Target makes $1B bet on digital

By George Anderson, RetailWire

The following appears courtesy of RetailWire.com, an online discussion forum for the retail industry.

On his late February earnings call with analysts, Target CEO Brian Cornell said the company's first priority was "to drive industry leading digital sales growth" and "become a leading omnichannel retailer." Subsequently, Mr. Cornell and his team began to provide analysts with some answers on how they intend to achieve those goals.

For one, Target announced it would allocate roughly half of the company's $2.1 billion capital expenditures budget for technology, supply chain and inventory management upgrades to help connect more effectively and efficiently with digital consumers.

According to an announcement released on March 3, the company is looking to drive the total experience across stores, online and mobile. Target's research has found that shoppers who make purchases from its stores and website spend three times as much as those who shop in its stores alone.

Target.com had a really good fourth quarter, with sales growing 36 percent. The company expects to improve on that pace with 40 percent growth in digital revenues this year. Sales at physical stores are expected to grow between two and three percent in 2015.

Target's investments in technology and e-commerce are a clear departure from the company's past practices in which the majority of capex dollars went to opening new stores and remodeling existing locations. The retailer plans to continue expanding on its store base but shift its focus to "more flexible formats like TargetExpress and CityTarget, which cater to guests in rapidly-growing, dense urban areas."

Target is also looking to cut roughly $2 billion in costs through a restructuring plan that will mean the elimination of several thousand jobs at the company's headquarters in Minneapolis, as well as its tech hub in Bangalore, India.

Discussion Questions:

  • Do you think Target CEO Brian Cornell is correct in making "industry leading digital sales growth" the company's first priority?
  • What will Target need to do to become one of the leaders in omnichannel retailing?

Comments from the RetailWire BrainTrust:

Paula Rosenblum, Managing Partner, RSR Research

I don't think that's quite right, honestly. I think Target's first priority should be to sell things people want to buy that carry a respectable gross margin.

Omnichannel is every retailer's priority, because you get more productive inventory as part of the deal, and the customer just wants what she wants, when she wants it. But if you're not selling what she wants, or if you've got a major focus on grocery, which is neither high margin nor omnichannel ready, then my reaction is "meh."

Max Goldberg, President, Max Goldberg & Associates

With sales not growing in stores, Target has decided to focus on digital. That may hold some promise, but the move to omnichannel could be hindered by problems that plague their stores: out-of-stocks and poor selection. How can stores be used for BOPIS if the products are not in-stock in the stores?

I like the continued expansion of smaller-format stores. With the proper selection of products, this effort could add profit to Target's bottom line.

Overall, it seems as if Cornell is trying to take Target in a number of directions at once. With so many priorities, will management and employees know where to allocate time and resources?

J. Peter Deeb, Managing Partner, Deeb MacDonald & Associates, L.L.C.

Yesterday we heard that Target was going to grow its grocery business as a 2015 priority. Today it is omnichannel retailing. Can they do both in the midst of what is a major restructuring? Having lived through several restructurings in my corporate career I know how hard it is to keep the current businesses on track, let alone move them in new directions. Accomplishing these objectives will require major management focus and direction.

Gene Detroyer, Professor, Independent

This sounds like a company flailing to find a way. The first thing this company has to do is get their house in order. If they don't, no strategy will work. Target was a customer of mine 10 years ago. Their answer to why Walmart was always beating them was that vendors always sold to Walmart for less. (Not true on my part).

The same kind of thinking went into the Canadian invasion. All top-line decisions, no nitty-gritty, and a disaster. They didn't even know how to sell milk to Canadians. They never took a moment to check it out.

Now they have a new CEO, but the reports aren't changing my mind. Here are the steps for Target:

Get your house in order.

Forget the grocery expansion. It is going to be difficult, take up time and resources and you are pushing against a no-growth market.

AFTER you get your house in order, focus on omnichannel. That is where the growth is. Become a major player. Do it better than anyone else. And most importantly, don't let your current infrastructure and thinking drive your omnichannel decisions. Start with a blank piece of paper!

Mohamed Amer, Vice President, Global Consumer Industries, SAP

In Target's own announcement "Roadmap to Transform the Business," the company states four focus areas: 1. Channel-agnostic approach to growing the business, 2. Prioritizing style, baby, kids and wellness categories, 3. Localized assortments and 4. Opening more flexible formats.

I see investment in digital—inclusive of investments in technology, supply chain and inventory management—to be integral to Target's ability to deliver an inspired and enjoyable shopping experience. An equal effort on the other fronts is needed, especially to infuse excitement and freshness to their assortments. This will get Target on a path to catch up to its brand promise as well as differentiating the shopping experience and enhancing guest loyalty (and spending).

So maybe the actual top priority, or better yet the guiding growth principle for Target, is to deliver an inspired and enjoyable shopping experience no matter how and when their guests wish to do so. Digital by itself is necessary but not sufficient to achieve the company's growth goals and they need to hit on the other cylinders as well (including having the internal energy and alignment to drive this multi-year transformation). It's all about execution and it starts now.

Cathy Hotka, Principal, Cathy Hotka & Associates

Paula's right. The old Target, the one that didn't sell commodity products, had a truly compelling value proposition for customers—great style at a good price. The new Target tends to sell items that customers can find elsewhere, which only fuels a pricing race to the bottom. It's time for Target to bring back the magic.

Shep Hyken, Chief Amazement Officer, Shepard Presentations, LLC

Target has an advantage in that it has a strong physical store presence and a somewhat successful digital presence. From what I read, the store sales are soft and the obvious place for growth is digital. This isn't a reinvention. It's just running faster in a lane they are already in.

W. Frank Dell II, CMC, President, Dellmart & Company

Target is right to do anything they can to achieve sales while they are in this transition period. The problem is, omnichannel may increase sales or reduce lost sales, but these sales have a lower net profit. All one has to do is look at the increased inventory carrying cost caused by the inventory multiplier to see cost increase expenses—although this may reduce store out-of-stocks. Further, additional handling to fill the order and shipping also increase expenses.

The real value for a brick and mortar retailer from e-commerce is sales outside the service area of the store. This is truly a plus, not cannibalization sales.

Lee Peterson, EVP Brand, Strategy & Design, WD Partners

Short answer: YES. Hidden truth: DUH. If he would've said, "We're putting all our focus on opening more stores," hopefully, the board would've fired him.

Missing from this conversation SO often, though, is investment towards store level associates. Hiring, training, educating, informing, morphing, wiring, etc., etc. All of our studies say that store associates are actually a hindrance when it comes to customer perception and brand impact. This needs to be fixed as well.

Dear Brian: take some of that whiz-bang "omni" money and improve the sales staff in stores for the sake of all of us customers and good old-fashioned retail in general. Please!

Kenneth Leung, Director of Enterprise Industry Marketing, Avaya

I think the key is not to grow the channel, but to grow wallet share of the customer by whatever channel necessary. The problem with focusing on growing digital is that it invariably lets the eyes off the ball in the store, which is where the bulk of purchasing is still being done.

Read the entire RetailWire discussion...

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