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Is Target Cooling? Slow Growth Feared At Hot Discounter

NEW YORK — Target Corp. may have trouble retaining its status as a retailing phenomenon while it tries to keep up with its own ultrahip image, ultratough competition and ultrahigh expectations.<br><br>While Wall Street generally remains bullish...

NEW YORK — Target Corp. may have trouble retaining its status as a retailing phenomenon while it tries to keep up with its own ultrahip image, ultratough competition and ultrahigh expectations.

While Wall Street generally remains bullish on the Minneapolis-based retailer, analysts acknowledge the firm, with its own presence expanding and bankrupt Kmart waning, is increasingly going toe-to-toe with Wal-Mart — the world’s largest company and a competitor that continues to get better, as well as bigger.

The firm has been a juggernaut in the last few years, but there are signs it may be heading for somewhat slower growth. For five years, through the end of fiscal 2001, the Target division drove revenues up 60.5 percent to $32.59 billion, while its pretax profits shot up 97.8 percent to $2.55 billion.

J.P. Morgan Securities analyst Shari Schwartzman Eberts said, “Target still has a lot of growth in its core discount store format. Clearly, it’s concerning that a large portion of its growth over time comes from lower-return businesses like credit cards and SuperTarget. I’m not willing to declare the end of growth at Target, but clearly the growth vehicles that they are emphasizing are lower return.”

The Target bulls inhabiting Wall Street may just be finding themselves less enamored with the firm. In the last week-and-a-half, Goldman Sachs & Co. and US Bancorp Piper Jaffray pulled down their ratings on the retailer citing, in part, weak September comparable-store sales trends.

Ladenburg, Thalmann & Co. analyst Eric Beder noted, “With the comparison getting much more difficult going forward with comps — that haven’t been that strong over the last two months — I’m not sure how much longer they are going to remain a darling of the industry. If they can [post comps at above] 2 to 4 percent, they are really showing something positive. I don’t think people are expecting it, and I don’t think they’re planning it.”

As the unfriendly back-to-school season demonstrated, Target is not alone with its less-than-robust top line, as sales trends in the discount sector and all of retailing have been difficult in recent months. Profits have been strained as well, and not just in the lower-tier sectors of retailing. Luxury stalwart Gucci Group last week reported that its net profits fell 55.1 percent in the second quarter. This came on top of a 42.2 percent drop in the preceding quarter.

This story first appeared in the September 30, 2002 issue of WWD.  Subscribe Today.

In its attempts to stay above the fray and maintain its growth, Target’s touchstone has been differentiation.

Calls to Target seeking comment were not returned.

In the end, fashion and style, through its many designer offerings, may be all that stands between Target and its much-larger competitor Wal-Mart. Higher-end fashion, however, has not escaped Wal-Mart’s notice as the firm’s focus on apparel has increased. And where once the focus for the two discounters was more in basics and commodity products, apparel has now become an important front in the war for market share between the two firms. Ultimately, fashion could prove to be the major differentiator since most of their other products — from food to beauty to lawnmowers — are from mostly the same brands.

Certainly, the Target-versus-Wal-Mart duel is not a battle for sheer size, though both firms qualify as giants. Target has 1,107 discount stores across 47 states, including 82 grocery-hybrid SuperTargets. On the other hand, Wal-Mart weighs in with 2,782 stores in the U.S., with more than 40 percent of them SuperCenters offering food.

Jerry Storch, vice chairman, told the Grocery Manufacturers of America this summer that if Target opted to grow by rolling out discount stores only, it’s possible to project a company with revenues of about $115 billion in 10 years. However, rolling out 30 to 40 SuperTarget stores annually could produce a company with a top line of $160 billion over the same time frame. “This is not a projection, but a mathematical formula applied to the number of stores,” Storch emphasized, indicating the importance of food to the discounter’s future.

Target has its eye on 2,010 stores by the year 2010 — still below Wal-Mart’s current level. About 400 of them are slated to be SuperTargets.

Storch noted of Wal-Mart, “We’re fierce competitors. We’re locked into a very heavy battle in our marketplace, and we want to win.” Price is an important element of this confrontation. “If we’re in the business of selling the same stuff that the guy down the street has, we’re not going to be able to sell it for more. I don’t care how big the store is or what it looks like,” summing up Target’s overall strategy in all product categories.

So far, Target has been successfully compensating for what it lacks in size with a formula that combines low prices with a panache that at times verges on the kitsch. It’s one reason the firm’s name is sometimes pronounced by the fashionable in a faux French accent as Tar-jay. These higher-income consumers generally don’t shop at discounters, but find Target palatable, given such apparel offerings as Mossimo, Cherokee, Stephen Sprouse and, more recently, Liz Lange with a maternity collection set to hit stores late this year. Todd Oldham, Philippe Starck and Michael Graves give the company’s home offerings their designer flair, and Eddie Bauer and Woolrich add to its home assortment, as well. As was recently confirmed, Cynthia Rowley will also offer a collection of home products called Swell. Details on the line itself are still sketchy, but sources indicated the lifestyle collection will include everything from carpets to comforters and will bow in the spring. Also, word has it the firm is pitching designer-cum-talk-show-host Isaac Mizrahi to create an accessories collection.

Estimates place sales of Target’s total designer offerings at around 15 percent of what the discounter rings up at the register. This makes for revenues of about $4.9 billion from the discounter’s signature offerings for the year ended Feb. 2. Total sales for the company, including credit card revenues as well as the Mervyn’s and Marshall Field’s department stores, totaled $39.89 billion last year.

“Being chic is critical to their growth, because it’s their chicness that allows them to coexist with Wal-Mart,” said J.P. Morgan’s Eberts. Of course, “chic” takes on a different meaning for the discounter than it does for, say, Bergdorf Goodman. And chic, like so much of fashion, is hard to attain and even harder to hold on to.

While still lacking the cache of Mossimo, Wal-Mart, after testing its George women’s line in 1,600 U.S. doors last fall, rolled out the line’s fall-holiday offering to all of its stores this month.

George Davies, who has since left the company and was previously a Next designer, launched the line 12 years ago at Asda — a British retail chain now owned by Wal-Mart. George men’s wear was also introduced last December in Wal-Mart’s U.S. stores and will be in more than 2,000 locations this year. The George line rakes in sales of $1.5 billion in the U.K.

Eberts noted, “Clearly, their launch of George, if it’s successful, will have an impact on everybody who sells apparel. If Target is unable to maintain their differentiated look, competition with Wal-Mart would be much more difficult, but we expect that they will be able to maintain that differentiation.”

Analysts also noted that Wal-Mart, with its emphasis on basics and philosophy of always stressing the lowest-possible price, isn’t attempting to compete head-to-head with Target on apparel. The two firms reportedly overlap in about 70 percent of their markets.

The two firms also cater to different customers. While Wal-Mart would not provide such data, Target, on its Web site, said the median age of its customer was 44 with a household income of approximately $51,000. The vast majority, or 80 percent, of the discounter’s customer base is female, 43 percent of whom have children at home. About 39 percent of Target’s customers have completed college.

The Census Bureau reported last week that the median household income in the U.S. declined 2.2 percent in real terms in 2001 to $42,000.

Ladenburg’s Beder, who noted that the median income of Kmart’s customers, before the firm entered Chapter 11 in January, was $42,000, estimated the median annual income of Wal-Mart’s customers at $35,000 to $40,000. Of course, Wal-Mart’s greater number of stores means it captures both more of the middle- and low-income customer than Target does.

Retail consultant Walter Loeb pointed out, “In order to distinguish themselves from Wal-Mart, their chief competitor or Kohl’s, a strong competitor, Target has to continue in the mode of having something very special that the consumer can’t get anywhere else.”

Moody’s Investors Service fixed-income analyst Elaine Francolino added, “What Target needs to continue to do is what it’s done, which is every year take on some new brands or extend some of the brands that work well for them. That is the challenge for them, but so far every indication is that they can do that.”

However, she added, in a recent report, “Now that Target has successfully differentiated itself with unique and fashionable merchandise, it may become more difficult for the company to consistently find new trend-right merchandise to sustain its high level of customer traffic.”

C. Britt Beemer, founder and chairman at America’s Research Group, a Charleston, S.C.-based consumer marketing consultancy, said, from consumers, “Target gets great ratings and they certainly have attracted a large group of younger customers that were, for example, Gap customers.”

He added that 59 percent of Target’s apparel shoppers polled described them as being on-trend. Most retailers score on-trend percentage ratings in the 20s or low 30s. “To some extent, it may be a matter of ‘on-trend and I can afford to buy there,’” he noted.

Customers, he said, “don’t look at Wal-Mart as much of an apparel store. The Target customer is very apparel-focused, much more than their two [discount] counterparts because that’s what Target stands for.”

This speaks volumes for Target’s ability to create an image in its customers’ minds, a skill enhanced by the kind of eye-catching advertising not usually associated with discounters. Now, as with any good performer, the toughest act may be following itself.

Mike Toth of Toth Brand Imaging laid out three crucial elements of any branding strategy: communicating the brand message, having an appropriate culture within the company and branding the experience with the customer.

On the first two points, Toth gave Target high marks — with special praise for its advertising prowess — but on the third element of branding, he said he wasn’t sure if they’ve perfected their message at retail. “It looks just like another mass box and I think they need to spend some time on what kind of experience they want the customer to have.”

With its chicness, he said, Target’s given consumers “permission” to go to the discounter, but the question remains whether the shopping experience lives up to that image.

“They’ve been incredibly courageous and brave doing what they’re doing, but they still need to follow through,” he said. “They’re in the second inning. The ads are really cool, but when you get into the store, I just don’t feel the hipness, coolness and all that stuff. So I think that the promise is a little bit unfulfilled.”

Toth added: “It’s important to be yourself and, if Target is cool, then they have to keep being cool and that’s a tough one to play. You’re going to recruit the coolest, most innovative people in the world and you have to keep it going and keep it fresh. They’re going to be on that edge and they’re going to have to stay there and walk that line.”

Marc Gobe, president of New York brand consultancy firm Desgrippes Gobe and author of “Emotional Branding,” noted, “What Target has going, which is something that the department stores have forgotten to do, is that they’ve brought exclusivity. If you go to department stores you see the same brands everywhere. It’s a sea of sameness. People know what they will get. Emotionally, they know that they’ll find innovation and stuff they will not find anywhere else, and that’s very exciting.”

Designer Mark Montano sees Target’s strategy of differentiation as a positive for the design set. “What you find now is, because style has been shoved down everybody’s throats for so long, there aren’t a lot of outlets for big-name designers.” Target, however, has provided “a chance for some designers to reach their whole market and to be really broad based.”

Mark Miller, analyst with William Blair & Co., noted, “The company’s seeing a growing list of people who want to partner with them, not a shrinking list.” He added, on the competitive front, “Wal-Mart’s taking share from everyone, including Target, but Target’s success has come from taking share from other people. Target’s success or failure is more in their own hands, in the way they manage their business.”

Ladenburg’s Beder noted, “Some of these people they’re signing, I’m not really sure what it does for them being chi-chi. Mossimo was a brilliant stroke, but at the end of the day, they’ll probably get better traction from Woolrich and Eddie Bauer. I’m not sure how much you can take Target to that level and not take them away from their core customer.”