Target: The Cool Factor Fizzles
Lori Hardwick was a devoted Target shopper. Like many Americans, she was wowed by Target Corp.'s (TGT ) hipper-than-Wal-Mart marketing campaign. But lately, Hardwick, who manages a Chicago financial services firm, has soured on the trendy discounter. "I used to think Target was a step up," she says. Now Hardwick visits her local store less often.
If Target's recent numbers are any measure, more and more Americans are following suit. Over the course of 2002, Target's same-store sales growth slipped from a high of 6.8% in the first quarter, to -1.1% in the fourth. So far, this year isn't any better. Although Target projected a sales hike of 1% to 3% for January, it reported sales up just 0.3% on Feb. 6.
Has Target lost its mojo? The weak economy isn't helping, but analysts say blame also lies with Target's strategy. It has long aimed at drawing higher-end buyers into the stores with its zippy ads, designer apparel, and trendy kitchen doodads, in hopes that they'll buy plenty of discount-chain staples such as detergent, paper plates, and toothpaste. But buyers are no longer flocking to Target for its cool stuff--and those who do often skip the staples in favor of cheaper rivals like Wal-Mart Stores Inc. (WMT )
The result: Target is saddled with the higher marketing and fixed costs needed to attract upscale customers even as Wal-Mart and others are discounting heavily and, in some cases, muscling in on its high-style niche. The combination has hit earnings hard: According to UBS Warburg, Target's earnings grew an estimated 6.5% for the quarter ended Jan. 31, well below the 21% profit growth it posted a year ago. Says Salomon Smith Barney analyst Deborah Weinswig: "Target is between a rock and a hard place."
Target's advertising-heavy strategy is an increasing burden. The retailer, which declined to comment, spends 2.4% of sales on marketing. Wal-Mart spends just 0.3%. The high marketing costs are one big reason slowing sales hurt Target more. For every one percentage point fall in same-store sales, Target loses 3 cents a share in earnings, says Weinswig. The same sales drop costs Wal-Mart just 2 cents a share.
It doesn't help that Target is being squeezed in apparel, which accounts for up to 25% of sales. Wal-Mart has improved the style and quality of its clothing, yet is still able to underprice Target. In the third quarter of 2002--the latest figures available--Target's market share in apparel dropped from 3.7% to 3.5%, while Wal-Mart's surged from 12.4% to 12.9%, according to market researcher NPDFashionworld. And they aren't the only resurgent rival. Department store Kohl's Corp. (KSS ) is expanding aggressively. Its market share in apparel surpassed that of Target in the third quarter of 2002, rising to 4.4%, up from 3%.
That's why Target's failure to deliver on the promise of its hip marketing is such a big issue. Part of the challenge is the stores themselves, which resemble a typical discounter. "The cool factor disappears as soon as you walk in," says Kenneth H. Walker, head of the consulting firm Retail Options. The other trick is finding the right mix of merchandise to keep the hipsters and upscale buyers coming. Despite introducing a host of new designer wares, from youth-oriented clothes by Marc Ecko to home accessories from Todd Oldham in the last year, Target's sales growth stalled anyway. And that's the uncoolest cut of all.
By Robert Berner in Chicago