Target Stores: Maintaining Momentum During

 Target Stores: Maintaining Momentum During Economic Downturns Marshall School of Business University of Southern California November 2008 Target Stores: Maintaining Momentum During Economic Downturns Target Stores: Maintaining Momentum During Economic Downturns Challenging Times for the Retail Industry It is November 2008. Barack Obama has been elected the next president of The United States of America. On the other hand, as a consequence of the recent financial crisis, employers have slashed jobs from one end of the economy to the other in October, pushing the unemployment rate to 6.5%. That’s the highest level in more than 14 years, and makes a deep recession a virtual certainty.i The last time the unemployment rate was so high was in the first quarter of 1994, when the economy was still struggling to recover from a recession. The situation facing job seekers today is even worse when so‐called discouraged workers are factored in—an 11.8% overall unemployment rate in October, the Labor Department estimated, up from 11% in September. Jared Bernstein, a labor economist with the Economic Policy Institute, noted that job losses were a lagging phenomenon. That is, unemployment tends to peak well after the economic shocks that cause it, and takes longer to abate even after the economy recovers. He noted that the lag had lengthened in recent business cycles, with it taking roughly two years after a recession was over for the economy to regain lost jobs.ii For the first time in years Americans appear to be increasing their savings, said Ed Leamer, Director of UCLA’s Anderson Forecast. That is probably wise for consumers whose assets have lost value and for workers fearful of losing their jobs, but it robs the economy of its major driver: About 70% of the nation’s gross domestic product is composed of consumer spending.iii Mr. Ed Leamer, Director of UCLA’s Anderson Forecast, predicted that large job losses are likely to continue for five or six months. iv Weakness in the economy and the labor market is reflected in reduced consumer spending The Conference Board reports that the Consumer Confidence Index was at an all‐time low in October. The index stands at 38, down from 61.4 in September. Looking ahead, consumers are extremely pessimistic. Those expecting business conditions to worsen over the next six months surged to 36.6 percent from 21.0 percent, while those anticipating conditions to improve fell to 9.9 percent from 13.4 percent. This news does not bode well for retailers who are bracing for what will be a very challenging holiday season v Copyright,2008. Professor Michael W. Coombs prepared this case with the assistance of Kim Esser. This case is developed for case discussion only. It not intended to serve as an endorsement, primary source of data, or evidence of effective or ineffective management. 2 Target Stores: Maintaining Momentum During Economic Downturns Facing economic uncertainty, not to mention tighter credit, U.S. households are expected to scale back spending radically this year. As retailers brace for one of the slowest shopping seasons since the early 1990s, their focus has shifted to one area that promises to stay strong: 1
kids’ apparel. Chains such as Kohl’s, J.C. Penny, and Macy’s are gearing their advertising and in‐store promotions toward children’s clothing in a bid to garner what few discretionary dollars are being spent. Ellen Davis, a vice‐president at the National Retail Federation, says children’s clothing may even outsell toys this year. “In previous years, that would have been a ‘because you need it’ purchase,, not a gift,” she says. Macy’s belief: Woo the kids and the parents will follow. Peter Sachse, Macy’s chief marketing officer, says that themes of nostalgia and stability should resonate as “the consumer is looking around them and things are falling apart.”vi Expected change in U.S. department store sales this holiday vs. last year: ‐4.5 %.vii In the past, consumers have gone shopping the moment the sun came out. But this time? Market researchers trying to divine the consumer psyche are picking up signs that attitudes are changing. Booz & Co. recently conducted a survey of nearly 1,000 households. Among other findings, 43% of respondents said they are eating at home more and 25% said they were cutting spending on hobbies and sports activities. In both cases, most said they’d continue doing so even when the economy improves. Much the way pump prices have prompted many Americans to forsake SUVs for small cars, the collapse of home values and 401(k)s will make consumers think twice before hitting the mall.viii About 45% of Americans are eating out less this year to save money, an increase from 2007 of nearly 12 percentage points, according to BIGresearch in Worthington, Ohio. That’s good news for the makers of breakfast cereal, soup, and macaroni and cheese, who have been able to offset rising commodity prices by jacking up their prices. By and large, consumers have grudgingly gone along. People don’t eat less in a recession, analysts say. They’re simply more inclined to eat at home….As consumers eat out less often, Mulligan says, that “clearly benefits those like us who play in the grocery stores.”ix Americans are already reining in their spending. Sales at major chain stores surveyed fell by 0.9% last month compared with October 2007—and by 4.2% if discount king Wal‐Mart Stores Inc. is excluded, the International Council of Shopping Centers said.x Tina Schiel, Senior Vice President, Target Stores, considers how to respond to the expected decrease in consumer spending in the coming months. Recent company‐wide initiatives included a new “Go International” campaign featuring chic‐and trendy apparel from well‐
known designers. In addition, Target is implementing a program of localization where the mix of products in each of the stores more closely reflects the ethnic composition of the local area. It is estimated that almost one‐half (46%) of U.S. population growth in the next decade will come from three states: California, Texas, and Florida, which by 2016 will have overtaken New York as the third largest in the country. Higher birth rates among minorities and increasing 3 Target Stores: Maintaining Momentum During Economic Downturns immigration from Latin America and Asia are making parts of the U.S. significantly more diverse. Minorities now make up one‐third of the U.S. population. The Hispanic population is the fastest growing, with more than 42 million people of Hispanic origin in America today and a projected 2
102.6 million by 2050. Analysts predict that the sheer number of Hispanics in our country will elevate the demographic from what is often considered a “niche market” today, into a mass market in its own right, segmented by nationality, cultural experience, and other characteristics. In recent years Los Angeles County has become one of the most diversified counties in the country with the percentage of Caucasian residents now eclipsed by Latino and Asian populations. Could a multi‐cultural focus help drive continued sales? Ms. Schiel puts down the newspaper and considers what to do next. As West Coast Regional Manager she has been paying close attention to the impact of the national financial crisis on consumer purchasing behavior. Traditionally intensive consumer purchasing during the last two months of the calendar year are relied upon by retailers to offset weak consumption during the first 10 months of the year. What should Target do in the Los Angeles area to weather the economic downturn? Reduce advertising? Cut back on hours of operation? Change the mix of products in the store? Continue to focus on local community demographics with products attractive to dominant cultural groups? She picks up the phone to call for a meeting with her staff. History of Target Stores Minneapolis‐based Target serves guests at 1,500 stores in 47 states by delivering today’s best retail trends at affordable prices. This includes 182 SuperTarget stores, which add an upscale grocery shopping experience. Target is committed to providing guests with great design through innovative products, in‐store experiences and community partnerships. Whether visiting a Target store or shopping online at Target.com, guests enjoy a fun and convenient shopping experience with access to thousands of unique and highly differentiated items. Target opened its first store in Roseville, Minnesota in 1962. More than 100 new Target stores are opened each year during three cycles in March, July and October. New store prototypes, ranging in size from approximately 126,000 square feet to 175,000 square feet, utilize advancements in technology and design to better respond to Target guest needs. Total square footage of Target stores is more than 181 million. Target currently operates 26 regional distribution centers (RDC), four import warehouses and one Target.com distribution center. The Merchandising Strategy Target’s merchandising mission is to drive profitable market share growth by fulfilling its “Expect More. Pay Less.” brand promise. Specifically, the merchandising team focuses on the following four areas to remain relevant to guests over time and sustain a competitive advantage: 4 Target Stores: Maintaining Momentum During Economic Downturns Value: Provide outstanding value through price, quality, timeliness and great design. Differentiation: Surprise and delight guests with distinctive, exclusive and unexpected offerings. Reliability: Drive sales by having what guests want, when they want it, where they shop. Frequency: Increase shopping frequency by creating a convenient shopping experience that meets guests’ lifestyle needs; such as: pharmacy, food, and commodities xi Target has distinguished itself from Wal‐Mart and grown to become the nation’s #2 discounter by employing a strategy that relies on exclusive private‐label offerings from big name designers. To stay ahead of archrival Wal‐Mart which has tried to upgrade its fashion profile, Target has launched its “Go International” program; limited edition collections from global designers including, most recently, the Iranian‐born designer Behnaz Sarafpour. Previous Go collections were produced by UK’s Luella Bartley, Tara Jarmon, and Paul & Joe. Other designers with exclusive lines at Target include Amy Coe (children’s bedding and accessories), Liz Lange (maternity), Mossimo (junior fashions), and he architect Michael Graves (housewares).xii Target’s most high‐profile designer partnership has been with fashion designer Isaac Mizrahi, who joined the discounter’s stable of in‐house talent in mid‐2003. Mizrahi offers a line of chic and affordable women’s apparel and accessories, including a collection of bridal gowns for budget‐conscious brides‐to‐be. However, in early 2008, Mizrahi announced he would end his exclusive design deal with Target at year end and move to Liz Claiborne. The Mizrahi collection rang up as much as $300 million each year for Target and helped the chain become a destination for cheap‐chic apparel. Target now faces the challenge of finding a replacement for his apparel line, which will disappear from Target stores at the end of the year.xiii Private Label Goods U.S. sales of private‐label goods rose 10% in the year ending June 28, according to Nielsen, compared with a meager 4% gain for national brands. Private label products comprise the majority of the merchandise in Target Corp’s outlets and online business. The company does offer a wide range of national brands but relies on its private label lines to be its point of differentiation. Target will continually monitor its private label lines, while strategically using its partnerships with designers to stay ahead of the competition.xiv Several factors are behind this heyday for generics. In a homogeneous retail world, stores are looking to private‐label offerings to distinguish themselves from rivals.….With no ad costs store brands also deliver higher profit margins. Much of that money is plowed back into the business….”Not only are consumers trading down to lower‐priced products, we believe that grocery retailers are stepping up their private‐label focus to take advantage of that consumer migration,” says SunTrust Robinson Humphrey analyst William Chappell.xv Quality has always been a central element of Target’s strategy. The following story supports the basis of this long‐held belief in quality at Target. 5 Target Stores: Maintaining Momentum During Economic Downturns Quality meant numerous rounds of testing, and sacrificing profits on products that didn’t make the cut. Target’s team knew if they committed to quality, word of mouth would follow. “By god, we tested living hell out of our stuff, not only in labs, but with our people,” Pistner recalled. “People would notice, and customers would say, ‘I bought that at Target.’” Kenneth Macke, who later became CEO, acted on the code. A shipment of shoes that went into stores subsequently failed tests at a quality control lab. “I remember Ken Macke calling on the divisional merchandise manager, who said, ‘I can’t take these out of the stores, this will cost us $75,000.’ And Ken says, ‘Okay, I’ll tell you what to do. I want you to go out of the room and call every single store that has those shoes, and I want them taken out and thrown in the dumpster.’ The guy blanched and turned white. And the point of that little episode is that people began to realize within Target that we were serious about quality.”xvi In another situation, a shipment of lawn furniture was not stained properly, and Target disposed of $8 million in product.xvii Typical Guests People who shop at Target are referred to as “guests” rather than “customers” throughout the company, reflecting the view that these people are doing the company a favor by visiting their stores and should be treated as one would treat a guest in one’s home.xviii Target guests are young, well‐educated, moderate‐to‐better income families who live active lifestyles. The median age of the Target guest is 41, the youngest of major discount retailers. They have a median annual income of $58,000, 43 percent have graduated from college, 76 percent are female, and more than 40 percent have children at home. Also, 97 percent of American consumers recognize the Target bullseye. This profile is more upscale than the profile of the Wal‐Mart customer and slightly younger and less affluent than the Costco customer.xix A loyal Target guest averaged nine trips to the store per year. She also shopped at Wal‐Mart (74 percent of Target guests had shopped at Wal‐Mart in the past thirty days), but was less likely to frequent Costco (only 28 percent of Target guests had shopped at Costco in the past thirty days). When visiting Target, the guest averaged the same amount of time in the store regardless of how long it took her to find the planned purchase items. Thus, the company placed frequently purchased items near the front of the store so that guests could find what they needed and then spend the remaining time browsing. Target hoped to drive future growth by expanding its offerings in categories that motivated frequent shopping trips (e.g., food and pharmacy).xx Target did extensive research on its guests, conducting an annual competitive tracking survey with two thousand people. This research revealed that guests viewed their in‐store experience at Target more favorably than their in‐store experience at either Wal‐Mart or Costco. It also indicated that 70 percent of the products that a typical guest bought were unplanned, and that attractive design and packaging played a key role in these unplanned purchases. If a guest picked up a product, 80 percent of the time she bought it.xxi 6 Target Stores: Maintaining Momentum During Economic Downturns Target’s Strongest Competitors Target faces competition from various channels. These include national and local department stores, specialty stores, variety stores, supermarkets hypermarkets and pharmacies/drugstores, as well as other internet retailers.xxii In 2007, Target’s largest retail value share was in mass merchandisers, where it ranked second to Wal‐Mart, and grew from 35% in 2006 to 38% in 2007. Target and its larger grocery‐carrying incarnation, SuperTarget, have carved out a niche by offering more upscale, fashion‐forward merchandise than rivals Wal‐Mart and Kmart. Wal‐Mart Wal‐Mart, the world’s largest retailer, can balance its domestic sales with its non‐domestic sales. Even still, within the U.S. Wal‐Mart recently exceeded expectations and reported a 2.4% sales increase, excluding fuel sales. But even the world’s largest retailer is nervous.xxiii Wal‐
Mart got panicky and tried to emulate its much smaller but infinitely cooler rival Target. Wal‐
Mart introduced relatively chic clothing and pricier home goods. The results were forgettable, to be kind. Wal‐Mart spent two years conducting quantitative research—something Wal‐Mart had avoided—to determine why consumers shop at the retailer and what they want. When, for example, pharmacy customers told researchers that they broke pills in half because they couldn’t afford their full prescription, Wal‐Mart conceived it’s wildly successful $4 prescription drug plan. Perhaps the most important finding: Wal‐Mart’s most profitable customers are also its most price sensitive. This indicated that Wal‐Mart didn’t need to mimic Target: the low price mantra still resonated.xxiv In anticipation of a difficult economic period Wal‐Mart is editing its merchandise assortment to obtain greater relevancy and lessen risk. The number of SKUs is reduced considerably, and there is an increased emphasis on visible brands—particularly in electronics When compared to the changes being made by Wal‐Mart, Target appears to be making fewer changes and remaining with what already works which evidences its well‐established merchandising capabilities. In an interesting side‐by‐side comparison of these two firms by analysts at William Blair & Company found Target above Wal‐Mart in most categories, except in pricing, where it maintains a near price parity with Wal‐Mart on basic items (see Exhibit 4). Costco Costco’s same store sales were up 9% in August, and its e‐commerce business is growing even faster. Founder and CEO, Jim Senegal, reports: “There are definitely purchases that are being deferred: patio furniture, housewares, and domestic products—blankets and thing like that. The upside is that we’re seeing more purchases of basic stuff like health and beauty aids and food. Apparel is doing reasonably well, but we are not in the business of selling $800 cocktail dresses.xxv One thing working in Costco’s favor is its buzz factor. The chain is known for its constantly changing roster of high‐quality goods, which entices shoppers to make impulse buys. Anyone 7 Target Stores: Maintaining Momentum During Economic Downturns can walk into a Wal‐Mart for cheap underwear, but getting a discount Cartier watch is something else entirely—especially when customers know it may not be there when when they come back. Such deals, more prevalent in a week economy, have made Costco a place where even the highly affluent like to brag about shopping. (The average member household makes upward of $75,000 a year). David Novak, CEO of YUM! Brands, says he buys wine and cleaning equipment at Costco. As QVC CEO Michael George, a longtime member, puts it: “You don’t just go there for bargains. You go there for the treasure hunt.”xxvi However, Costco will find it difficult to survive on sales of basic items alone due to its ongoing source of revenues. Despite slowing economic growth, soaring commodities prices this year have forced manufacturers around the world to hike process they charge retailers, which in turn have raised their prices on consumers. In many cases this means tough bargaining with suppliers. Costco can’t raise prices as easily as its rivals can. It gets around three quarters of its operating profits from membership fees, which range from $50 to $100 a year. If Costco were to hike prices too high, some of the 29 million households that carry memberships would simply let them expire. Profits could suffer.xxvii Looking Ahead As she prepares to meet with her staff, Ms. Schiel considers what combination of actions to use to maintain sales momentum in a declining economy. Should she change the product mix or decrease prices to maintain foot traffic? Should she reduce operating expenses by cutting back on store hours or the number of employees? Should she reduce advertising in the face of the oncoming holiday season? Should she increase the initiatives focusing on the local multi‐
cultural customer segments? What is the best way to maintain profitability during this difficult time? 8 Target Stores: Maintaining Momentum During Economic Downturns Exhibit 1 9 Target Stores: Maintaining Momentum During Economic Downturns Exhibit 2 10 Target Stores: Maintaining Momentum During Economic Downturns Exhibit 3 11 Target Stores: Maintaining Momentum During Economic Downturns Exhibit 4 12 Target Stores: Maintaining Momentum During Economic Downturns Endnotes i
Reynolds, Maura, When Recession Calls, Job Market Gets Message Lost, Los Angeles Times, 11‐
8‐08, p. p. A1. ii
Reynolds, Maura, When Recession Calls, Job Market Gets Message Lost, Los Angeles Times, 11‐8‐08, p. p. A21. iii
Reynolds, Maura, When Recession Calls, Job Market Gets Message Last., Los Angeles Times, 11‐8‐08; p. A21. iv
Reynolds, Maura & Chang, Andrea, Retail slump is a bad omen. LA Times, 11‐7‐08, p.A1. v
The Conference Board, October 2008 Consumer Confidence Survey. vi
McConnon, Aili; BusinessWeek, 11‐17‐08, p. 70. vii
TNS Retail Forward, quoted in BusinessWeek, 11‐17‐08, p.70. viii
Hamm, Steve with Young, Lauren & Helm, Burt; The New Age of Frugality, BusinessWeek, 10‐
20‐08, pp. 55‐58. ix
Boyle, Matthew; Snap, Crackle, pop at the food giants. BusinessWeek, 10‐6‐08, p. 48. x
Reynolds, Maura & Chang, Andrea, Retail slump is a bad omen. LA Times, 11‐7‐08, p.A1. xi
Deutsche Bank Securities, Inc., Global Markets Research, August 19, 2008, p. 3. xii
Hoovers, October 2008, pp. 1‐3. xiii
Hoovers, October 2008, pp. 1‐3. xiv
Euromonitor International, Target Corp‐Retailing‐US, p. 2. xv
Boyle, Matthew; Snap, Crackle, pop at the food giants. BusinessWeek, 10‐6‐08, p. 48. xvi
Rowley, Laura; On Target: How the World’s Hottest Retailer Hit a Bullseye. John Wiley & Sons, 2003. xvii
Tybout, Alice; Target Stores: Strategic Brand Alliance Exercise. Kellogg School of Management, 2007. xviii
Tybout, Alice; Target Stores: Strategic Brand Alliance Exercise. Kellogg School of Management, 2007. 13 Target Stores: Maintaining Momentum During Economic Downturns .Tybout, Alice; Target Stores: Strategic Brand Alliance Exercise. Kellogg School of xix
Management, 2007; Internal sources. Target, 2008. xx
Tybout, Alice; Target Stores: Strategic Brand Alliance Exercise. Kellogg School of Management, 2007. xxi
Tybout, Alice; Target Stores: Strategic Brand Alliance Exercise. Kellogg School of Management, 2007. xxii
Euromonitor International, Target Corp‐Retailing‐US. July 2008, p. 3. xxiii
Reynolds, Maura & Chang, Andrea, Retail slump is a bad omen.LA Times, 11‐7‐08, p.A24. xxiv
Kapner, Suzanne; Wal‐Mart Enters the Ad Age. Fortune, 8‐18‐2008, p. 30. xxv
Chu, Jeff & Rockwood, Kate; Thinking Outside the Big Box. Fast Company, November 2008, p. 132. xxvi
McGregor, Jena; Costco’s Artful Discounts. BusinessWeek, 10‐20‐2008, pp. 58 ‐60. xxvii
McGregor, Jena; Costco’s Artful Discounts. BusinessWeek, 10‐20‐2008, pp. 58 ‐60. 14