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Target's distinguishes itself from competitors with its innovative marketing strategy that emphasizes the brand's focus on design. Target partners with a variety of international designers to provide customers with affordable style in apparel, home furnishings and accents, and accessories. This sales strategy has helped Target create a special niche market, which has contributed to Target's recent gains in market share.
The company, like many general retailers, has moved to gain greater share of consumers' wallets (i.e., more of their overall spending). Several key initiatives drive this goal. First, Target is increasing the number of SuperTarget stores, which include full grocery offerings as well as general merchandise. These stores compete directly with Wal-Mart's similar Supercenters. Second, Target offers a wider range of convenience services, including photo processing and pharmacies--both of which allow customers to drop-off and pick up orders while shopping and generate greater foot traffic. Finally, branded credit cards drove approximately 8% of pre-tax earnings for the company in FY 2007. Target credit cards produce bottom line benefits for the company through financing gains as well as encouraging additional consumer purchases with its successful rewards program.
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[edit] Company Overview
[edit] Business Strategy
Target Corp. operates by an "Expect More, Pay Less" philosophy, which emphasizes Target's position as a retailer focused on providing quality products at low prices. Unique for a discount retailer, Target has a special focus on design, which is evident through Target's partnerships with a variety of designers for clothing, accessories, houseware, and home decor. This allows Target to attract a relatively more wealthy customer base than standard discount retailers, and also buffers Target from direct competition with retail giant Wal-Mart.
In 2006, Target launched the new GO International series, a set of apparel collections designed by internationally recognized names such as Luella Bartley and Behnaz Sarafpour, as part of an effort to expand clothing sales and reemphasize the company's commitment to providing fashionable products.
Target's management is focusing on expanding the company's operations within the United States by a combination of adding new stores and renovating and expanding existing branches. At the end of FY07, Target operated a total of 1,591 stores throughout the U.S., up from 1,488 stores at the end of 2006. Target Corp. has been adding about 100 net new stores annually; management is predicting that Target will operate 2,000 stores by the year 2011.
Interestingly, Target is not pursuing opportunities for international expansion, unlike its rival Wal-Mart Stores (WMT) which has significant international operations.
[edit] Merchandise
[edit] Consumables & Commodities (34% of Revenue)
Target has been expanding its capacity for internal food distribution, in order to cut costs. The company is currently in the process of constructing a company-owned, third-party-operated perishable-food distribution center to serve stores in the southeastern states, which has a projected completion date in the summer of 2008. Target already manages its own distribution of dry foods.
In the grocery, Target offers its own private-label brands, Archer Farms and Market Pantry. Target has been expanding the number of goods offered under the Archer Farms brand name; new items in 2006 included imported pasta, organic coffee, and frozen entrees. Market Pantry offerings have also been expanded to include cheese, Mexican food, and cookies and crackers. Target Corp. also produces and sells its own selection of meat, under the brand name Sutton & Dodge.
[edit] Electronics, Entertainment, Sporting Goods, & Toys (22%)
Target sells a range of sporting goods and toys, including bikes, golf supplies, camping and outdoors equipment, and toys for children of all ages. In the entertainment section, Target sells a wide selection of music and movies. Target has also been increasing its stock of electronics. In 2006, Target added new LCD and flat-panel TVs and high quality digital cameras to its inventory, as well as expanding the selection of portable audio electronics, such as mp3 players. Target also participated in the launch of new video gaming systems by selling hardware (consoles), software (games), and accessories (controllers, memory cards). Target Corp. is well positioned for profitability and continued growth in the consumer electronics department.
[edit] Apparel & Accessories (22%)
Target stores sell a range of clothing, for men, women, and children, including casual, athletic, and business casual to semi-formal styles. In addition, Target.com sells formal apparel and evening wear. Target also sells shoes and a variety of accessories, from sunglasses to purses to jewelry and watches.
GO International, Target's new design initiative, was launched in 2006. Featuring international designers for limited-edition collections, GO International is part of an effort to boost clothing sales and emphasize Target's reputation as affordably trendy and fashion-conscious.
[edit] Home Furnishings & Decor (19%)
In the home decor and furnishings department, Target sells a selection of bedding, linens, and decorative home accents. Target also carries a stock of furniture, including chairs, tables, desks, and bookshelves.
The company introduced the Target Casual and Contemporary Home brands in 2006, and also reintroduced the Waverly brand. These Target-owned brands allow the company to keep prices low for customers, while still maintaining profitability for the store.
[edit] Other (3%)
The Target pharmacy delivers prescription and over the counter medication to patients. A main advantage of the pharmacy is convenience: customers can get their prescriptions filled while they shop for groceries and other supplies, and then pick up their medications when they are ready to leave. Target introduced the ClearRx pharmacy bottle in 2005, which is color coded and has a larger area for the label, making it more customer friendly.
Target's health and beauty section sells cosmetics, hair products, and other beauty products. In 2006, the company expanded its merchandise selection to include premium brands typically not found in general retailer stores.
Each Target store also contains a section for seasonal merchandise. Popular seasonal items include school supplies in the fall, holiday decorations in the winter, and patio and lawn equipment (patio tables, outdoor grills) in the spring.
Some Target and SuperTarget stores also contain 1-hour photo centers, Target Optical, and Target Clinic (a walk-in medical clinic, offered in the Twin Cities, Minnesota, area). Target also partners with food service providers, which allows many SuperTarget stores to contain Pizza Hut, Taco Bell Express, Starbucks, or Jamba Juice shops.
[edit] Credit Cards (REDcards)
Target's REDcard program consists of the Target Visa Credit Card and the Target Credit Card. Both types of REDcard allow cardholders to earn rewards of store discounts, redeemable only at Target and SuperTarget stores. In addition to incentivising REDcard use, the rewards programs also boost customer loyalty to Target stores and encourage larger purchases: transactions for reward redemption are approximately four times greater than the average transaction.
Target earns revenue on its credit cards primarily from finance charges and late fees charged to customers. Target also receives revenue in the form of fees from merchants who accept the Target Visa credit card. Net credit card revenues were $1.6 billion in FY07 a 17.6% increase from 2006.
Expenses that Target Corp. incurs by offering credit card services include a provision for bad debt (outstanding balances that can no longer be collected, for example, those from customers who declare bankrupcy). Other expenses include marketing and operating costs associated with promoting and maintaining the Target brand credit card, and the cost of reward programs and new account discounts.
Net interest expense increased by 13.2% in 2007 to $647 million, compared to $572 in 2006; the increase was primarily caused by rising costs of funding Target's credit card operations. This isn't necessarily bad news for Target because higher interest expenses typically means that the amount charged to credit cards is higher and they make more profit; it could also mean that interest rates are rising. Net interest expenses stem from the funds Target borrows to pay merchants before credit card holders pay their balances.
On May 19th, 2008 Target sold a 47% stake in its credit card receivables to J P Morgan Chase (JPM) for $3.6 billion dollars cash. Target was previously on of the last big box or department store to maintain a 100% stake in their credit card receivables[3]
[edit] Trends and Forces
[edit] International vs. Domestic Growth
Target is not expanding to the international arena. This has several repercussions for the company, including lost potential for opportunities in emerging markets such as China and extreme vulnerability to the domestic economy.
[edit] Emerging Markets
Competitor Wal-Mart already operates internationally, with stores around the world. By contrast, Target has no international exposure, which means Target cannot take advantage of the rapid economic growth in eastern Asia, specifically in China. Although management's focus on domestic growth may strengthen Target's position domestically and help Target gain market share from Wal-Mart in the United States, not expanding overseas now may limit Target's opportunities for long-term growth in the future. At its current rate, the domestic market is estimated to be saturated within 19 years. Within that time, Wal-Mart and other competitors may have firmly secured positions in overseas markets, and Target may have a hard time breaking into those markets. In addition, the company's geographic concentration leaves it highly exposed to downturns in the domestic economy.
[edit] Domestic Economy
A discount retailer, Target's customer intersects a large portion of the low-income demographic. Many low-income families are more sensitive to rising energy prices, which can negatively affect Target's sales revenue. Target has reached into more affluent, "selective consumer" segments though its design-based marketing strategy. Wealthier households' consumption decisions are generally less responsive to energy prices, and will remain relatively steady even in the face of high energy prices. This helps create a greater buffer for Target against energy prices compared to its main competitor, Wal-Mart.
The U.S.'s slow housing market also affects Target. The domestic economy is experiencing the "home equity effect," where homeowners perceive their house values to be lower than anticipated, and therefore believe themselves to be relatively less wealthy. As a result, consumers spend and consume fewer goods and services in general, which results in lower sales for retailers such as Target.
[edit] The Subprime Crisis Effect
In an economic downturn, consumers first eliminate or minimize non-essential purchases, which would include much of Target's merchandise, including the designer home accents, apparel, and accessories. This has recently occurred in the third and fourth fiscal quarters of FY 2007, when the economy has proven to be volatile after the subprime lending crisis unsettled the financial industry and subsequently consumer confidence and the retail industry. Target experienced a decrease in net profit during both quarters due to lower sales on high-margin products like apparel and home accentual goods.
[edit] Direct Sourcing
Target relies on direct sourcing through its contracts with designers. This allows Target to sell exclusive products, which competitors such as Wal-Mart and Kmart cannot offer. A focus on design has helped Target builds its "cheap chic" reputation, which has attracted customers to Target stores and helped Target gain market share. Target has also used its exclusive designs in an effective marketing campaign, in order to differentiate itself from its competitors and solidify its position in the industry.
[edit] Infrastructure
Target has been rapidly adding to its network of infrastructure, with net growth of approximately 100 stores per year and a new distribution network under construction. The new stores are intended to add convenience to customers and gain additional market share, while the distribution allows Target to cut costs and maximize profits.
[edit] Store Format
Target's new stores follow the same format as the existing ones, with the majority of new stores being built as general merchandise stores and about 20% as SuperTarget stores, which include general merchandise and a full grocery. The two different store formats allow Target to compete directly with Wal-Mart, with general merchandise Target stores competing with Wal-Mart stores, and SuperTarget stores competing with Wal-Mart Supercenters.
The layout of Target stores is much more open and spacious than competitors' stores, which adds to Target's popularity with high-income customers. Target stores have wider aisles and less crowded shelves than either Wal-Mart or Kmart. Although this means Target offers a slightly smaller variety of goods than Wal-Mart, it helps Target present a more customer-friendly image.
[edit] Distribution System
In 2006, Target added 3 new distribution centers to its network, bringing the total number of distribution centers up to 29. These centers, located around the country, provide essential support to the stores, and the growth of the distribution network signals that Target is well positioned to expand its retail network by adding stores.
As part of an effort to cut production and distribution costs, Target has been expanding its capacity for internal food distribution. Instead of relying on distribution lines owned by third-parties, which would be more expensive, Target has been moving towards controlling its own distribution networks. Target currently manages its own distribution of dry foods, and the company is currently in the process of constructing a company-owned, third-party-operated perishable-food distribution center to serve stores in the southeastern states. This new distribution center is expected to be completed in the summer of 2008.
[edit] Competitors
Target's main competitor is Wal-Mart Stores (WMT). The two retailers compete for many of the same customers; however, Target's reputation as "cheap chic" has boosted its status with relatively affluent "selective" shoppers who purchase consumable household goods at Wal-Mart for low prices, but are not interested in Wal-Mart's apparel or home accessories offerings. These consumers frequent Target for their more trendy home furnishings and clothing selection. The average household income for Target customers is about $70,000 a year; by comparison, the average yearly income for a Wal-Mart customer is $59,000, below the overall US average of $65,000. This advantage in terms of customer wealth makes Target less vulnerable to market fluctuations than is Wal-Mart, because the wealthier consumers have spending patterns that are less elastic with respect to energy prices and general economic strength.
In terms of physical location within the United States, Target's focus in suburban areas gives the company proximity to a larger number of customers than does Wal-Mart, even though Target has significantly fewer store locations. The difference is significant: 1.4 million people live within 5 miles of a Target, versus only 380 thousand within 5 miles of a Wal-Mart.
Target has also been competing with Wal-Mart on price, notably matching Wal-Mart's generic drug prices. By keeping its prices low, and extremely close to Wal-Mart's, Target is challenging Wal-Mart's position as the price leader in the discount retail market. However, Wal-Mart currently continues to dominate the market, and WMT's actions greatly influence the entire industry.
| Wal-Mart | Target | |
|---|---|---|
| Total Sales (millions) | $378,799 | $63,367 |
| Growth from 2006 | 8.6% | 6.5% |
| Same Store Sales Increase | 1.6% | 3.0% |
| Sales per Store (mm) | $52.1 | $39.8 |
| Sales per Square Foot | $436 | $305 |
TGT's operating margin is noticeably larger than the operating margin of Wal-Mart. Despite Wal-Mart's higher revenue per square foot of store space, Target earns higher margins for two reasons. First, Target sells comparable goods at slightly higher prices, but incurs similar operating expenses to Wal-Mart, which increases Target's operating margin. Second, Target's higher operating margin is due to strong growth in sales of apparel, a high-margin good, and high-margin food items. Target's growth in these high-margin areas has outpaced Wal-Mart's.
| Wal-Mart | Target | |
|---|---|---|
| 2007 (ttm ending Jan-07) | 6.14 | 7.56 |
| 2006 (ttm ending Jan-06) | 5.50 | 7.34 |
| 2005 (ttm ending Jan-05) | 5.60 | 6.47 |
Kmart, as the third discount retailer of the "Big Three", has had steadily declining sales since 2000, and has lost considerable market share to Wal-Mart and Target. Following its 2006 merger with Sears, Roebuck and Co., Kmart has been trading on the NASDAQ under the symbol SHLD.
| Total Retail Sales | Wal-Mart | Target | Kmart | "Big Three" | |||||
|---|---|---|---|---|---|---|---|---|---|
| Year | Sales (mm) | Sales (mm) | % of Total | Sales (mm) | % of Total | Sales (mm) | % of Total | Sales (mm) | % of Total |
| 2005 | $2,821,926 | $249,709 | 8.85% | $51,271 | 1.82% | $19,094 | 0.68% | $320,074 | 11.34% |
| 2004 | $2,671,210 | $228,944 | 8.57% | $45,682 | 1.71% | $19,701 | 0.74% | $294,327 | 11.02% |
| 2003 | $2,445,320 | $208,757 | 8.50% | $40,928 | 1.67% | $23,253 | 0.95% | $272,938 | 11.12% |
| 2002 | $2,296,630 | $188,823 | 8.22% | $36,917 | 1.61% | $30,762 | 1.34% | $256,502 | 11.17% |
| 2001 | $2,212,890 | $168,526 | 7.62% | $32,167 | 1.45% | $36,151 | 1.63% | $236,844 | 10.70% |
Target also competes with Costco Wholesale (COST), currently the largest membership warehouse retailer. Target and Costco share a similar customer base: the average household income for Costco's customers is $74,000, compared to Target's $70,000. This means Costco competes more directly with Target in terms of consumer base than does Wal-Mart. Costco sells a range of grocery items, electronics, household items, and clothing that rivals Target in product diversity; however, Costco sells products in bulk, whereas Target focuses on individual items and smaller packages. Costco is growing rapidly, with higher revenue than Target and a slightly faster rate of sales growth. The warehouse retailer also generates over 4 times as much revenuer per store than Target.
| Target | Costco | |
|---|---|---|
| Revenue ($B, ttm ending Dec-06) | 59.49 | 62.42 |
| Number of U.S. Stores | 1,488 | 358 |
| Sales Growth from 2005 | 12.9% | 13.6% |
Target
[edit] References
- ↑ Target Corporation FY 2008 Q2 Earnings Release
- ↑ http://seekingalpha.com/article/78354-target-s-earnings-no-big-surprise?source=feed
- ↑ TGT Q1 2008 Earnings Release
- ↑ BIG,2007,10-K,Item-6,Page-16
- ↑ BIG,2007,10-K,Item-7,Page-17
- ↑ 6.0 6.1 DLTR,2007,10-K,Item-6,Page-17
- ↑ FDO,2007,10-K,Item-6,Page-16
- ↑ FDO,2007,10-K,Item-7,Page-19
- ↑ TGT 2008 10-K
- ↑ WMT,2008,EX-13,page-1
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