The end of Target? Finding fashion in a competitive market

TargetThat it’s a year of transition for Wesfarmers’ struggling department store brand Target is something the market seems to agree on. Indeed, it was the buzzword of choice for chairman Richard Goyder when trying to explain the struggling brand’s continued losses to shareholders last week and remains the headline under which Target boss Guy Russo is reshaping the business. 

But despite Russo’s continued assurances to inquisitive analysts and investors, the question of exactly where Target’s transitional year will take the brand remains open to debate – leading many to predict a less than positive future for the long standing Australian retailer. 

Target’s revenue fell 17.7 per cent for the half year ended 31 December, with EBIT falling from $74 million in 1H16 to $16 million. Earnings for Wesfarmers’ department store division were saved only by a 16.3 per cent increase in EBIT at Kmart to $371 million. 

The disparity between the performance of the two brands has not gone unnoticed. Several analysts who IRW spoke to agreed that Kmart’s low price approach has won over customers and will continue to drive growth in the business.

But according to Queensland University of Technology professor Garry Mortimer, it puts Target in a difficult position. Russo has opted to implement many of the changes he made when shepherding Kmart to its current position at Target – leaving customers puzzled.

“Customers today understand what Kmart represents, but they don’t understand what Target represents,” Mortimer told IRW. “Is it supposed to be fashion? Or is it supposed to be cheap clothing and consumer electronics? Target has lost its market position.”

Since taking the helm at Target, Russo has repeatedly committed to transitioning the brand from its heavily promotional past to a simple, easy-to-run every day low price (EDLP) offer. 

In the last half year, Russo has decreased inventory levels by more than 20 per cent and, by has reduced SKUs by over 40 per cent by deleting “unprofitable ranges”. But despite a decision to end Target’s well-known annual toy sale, the retailer has been unable to avoid a heavily promotional retail climate.

“We realised that as we want to move to EDLP, that maybe it should be a slower move than the strength I really wanted to do in the first place,” Russo told shareholders.

“Going straight to EDLP is not the right answer…you have do it commercially right.”

Russo said that sales were adversely affected by the continued shift to EDLP and the cutting of bad ranges, and that the business would not incur restructuring costs from 2H16 in its FY17 results.

Finding fashion

Price investment remains an ongoing focus for the business, but Russo also understands the need to differentiate Target from Kmart, signalling his intention to take the business “back to high quality fashion” with “low prices”.

The ambitious plan will, in Russo’s own admission, drag out Target’s year of transition well into FY18, with losses expected to continue as the business attempts to morph into the ‘better and best’ offer it used to trade on.

“[It] won’t happen until inventory levels drop, buyers and designers have nailed fashionability, and we’ve located some really good quality factories,” Russo explained.

Whether Russo can successfully turn around the retail brand’s offer remains to be seen. A former employee familiar with the company agrees with the vision and told IRW that Target has lost the middle-of-the-road customer who can’t afford Myer, but wants better quality products than those at Kmart or BigW. Meanwhile specialty retailers like Just Group have picked up the slack.

Mortimer agreed, adding that Target’s move away from brands like MAC cosmetics and Stella McCartney-designed products have left the company looking too much like Kmart.

While finding quality is a priority, the retail landscape is very different today than it was in Target’s heyday, argued IBISWorld senior industry analyst Lauren Magner.

“Kmart is currently cannibalising all the sales from Target, so it has to become more fashion-forward,” Magner said. “But the issue is that it will then be competing directly with the likes of H&M, Topshop and Zara.”

With Myer also in the mix, Russo explained that he has spent time studying his local and international middle-market competitors and that the going plan is to match them, but with better prices.

The challenge that lies ahead

Winning back the customers who have fled from Target in recent years remains front of mind. A former employee said that while the toy sale was not profitable, it did drive considerable foot traffic, indicating the sale was axed too soon.

Concern was also raised in last week’s investor briefing that foot traffic had stunted, raising questions over how Target can keep interest during its transition, getting customers onboard with the new model in the process, said the former staff member.

Differentiating Target from Kmart in the eyes of consumers is still a challenge, which could be best addressed by taking Target back to its marketing roots. Familiar advertising campaigns that leverage the considerable brand equity the department store has built up over its long history could renew relationships with old customers and ignite interest with new ones.

Another ongoing issue, according to both Mortimer and Magner, is what is considered to be a “bloated” store profile, which extends even to Kmart and Big W.

“Within the Target/Kmart relationship alone, there are shopping centres that have both those businesses,” Mortimer explained. “In Turnbrook [Queensland] they are literally vying for the same customer wallet in a relatively small suburban centre – consumers won’t go to both.”

 

Consolidation is expected, but as Citibank’s head of consumer research, Craig Woolford, suggested earlier this year, store consolidation is difficult because of long-term leases binding the companies into bad stores.

 

The future of Target

Russo’s transition to an EDLP model has left an important door open for Wesfarmers, Mortimer pointed out. By transitioning Target in a way that brings it into line with Kmart’s offer, the possibility remains that it could be merged into Kmart if performance goals are not met.

“Target will simply re-badge to Kmart, closing those sites which duplicate in the same complex,” Mortimer said. “They have a strong supermarket division; they should only have one department store – that looks like what they are focused on.”

Mortimer expects the move to occur by FY20 if there is no drastic change in Target’s performance, which was echoed by a former employee familiar with the company.

Two Target stores were converted to Kmart in 1H17, with an additional Target store closing completely, bringing its total portfolio to 304. Kmart opened three stores, not including the conversions, for the half year, bringing its store total to 214.

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