Wednesday, March 04, 2015

Target: Recovering from a Straddle

This week's issue of Fortune has a cover story about Target's new CEO, Brian Cornell.  He has made some bold moves in the initial months of his tenure, including a complete exit from the company's costly failure in Canada.   The article sheds some light on a key reason why Target struggled in recent years.  We all know about the Canadian troubles and the major security breach.  Beyond that, however, the company faced some more fundamental issues in its US business.  Check out this excerpt from the article:

The Great Recession threw the company off its stride. Being trendy seemed like an indulgence in a time of depressed wages and underemployment. Target’s marketing began echoing Wal-Mart’s dogma of frugal prices rather than fun and flair. Target cut back the shelf space it was devoting to unique, unproven merchandise—whether it was home goods or clothing—and reduced the quality of some of its apparel to keep costs down. Meanwhile, Macy’s, Kohl’s, and H&M were imitating the company with their own designer collaborations.  Target was standing out less and less. To generate visits the company added more groceries, but without any distinctive touch to set it apart. By 2013 food, a notoriously low-margin business, had grown to a fifth of its revenue. Target had concentrated too much on the “pay less” part of its mantra and not enough on the “expect more” part.

This excerpt suggest that Target moved away from its differentiated positioning during the economic downturn, as it tried to compete more on price because consumers were hurting.  However, it found itself straddling its longstanding position as a highly successful differentiated player in the mass merchandiser market and the low cost position occupied by players such as Wal-Mart.  It was in no man's land - not the most efficient, frugal, low cost and low price player... nor the hip, cheap chic, fashionable player it once was.  Cornell seems to be moving aggressively to fix the problem.  

Target succeeded historically because it chose to stand out from other mass merchandisers, differentiating slightly from the low cost pack.  Expect more, pay less.  It didn't become Nordstrom, but it was clearly not Wal-Mart.  JetBlue has tried to do the same thing in the airline industry.  It's a tricky strategic position though, because you can't completely ignore cost and efficiency.  You cannot have the cost structure of a luxury retailer.  When recessions hit, it can become tempting to compete more aggressively on price so as to retain customers.  However, that can damage the firm's differentiated positioning in the long run.  Full disclosure here... Target is a great partner of Bryant University.  I'm rooting for Cornell and the entire team to continue to reinvigorate the organization. 

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