Brief

Target unveils $7B plan to overhaul stores, digital operations

Dive Brief:

  • Target executives on Tuesday unveiled a series of initiatives designed to reverse the big box retailer’s same-store sales declines, including an investment of more than $2 billion of capital in 2017 and more than $7 billion over the next three years. The company will use about $1 billion of operating profits this year to improve brick-and-mortar and digital operations, according to a conference call transcript from Thomson Reuters StreetEvents.

  • CEO Brian Cornell said much of the investment will go to adding more than 100 small format urban stores over the next three years, as well as overhauling existing locations using aspects of the retailer’s LA25 concept store that have tested well. Stores are also being reconfigured to more efficiently serve as fulfillment hubs for online orders.

  • The company is also dedicating teams to introduce more than a dozen new brands over the next two years, with the research and design approach used for the retailer’s new Cat & Jack kids apparel and Pillowfort kids home decor brands. “We will touch more than $10 billion of current volume with the expectation that we will accelerate growth within our most differentiated and profitable categories,” Cornell said. For commodity products like food, consumables and household products, Target plans to compete better on price, executives said. 

Dive Insight:

Cornell's outline of a massive overhaul of Target's brick-and-mortar and digital operations is a response to what he called "a seismic shift" in the retail industry. "All across the retail industry many of our competitors are aggressively rationalizing their assets," he told analysts. "They are closing stores, exiting markets. They are cutting costs just to keep their heads above water. We've not seen this number of distressed retailers since 2009 in the Great Recession."

From bookstores to electronics stores, many retailers have registered such seismic activity well before now, notes Matt Sargent, Senior Vice President of Retail at Frank N. Magid Associates, Inc. "Target just took longer to feel the 'Amazon digital effect' than [Best Buy], due to the categories and customer base they play within," Sargent said in an email to Retail Dive. "Amazon initially went after books (successfully destroying physical book retailers), and then went onto CE and office supplies, and now are expanding into food and apparel."

Judging by efforts to double-down on its "cheap chic" merchandise differentiation, Target seems unwilling to cede much to Amazon or anyone when it comes to home decor and apparel, which outgoing CFO John Mulligan on Tuesday said account for about $26 billion in sales. Although Target has been hit with criticism in recent months for its lackluster grocery offering, very little attention was paid to that category in the conference call Tuesday, until questions were pointedly asked. “We've made significant progress in procurement, in supply chain, in making sure we improved our assortment, in making sure that in the test stores in Los Angeles and Dallas we understand the changes that need to be made in the in-store experience,” Cornell said.

He reiterated the fact that Target has no ambitions to serve as a traditional grocery retailer. "One of the things we talked about over the last year as it pertains to Target's food and beverage offering is the recognition that we don't have a full service grocery experience,” he said. “We don't have meat and seafood counters, we don't have deli counters. We don't provide a full assortment of experiences and services that many of our full-line competitors do. But we can offer a great self-service convenient experience. And that starts with the right quality, the right assortment, the right in store experience, great value, we've got to make sure we are supplying those products or I guess every single day to make sure the freshness is there.”

Several analysts have questioned Target’s basic approach, noting that grocery is a major driver of store traffic for retailers like Wal-Mart.  “Target continues to be plagued by a rather bland foray into grocery,” Joleen Wroten, Senior Retail Strategist at retail intelligence firm 360pi, told Retail Dive in an email. “Target reportedly earns one-fifth of their sales from grocery categories whereas Walmart generates over 50% of their sales from grocery in the US.”

But it’s possible that Target is purposely attempting to stay above the fray, considering the expanding competition from no-frills German grocery chains that threaten to disrupt the grocery business and decimate the already thin margins of that category. In any case, Wroten, like others, warned that Target’s promise Tuesday to lower prices on consumer goods shouldn’t morph into a major price war. 

“Grocery is an exceptionally challenging space to compete in thanks to Walmart's aggressive pricing, new and expanding threats (ie. Fresh Thyme, Whole Foods and Hy-Vee's new format) and general market food deflation impacting everyone,” Wroten said. “Additionally, recent reports indicate that Walmart has gone back to their manufacturers looking for even deeper cost cuts to support a push to further lower prices. This effort appears to be aimed at the likes of global discount supermarket chain Aldi and not players like Target, but embattling Walmart in a pricing war is undoubtedly a losing battle for Target. The retailer should return to their legacy ability to differentiate with exclusive, affordable 'fresh' product offerings coupled with clean & easy shopper experiences.”

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Filed Under: Corporate News