Target: A Retailer Built for the Future

Maybe it’s the quirky advertising, the mischievous Bullseye mascot, or the $4 million a week donated to charity – whatever the reason, Target holds a special place in the lives and hearts of many Americans, much more so than many other large retailers, including Amazon and Walmart.

Although it helps, affection doesn’t automatically put money in the register – something Target discovered a few years ago when its same-store sales started to nosedive.

Fortunately, early in 2017, management saw the trajectory and took steps to pull Target out of its tailspin. With a $7-billion capital price tag attached, the three-year plan CEO Brian Cornell set out was both decisive and bold. However, early evidence suggests it is working.

Just twelve months into the plan and Target is slowly climbing. For the past two quarters, comparable sales have been positive; and with holiday same-store sales growing by 3.4%, final-quarter performance will also be strong.

So what is Target getting right and how is it beating giants like Walmart and Amazon? Let’s explore.

In-store experience

A large chunk of Target’s investment is going towards improving the in-store experience, with plans to remodel more than 1,000 stores by 2020. This decision caused some shock and skepticism among commentators who see the future in purely digital terms. The strategy, however, is sound.

In the days before online, Target’s warehouse-style format, with aisle after aisle filled with products on shelves, made sense. Back then, stores were the destination for almost everything – from butter to blankets.

Today, things are different. The internet has given consumers a bewildering array of choice, all available at the click of a mouse. As a result, stores need to add value beyond just having “lots of things.” They need to be places of discovery, providing inspiration, ideas, and excitement.

That’s one of the reasons Target is completely reinventing the in-store experience. Remodeled stores are more visually appealing, boasting ceiling treatments, lighting, flooring, displays and signage that “bring stories to life” and “draw guests in.” These stores also provide more inspirational shopping experiences, with prominent sections for curated home and apparel pieces as well as merchandising displays that intertwine beauty products, jewelry and accessories to create “compelling style moments.”

The early results of these investments are positive. Stores like the one at the Talking Stick Shopping Center in Scottsdale, Arizona, have gone from providing dingy, down-at-heel shopping experiences to being attractive, modern spaces that are pleasant and comfortable to shop. Customer survey data show that shoppers have both recognized the transformation and feel positively about it. Satisfaction for Talking Stick customers, for example, rose significantly after the upgrades.

Interestingly, customers who recognized the improvements also said the upgrades made them more likely to visit Target’s website. This vindicates Target’s view that stores are a critical part of the digital ecosystem and are worthy of investment.

Target’s commitment to improving the in-store experience puts it ahead of physical rivals like Walmart and gives it an advantage over Amazon in categories like home and apparel, where consumers still like to touch and see products.

Small-format stores

While large stores will remain the cornerstone of Target’s strategy, the format is unsuited to dense urban markets. That is one of the reasons Target rolled out 30 small-format stores last year, with more to follow in 2018.

The productivity of these shops is more than double that of larger stores, and comparable sales growth is in the double digits. More importantly, this format has exposed Target to new audiences, such as college students on campuses, urban millennials, and city workers.

Notably, among these shoppers, usage of Target’s website has gone up, both because stores serve as a constant reminder of the brand and because they act as convenient pick-up points where online orders can be collected.

This early evidence suggests that Target has made its reduced-footprint concept work – a significant coup considering that rival Walmart has always struggled to find success with smaller-format stores.

New owned brands

Just as store improvements have been welcomed by customers, so too have Target’s new private-label brands. In apparel, Goodfellow & Co and A New Day are gradually attracting the attention of younger, fashion-conscious shoppers, and Target is starting to see better clothing sales as a result. In home furnishings, the Pillowfort and Project 62 brands have been equally well received.

As much as they are driving sales, these owned-label brands are also part of a sensible defensive strategy. Because they are only available at Target, customers who want them cannot default to Amazon or any other rival. Target is giving shoppers reasons to come to its stores and visit its website.

Walmart is now imitating Target by launching its own new apparel brands, such as Time & Tru and Wonder Nation. However, both Walmart and Amazon have some catching up to do when it comes to perceptions of quality and style.

Expanded digital capabilities

Although Target is right to recognize that both products and stores are critical ingredients for success, the company has not neglected digital.

Indeed, part of the store remodeling program involves changes to the back end that allow more product to be shipped to consumers from individual stores.

More significantly, last year’s acquisition of delivery company Shipt signaled a clear intention to capture a much larger slice of the fast-growing online grocery market – a market that Amazon, with its acquisition of Whole Foods, is now also chasing. This is sensible for several reasons.

First, Shipt gives Target the infrastructure and operational capacity to grow its market share in the online grocery channel. This is currently a segment where Target underperforms – a position that is not sustainable given the increasing popularity of buying food online.

Second, bolstering growth in grocery allows Target to improve sales volumes, which is necessary to support economies of scale and margins. This has become particularly important because of Target’s focus on low prices.

Third, and perhaps most importantly, the new platform allows Target to offer same-day delivery on a wide selection of non-food items. This makes the grocery service more attractive to consumers and will also increase the profitability of the Shipt business model.

Running the delivery service from stores will ultimately strengthen the operational performance of Target’s physical assets – something that will help justify the various investments it is making.

Lessons learned

Target’s recent history serves as a lesson that even well-liked brands cannot rely on customer affection alone for continued success. To remain relevant, retailers need to rethink and reshape their business models to deliver what modern consumers want.

Target has also demonstrated that change requires bravery and commitment. It would have been easy for the company to make cautious, inexpensive changes – but in the face of intense competition, this wouldn’t have been sufficient to deliver meaningful results. Indeed, it would have left Target vulnerable.

The final lesson is that cooperative thinking is essential. All the changes Target has made are part of a broader vision to create a retailer fit for the future. Changes in stores help digital growth, brand enhancements support website and store sales, and online is shaping the way stores work and function. This unified approach is key to success.

The actions Target is taking today will ensure it remains both successful and popular tomorrow.

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