said it expects to see a decline of comparable store sales in the low single digits this year.
Target CEO Brian Cornell said the company’s results were a reflection of a changing retail environment in which sales are shifting from stores to online. While maintaining that the company has made progress, he said Target now needs to speed up its response to market conditions.
“We will accelerate our investments in a smart network of physical and digital assets as well as our exclusive and differentiated assortment, including the launch of more than 12 new brands, representing more than $10 billion of our sales, over the next two years,” he said. “In addition, we will invest in lower gross margins to ensure we are clearly and competitively priced every day.”
Target plans to spend $7 billion over the next three years to invest in store upgrades and become more price competitive.
The retailer plans to remodel 600 units, roughly one-third of the chain’s total.
“We know some of our stores have gotten tired. They’ve gotten old,” said Mr. Cornell on CNBC’s “Power Lunch” show yesterday. “I’ve got stores that haven’t been remodeled in over a decade. We have to go back and bring the best of Target to those stores. When we do that, the guest responds.”
The chain plans to continue focusing on smaller boxes in urban markets going forward. Mr. Cornell said Target would double the number of small stores it operates in the next year.
- Target CEO: We’re confident in our new direction – CNBC
- Target’s $7 billion spending plan still leaves some question marks – CNBC
- Target Reports Fourth Quarter and Full-Year 2016 Earnings – Target Corporation
- Target Gets a Lesson That Low Prices Matter – The Wall Street Journal
- Target’s data breach gets uglier – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Which of the investments within Target’s $7 billion plan over the next three years are most likely to help the chain regain market share? How confident are you that Target has the right plan and team in place to achieve its goals?
Poll
BrainTrust
Cathy Hotka
Principal, Cathy Hotka & Associates
Adrian Weidmann
Managing Director, StoreStream Metrics, LLC
After watching the hour-and-a-half executive presentation yesterday, I was impressed. Based on what I saw, I believe Target’s executive team understands the magnitude of the change occurring in the retail industry and are responding with thoughtful and bold moves. Of the initiatives discussed yesterday, three stand out for me: 1.) store rationalization and new small format stores, 2.) the development of exclusive brands and 3.) significant investments in online/mobile platforms and ramp-up/optimization of ship-from-store. While Amazon and Walmart continue to dominate the headlines, I wouldn’t count Target out.
In light of previous discussions here about the grocery battle between Walmart and Aldi’s, all I’ve gleaned from this Target news is that “food continues to be a work in progress.” I think that is grim news for Target. Obviously one of the strategies for grocery by Target was to get shoppers to make a trip to pick up a few grocery items or veer their carts into grocery for other trips, but there is absolutely nothing unique about the grocery experience at Target except some high-quality private label goods. And with the price war going on elsewhere Target will probably have to respond in kind, and this won’t work very well.
With so many retailers whistling past the graveyard, it’s refreshing to see Mr. Cornell acknowledging big changes in customer behavior. Refreshing stores and carrying exclusive merchandise will be key to the transformation.
Walmart was criticized a couple of years ago for investment spending on its stores because it was likely to put a dent into short-term results. But the long-term view for Walmart is brighter because of this decision, and Target is aiming for the same kind of outcome.
But Target has some specific challenges ahead that a store revamp won’t fix on its own:
I can’t overstate the importance of the last point. A trip to Target where a third of the shopping list can’t be filled is a waste of time, no matter how compelling or competitive the merchandise might appear.
Dick, I agree on #4. An case in point: distilled water is always on my list, and three times in the last two months, a large shelf at Target (probably 4′ by 4′) labeled distilled water has been empty. Very frustrating. And naturally I couldn’t find a red shirt to ask about more stock in the backroom.
Nobody likes to shop in a tired and out-of-date environment and whether a customer consciously thinks about it or not, the subconscious experience will be affected. Target are right to focus on re-modelling the tired stores and create the best possible experience and environment, however this alone will not increase market share. They would also be smart to refocus on and re-invest in how the staff can add to the experience through re-training programs.
I’ll disagree with Mark Ryski because these initiatives are the same ones that they’ve been touting for years. Target has lost its way from being a “better-than-Walmart” mass-merchandiser. Remodeling stores is unlikely to solve anything. They should look to better selection in the non-general merchandise categories along with Walmart-parity pricing for these products.
Fair point Dr. Needel and prior to seeing the presentation, I likely would have agreed with you. However, I encourage you to review their presentation to get a broader context on their plans. Change at Target’s scale takes time … 1,800+ stores, $70 billion in revenue, $2.7 billion in net earnings in 2016 — not too shabby.
Mr. Cornell stated the basis for the results is the changing retail environment. This is not new. What’s new is that Target is finally going to address it.
The changes Target is undertaking sound like the right moves — invest in existing stores that have been neglected, develop new brands, open new smaller-format locations with the dual purpose of selling product and being a BOPIS location, invest in digital retailing efforts and evaluate their pricing strategy. Each has its own risk and reward.
Investing in existing stores seems logical. Perhaps the questions is, why did they go for this long before a refresh? The smaller formats may work, but it will take a lot of them to generate the volume that one super-Target can generate. New brands don’t always work out and expecting to have them average almost a billion in sales seems like a stretch. Its digital investment seems like the most logical based on Cornell’s realization that retailing has changed. Dropping prices appears to be the riskiest. You know the immediate impact is lower margins and have to hope you can make it up in volume.
It sounds like Target is finally seeing the writing on the wall and has built a plan to address it. Refreshing stores and recognizing a trend for smaller formats in more urban areas is a good sign that Target is listening to customer demand. Grocery may still be their weak spot and, as others have stated here, Target needs to stay true to their “value chic” approach to merchandise assortment. It’s what differentiates them today (outside of grocery) and they need to build on that rather than try to directly compete on value price alone.
While the investments are indeed impressive and encouraging, the store formats and overall experiences at Target seem dated and somewhat commoditized. Target can’t maintain their strong brand loyalty and potentially gain new consumers simply by aspiring to be better and shinier than Walmart.
Target should aspire to transform their in-store experience by:
Smaller-formatted stores have worked well for Lowe’s and other big box companies … perhaps bigger isn’t always better.
The investment in the digital ecosystem that delivers customer or shopper delight is the way through the forest for Target. With their demographic of shoppers, they can own this space better than other retailers — and should. But it all starts with the infrastructure to deliver a true omnichannel set of touchpoints in a personalized and real-time fashion. Let’s stop kidding ourselves. This is HARD.
Secondly, they’ll win with smaller-format stores, where some replenishment items can be purchased online and picked up (or delivered) using new innovative methods, including smart lockers outside the store to pick up your order placed online. This keeps the store footprint down and makes it more efficient.
It’s not about understanding the changing retail landscape, but about coming to grips with the pace of that change. It’s not about executing an impressive multi-year CAPEX plan, but about making fundamental changes to the assumptions driving strategy formation. It’s not about competing along traditional measures, but about taking steps to create novel and unprecedented competitive advantages.
Consumers are making the retail shopping (and ownership) experience front-and-center in the hotly-competitive retail industry. Placing investment bets on optimizing elements of the business such as stores, prices and online transactions are all fine in isolation — the key though is to bake-in the relationships and connections between and among these elements. They have to be strong, consistent and focus on an original design.
I have great admiration for Target and their place in the communities they serve. The company has had a very loyal brand following with much goodwill. Some of the planned changes are necessary but not sufficient. The company can either decide to compete with the likes of Amazon and Walmart along previously established battle lines or move the battle to higher grounds where they can not just defend but launch their own offensives. Retail’s future battles will not be won on price, but on a shopping and ownership experience that is just starting to be understood in light of our technology-filled lives.
Store remodels and price cuts are nothing but a race to the bottom. Real, meaningful changes that reflect reality and bring value to the digitally-empowered shopper need to be addressed. I believe the most significant and relevant issue that retailers need to address is inventory visibility. The retail ecosystem needs 100 percent accurate visibility to in-store inventory to ensure that stock numbers on the website are 100 percent aligned with what is actually in the store. This issue will also ensure accurate product placement at the shelf. Vendor Managed Inventory (VMI) and On Shelf Availability (OSA) are fundamental to the success of creating a seamless selling environment. Once you solve this challenge (as I have been advising my clients), and augment the in-store merchandising experience with digital media delivered to a display AND/OR the customer’s smartphone that helps the shopper make an educated and informed purchase, the physical store becomes a valued destination.
Given the fact that 85% of a Target store’s customers live within 10 miles of said store, the idea of a refresh is a good one. But Target will also have to move faster on other key areas they lag in like improving the BOPIS process, grocery placement (which will improve sales in that category) and speed to check out. Which is, yeah, a lot of to dos.
It’s wise to create lower expectations while doing all the above. Let’s hope that investors have some patience and take the long road with these initiatives like they did/do with Amazon, who lost money for almost a decade. Because Target, as a discount alternative to Walmart and Amazon, is filling a niche that is obviously there: a more fashionable, dare say it perceived chic (hipper?) option that appeals to millions who are turned off by base-line shopping experiences.
While admitting to buying apparel at Walmart is still frowned upon, Target’s collaboration with Todd Oldham propelled them into the fashion-forward mass merchandiser category. This is exactly what Kohl’s is going for with its Under Armour collaboration and what J.C. Penney is shooting for with its plus-sized line. But Target swung it somehow, and revamping the appearance of the stores is the perfect way to keep us coming back.
Brian Cornell is a retail leader who is really honest about the changes in the marketplace; he is preparing Target to respond effectively. Smart move: investing in small format stores, which Target does especially well. The urbanization of Millennials tees this up for success. Target carves out a space more versatile than CVS, and more upscale than Walmart.
However, the ROI on their investment in digital remains to be seen. Why? The position of Target in the online space is unclear. A quick survey of other big digital players shows the challenge. Amazon is the go-to etailer, especially for subscription CPGs. Walmart.com seems to be a combination of price and long-tail items. In the apparel space, there are many competitive players. Carving out a compelling and differentiated space online seems to be the biggest challenge. Good luck to them.
While I certainly don’t object to any of these moves, I wouldn’t really call them “investments” either: these are the minimum things one needs to do to stay in business. If someone was expecting a rabbit to be pulled out of a hat, then they’re likely disappointed.
While it may prove to be incomplete, we do have a lot of opportunities for improvement in the report from the top of Target. The focus of management to make these conclusions seems a bit one sided. The focus on what Wall Street and the banks have to say is not what needs any more attention. In fact the company has used these sources for what might be considered a little too long. It is the customer and market that own the most reliable information for the company’s decline.
One of the best opportunities might be store inventories. Out-of-stocks and e-commerce only price, supply and return issues are in need of some of these billions ready to invest for improvements. Target might consider redirecting some of the investment dollars earmarked for lower margins and smaller stores to these needs, at least for a while.
Here’s what’s missing: the customer. Families have to come back into focus for Target to see ROI on $7B.
In the past, when Target had its swagger, it knew its customer better than anyone else. That focus informed the selling model and it differentiated itself from WMT as a better discount store. For many shoppers, it was preferred to department stores.
Now, when crossing the threshold of a TGT, that lack of clarity results in a store that seems to be in search of a strategy. To me, that was embodied in its decision to move away from education and to wellness. From something that mattered at the store level to an amorphous, ephemeral subjective concept.
I get that it sees urban stores as a channel that will drive comps, and I don’t see how education isn’t appropriate. Especially in urban school districts which are cash strapped. Elevating private label is good, as long as those goods are relevant to the trading area constituents of its stores. Price will remain important, and again this is more important to some locations than others. Rural stores will be a challenge if WMT choses to go low.
So which exec owns the customer? Who represents the voice of the shopper? Right now it’s the blind men and the elephant. Find another Pellegrine.
As we like to say, “retail ain’t for sissies!”
Refresh — YES! However, brand exclusivity and specialization should be job #1. Walmart WINS Price. Target cannot and should not play in that space — Target can’t win! Target needs to be better, and needs to be special. Then the customer will WANT to go. Special pairings and short time purchase opportunities should be pursued. This worked well in the past because it was different, not only from the other discount competitors like Walmart and unfortunately, soon to be gone Kmart, but will differentiate them from the off-pricers like TJX and Ross, and also from the mid department stores. Recall, the Missoni cooperation crashed the website in a few minutes and sold out just as fast. Assortment and aspirational merchandise will go far in helping out the situation.
And the refresh initiative is terrific — some locations ARE tired and worn. That will help too; a goodly amount!