• Andrea Lillo

Target getting into Wal-Mart's game?

After swallowing $1 billion in retail price reductions in 2002 as it pared price points to remain competitive with Wal-Mart, Target is intent on further lowering its costs — primarily through more direct sourcing, buying merchandise at lower prices and reducing supply chain expenses, in part through inventory reductions, executives said last week.

Target has always been frank about ensuring that its pricing on certain items remains competitive with Wal-Mart's, but in a conference call with analysts to review the corporation's fourth quarter and year-end results, executives shared uncharacteristically detailed information about the strategy. With Kmart sidelined by bankruptcy and its long-term survival in doubt, it was clear that executives are aware how quickly the race is tightening between its upscale discount operation, which accounts for 84 percent of its $43.9 billion in annual sales, and the world's largest retailer.

Target Stores' $1 billion in retail cuts were directed at items identical in its assortment and Wal-Mart's — which account for 25 percent of Target's skus and nearly 40 percent of its sales, said president Gregg Steinhafel.

"We also continued to benchmark a large number of similar items and lowered our prices on these products appropriately," he added. "And we initiated price reductions on a meaningful portion of our assortment, in keeping with our Expect More/ Pay Less philosophy."

That price deflation shaved in excess of three percentage points off last year's top-line sales of $39.9 billion in the discount division, executive vp/cfo Doug Scovanner told analysts. Acknowledging that part of the strategy was driven by "competitive dynamics," he also predicted that the lower pricing would be offset on a year-over-year basis by reducing the cost of sales.

As it whittles away at item pricing, Target has been simultaneously working to build margin by "reducing our acquisition costs by better negotiating" and placing more reliance on its AMC sourcing division. With 1,300 employees in 42 countries, it stands as "a vital partner" in the ongoing effort to bring more sourcing responsibility in-house," Steinhafel said.

Target's goal for 2003: to "substantially" increase the volume of direct imports through "the conversion of indirect imports," Steinhafel told analysts. The division is also expected "to implement a more comprehensive approach to vendor negotiations and accelerate the timetable of bringing products to the market.

"We remain focused on opportunities to lower our acquisition costs," he said.

Target also is increasingly looking to food as a traffic-driver for its discount stores, and as it expands its base of SuperTarget stores next year, is moving more best-selling food skus into the core discount assortment, he said. In keeping with its strategy of differentiation through house brands, Target is particularly focused on developing its Market Pantry and Archer Farms private labels.

The supercenter operation — a concept that less than a decade ago Target's senior management maintained had no place in its future — is making "nice progress on top-line sales growth," Steinhafel said, and is showing some slight margin expansion. He added that supercenters have improved their expense management and that comps are coming "very, very close to what we achieve in Target discount stores." For 2002, consolidated discount and superstore comps gained 2.2 percent.

The addition of 23 supercenters this year will account for 28 percent of the net 80 units the discount operation will open, reflecting the company's stepped-up food strategy.

With $3.8 billion in Target Visa receivables and almost 9 million Target Visa cards outstanding at yearend, Target's credit card program is "maturing as planned and will contribute meaningfully to 2003." Scovanner said.

Target Visa holders spend 50 to 60 percent more in Target stores than other customers, according to vice chairman Gerry Storch. The company tested its smart chip technology last quarter by distributing an electronic coupon to card holders in several markets and will roll it out later this year.

In a reference to home, Scovanner said that the recently bowed Cynthia Rowley program, is performing "a tad below" expectations.

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