Target Should Be Fine After Losing Star Merchandiser
After several years of struggle, Target stock is up 69% year-to-date and still rising. Losing their head of merchandising may concern some, but without good reason.
The world of retail has become a much more challenging one to succeed in lately, and in particular, since Walmart and Amazon have come to dominate it.
The success of Walmart and Amazon has come at a cost to existing retailers who have had to get used to lower sales numbers due to their inability to compete. Some have fallen to the wayside, and others have seen themselves barely keeping things together and hoping things will improve.
Times change though, and in order to understand the new landscape of retailing, we need to get back to basics enough to understand that every business serves a particular niche and we want to make sure that we serve a particular niche that we can become or remain competitive in.
Department stores have been around for a very long time, and Target is one of those who really have a long history, starting out as Goodfellow Dry Goods in 1902. The plan with department stores was to try to be everything to everyone, and many did a pretty good job of this in the 20th century, but in the new millennium, things really started to change and we actually become more specialized.
You wouldn’t normally think of an operation the size of Walmart as being in a specialized or niche market, but it truly is, even though the size of this niche is huge. Even Walmart is not everything to everyone, and no one really is. If low prices are your niche, and this therefore means that quality or service become subordinated, then you will really like Walmart, and a whole lot of people do.
If you think that you can compete with Walmart on this basis, or that in spite of it being clear that you cannot but you insist on still trying, you will in for a disappointment. Walmart simply dominates this niche with the combination of their strong physical presence in the marketplace and their superior buying power and distribution network.
Walmart will simply be able to buy things cheaper than you can and also get it to market more efficiently so there’s just no way that you can compete head-to-head with them. Some stores still don’t understand this well enough, but Target is no longer on this list.
Target ended up learning an expensive but potentially very valuable lesson when it tried to take on Walmart in Canada a few years ago. While Walmart dominates the discount department store market in the U.S., of which Target is a part of, their dominance in Canada is considerably more impressive.
Target really didn’t do their homework when they bought out the ailing Zellers chain a few years ago. Two years after they opened their first Target store in Canada, Target had the good sense to know when they were licked and just pulled the plug and sucked up the $2.1 billion loss on the deal.
Target Really Got to Understand the Futility of Competing Directly with Walmart
Walmart had ventured into Canada in the 1990’s by buying out the Woolco chain, which had gone bankrupt in the U.S. a decade earlier and their Canadian operation was nothing to write home about. This was a deal that worked out well for both sides. Walmart remodeled and rebranded the stores and the rest is history.
You hear stories about Walmart coming to town and then everyone else shutting down, but this actually happened to a country. The main competitors when Walmart arrived in Canada were Zellers, K-Mart, and Sears, all of which were doing well at the time. One by one they fell though, first K-mart which was sent packing by not being able to compete with Walmart, which were bought out by Zellers.
Zellers was always a very low-quality store, making even Walmart look upscale, so they at least stood out in this regard, but a lot of the products that they sold were also sold at Walmart, which really put the hurt on their business. Target had some strange idea that they could step in and compete, even though this ended up being based more on hubris than reality.
A lot of Canadians were under an illusion here as well, as many had shopped at Target across the border, whose prices were well below what Walmart Canada could offer, and they thought that Target could bring these prices north. Things just cost so much less overall in the U.S. though, for a number of reasons, but both the public and Target management thought that this was going to work.
What actually ensued is believed by some to be the worst case in history of a retail takeover, and losing over $2 billion in just 2 years in a market that just isn’t all that big certainly qualifies as a real bloodbath. Due to the challenges of the Canadian market, which they were totally unprepared to deal with, their prices came in much higher than Walmart’s, and they couldn’t even satisfy the meager demand they did get properly due to their supply chain fiasco.
The supply chain problems are blamed by many for their demise, but the problems ran deeper than this, and the real issue is that you can’t touch Walmart’s supply chain in Canada. They simply slay everyone. After Target was knocked out, this left Sears Canada as their only competitor, and it didn’t take that much longer for Sears Canada to go bankrupt and close all their stores. Walmart now stands alone in the traditional department store market in Canada. the only thing left that is close is Costco, which is more of a supermarket, but one that has carved out a profitable niche for themselves.
The lesson here is that if you want to be Walmart, there’s no chance that you will beat them at their own game and you need to pick a different one and hope that this gives you a chance. Amazon is a great example of this, and Amazon picked an entirely different game and became the Walmart of online shopping and are even set to pass Walmart in overall sales in a few years.
The battle cry for retailers is their need to reinvent themselves enough, and while this often gets little more than lip service, with perhaps a few minor changes that are far from game changers, Target has really stood out over the last 3 years as far as how seriously they take this.
Perhaps the lesson in Canada helped, and as it turned out, it was during the time of the closure of Target Canada that Target started understanding things more.
In addition to paying the $2.1 billion tab for the Canadian losses, Target CEO Brian Cornell contributed a further $5 billion on a remake of his company and take the need to reinvent and improve as seriously as he should.
Target Has Really Turned Things Around Lately
This investment has now come home to roost and earnings have been increasing every year since. Target’s latest earnings announcement was so positive that the stock is up 35% since August 20 and continues to climb and make all-time highs. It is sitting up almost 70% year-to-date, a number that is considerably bigger than what Walmart or Amazon has done this year.
Target may not be able to beat either on the price of merchandise, but they are beating them soundly with the price of their stocks. Walmart and Amazon dominate their particular niches so well and their niches are so big that they will both dominate Target in terms of size in the future, but if Target successfully carves out their own niche well, they can dominate that and prosper.
The word prosper with retailers isn’t used that much these days, outside of Walmart and Amazon that is, but it is one that is appropriate for Target these days. Things are not only improving but are expected to continue to improve, something that very few retailers indeed can boast these days.
Target focused on three main objectives, to create an improved shopping experience, to create more house brands to allow them to sidestep direct price comparison, and to really ramp up their online shopping experience and really leverage their strengths in doing so.
Target wishes to become what could be called a chic discount department store, landing them somewhere between Walmart and more upscale department stores. There is a significant segment that desires better quality and better-looking stores than Walmart offers, but may not want to pay the true premium prices of an upscale store.
They also may like shopping online but would also prefer the timeliness of being able to pick up their purchases at the store. The fact that 90% of Target’s online orders are picked up at a store, in an express fashion, demonstrates how well that they are reaching the right people.
Target also now offers a huge number of private brands, which both allow them to target the amount of quality that they are shooting for, and also allows them to be less likely to lose on price. If both stores sell the same thing, you can just compare their prices, but if Target sells their own brand which costs more, the quality might be better and this might even be the better bargain overall.
Head Merchandiser Mark Tritton no doubt deserves some credit for Target’s revival, and his leaving the company to lead Bed Bath and Beyond as their new CEO has some people worried that this will hurt Target in a meaningful way.
Target understands the importance of this role and are very eager to find a suitable replacement. Two of Tritton’s underlings will take over the role for now, both of whom are expected to compete for the permanent position alongside potential external candidates.
This recent growth has come by way of insight, and it is CEO Bryan Cornell that deserves the real credit here. Perhaps they won’t even find a head merchandiser as talented as Tritton, but they will come plenty close enough, and the die has fully been cast as far as the company’s overall approach will be, the one that has delivered this recent success and is set to drive even more.
Target stock really has stood out from among not only their competition in retail but just about all their competition in the stock market as well, and is providing high alpha with a very well -established business model, which is a nice combination.
There are a lot of reasons to expect that their success will indeed continue, both for the company and the stock, and in spite of how much it has gone up already this year, it’s further potential still looks tempting.
Editor, MarketReview.com
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