The importance of being Target
May 27, 2002,
Designer alliances and dazzling ad campaigns are one part of the story. So are reverse auctions, the in-house AMC sourcing arm and a bare-knuckled determination to hold pricing in check. And without the latter set of assets, it would be challenging for the Target Stores division of Target Corp. to sustain the former. Because at the end of the day, Target is, after all, a discount store.
As Target Corp. executive vp and cfo Douglas Schovanner noted during a recent presentation at a Lehman Bros. investors seminar, the "Pay Less" proposition in the company's "Expect More/Pay Less" slogan is integral to the discount chain's formula. And while many consider it a given that Target has distinguished itself from low-price leader Wal-Mart handily, Target does not take competition against the No. 1 retailer's pricing structure so lightly.
In competitive markets, Schovanner said, Target prices to match Wal-Mart on like product — with the exception that Target tends to round up to the 99-cent mark, a practice Wal-Mart strenuously eschews.
Despite the differences in marketing attitude between the two chains — Wal-Mart's just-folks conceit vs. Target's sleek modernism — Wal-Mart is clearly Target's benchmark. In fact, when asked how well the chain is positioned to weather encroachment from middle-market rival Kohl's, Schovanner shrugged off the comparison, noting: "We pay far, far, far more attention to what Wal-Mart is up to than what Kohl's is up to."
While the spotlight shines most brightly on Target's growing stable of upmarket brand partnerships — both in company reports and in the consumer press — a stroll along the racetrack in the domestics department reveals how vigilantly Target is pressing the value message. The succession of endcaps seen recently at a new SuperTarget store in Orlando tells the story:
Unbranded 30" x 50" Dhurrie rugs: sale priced at two for $9.00, regularly $9.99;
Waverly 20" x 30" braided rugs: sale priced at $9.99, regularly $14.99;
Unbranded 36" x 72" bath sheets positioned under "It's new at Target" signage: $9.99;
The in-house Home brand summer table linens all priced under $12;
Unbranded 34" x 72" beach towels: $9.99;
Home branded quilts and accessories: $17.40 for full/queen quilts; $6.40 for shams; $6.40 for dec pillows;
Wonder-fil bed pillows: $3.56;
Home brand quilt sets: $44.99 all sizes;
Unbranded poly/cotton solid color sheet sets: $21.99 queen size;
Unbranded 60" x 70" Beach Towel for Two: $19.99.
Sharpening price points was a top priority for Target in 2001 and remains a front-burner issue in 2002. The company's zeal in pursuing reverse auctions to achieve lower price points — particularly on basic merchandise — has already become legendary in supplier circles. Yesterday's vendor of the year is today's auction bait. And in some cases, the company's AMC division takes part in the events, bidding against outside suppliers for the business on the block.
That phenomenon is likely to continue, judging by the company's investment in building out its network of import warehouses. Target opened its first import warehouse last year and has acknowledged that it plans to open two more in 2003.
Getting a handle on in-stocks — not always one of Target's strong suits — has also become a strategic imperative. In 2001, the chain made "substantial progress" on this front, according to the corporation's annual report to shareholders, and achieved the highest level of in-stocks in its history.
This initiative also is rolling forward into 2002 with a program in place to expedite distribution of the top 1,000 skus throughout the chain. Target plans to more than double the scope of that program in the coming year. To support more rapid fulfillment, the company is piloting a Collaborative Planning, Forecasting and Replenishment Program to better track inventory flow. It also is expanding its network of regional distribution centers and plans to nearly double the number in operation by 2005.
As it refines its back-end operations, the discount chain will continue to forge brand partnerships that set its assortment apart from competitors. Starck Reality by Phillipe Starck is due in stores this week. Home goods by designer Todd Oldham will roll out roughly a month later. And going forward the company plans new brand introductions from Woolrich in textiles, Armetale in home décor, Stride Rite in shoes and Physical Science in boys' and young men's apparel.
Target's particular merchandising genius is applying panache to ordinary items amid the everyday basics — and that's a function of the way the corporation views itself. For although the discount division has long been the engine driving corporate growth — and in many years is the only division throwing off profit — Target Corp. doesn't consider itself a 40-year-old discount operation that also holds onto some mid-market and department store properties. It sees itself as a century-old department store company that operates a highly successful discount store chain.
How deep into the marrow that philosophy runs is evident in the fact that the company clung to the Dayton-Hudson Corp. name, a relic from the department store glory years, until just two years ago before allowing the much more relevant Target identity to carry the corporate flag.
But by bringing upmarket brands to the masses, Target has raised the bar across the field. In the process, it challenges not only rival discounters and competing specialty chains to match its standards for innovation, but also mid-tier retailers including JCPenney, Sears, Kohl's and, ironically, its own Mervyn's division.
Target is the first mass retail chain to bring smart-chip technology to a store branded credit card. Its co-branded Target Visa program launched last September had established more than 2 million active cards by year-end with more than $1 billion in receivables. This year, the chain is installing chip readers at terminals across its roughly 1,070 stores. The data collected from those cards will allow the chain to begin offering customer-specific promotions to a cream-of-the-crop consumer with a higher than average credit status than holders of its regular Target Guest Card.
In the face of so many high-profile partnerships on both the merchandising and services side (Target also has co-branded relationships with Amazon.com and eTrade), it's easy to overlook the fact that Target has traditionally been far more deliberate in plotting its course than its rivals.
Target is not yet, for example, a national chain in the strictest sense of the term — although it is coming close. During 2001, it opened the first Target store in Maine, its 47th state.
Target also came quite late to the party in terms of food merchandising, a strategy that has propelled Wal-Mart's U.S. growth for much of the past decade.
However, in the past two years, Target appears to be stepping up the pace. SuperTarget this year will add 30 units — a 40 percent increase in square footage. While not as aggressive as rival Wal-Mart's average of 150 superstore openings per year, it indicates the company believes it has finally found a workable formula for a concept that only five years ago company execs weren't convinced was worth pursuing.
" 'State-of-the-art' is the current mantra for systems and store environments. In the past year, the company has spent $3.2 billion on new store construction, remodeling, technology upgrades and its distribution system. That money was spent across all properties — Target Stores, Mervyn's and the Marshall Field's department store division — although the lion's share has been devoted to the discount operation.
In 2001, the company increased Target Stores' net square footage by 11 percent, or 12 million square feet, a pace slightly ahead of its traditional growth rate of 8 percent to 10 percent. The accelerated schedule was partially a function of opportunity — specifically the liquidation of the Montgomery Ward and Bradlees chains in early 2001. Target snapped up a total of 25 former locations from the pair, which boosted the year's openings to 44 net new discount stores (out of a total 61 openings) and 32 new SuperTarget units.
"Thrift in a time of prosperity buys advantage in time of adversity," Dayton's department store founder Nelson Dayton said nearly a century ago. Target's intense focus on banging down opening price points and growing its store portfolio at its own pace demonstrate that the company has not lost sight of the lesson carried in the adage.
But just as clearly it is rigorously applying an aphorism famously cherished by current chairman and ceo Bob Ulrich: "Speed is life."
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