Why Target US sales and profits are down
Target has ended the first half of its fiscal year with a gloomy set of numbers.
While total Target US sales are negatively affected by the removal of pharmacy revenue following the disposal of the business to CVS, the fact they are sequentially worse than the first quarter indicates that there has been a significant slowdown in trade. Same-store sales are in negative territory for the first time in two years.
Thanks to a combination of the sales declines and increased discounting and promotion – which has negatively impacted gross margin – profit has tumbled by 9.7 per cent. This fall comes in spite of some good disciplines around costs and some margin gains now the sales mix has shifted away from pharmacy.
So, what has gone wrong at Target this quarter?
There are four main factors at play.
First of these is the general retail environment which has been fairly sluggish over the past few months. Consumers have been spending, but they have been doing so more conservatively and carefully. As a mass merchant which relies on high and frequent footfall across its various categories, Target has likely been more exposed and susceptible to this slowdown than more specialist retailers. Our own data shows that existing customers have cut their visit frequency to Target, albeit only slightly; something that has brought down customer traffic and sales.
The second factor is related to the offer: There is not enough newness across many of Target’s categories, especially in those related to home; and where there is newness, Target is bad at highlighting and making a feature of it. Not only does this deter customers from visiting more frequently, it also dissuades those who come to the store on a particular mission from browsing other categories. In short, Target needs to provide more inspiration and excitement, especially in stores, to draw in customers and increase levels of conversion and impulse purchasing.
The third factor is price. The retail environment has been particularly promotional since the start of this year and this has made the communication of Target’s value-for-money message more challenging. Target is, rightly so, positioned as a retailer that offers quality products at reasonable prices; rather than as one that solely focuses on price. However, our consumer data shows customer perceptions of value for money have worsened over the past few months. Some of this is down to Target’s products becoming relatively more expensive as others have discounted, but some is also down to the rather complex array of discounts and deals that Target offers to consumers. Target’s promotional activity – with 5 per cent off for card users, Cartwheel discounts, special gift cards for bulk purchases, subscription based pricing, and so forth – is overly engineered and needs to be simplified so that consumers can more easily access the best deals. This is now especially pressing given that the retail sector is likely to become more price focused over the remainder of this year.
The final factor is related to specific categories. Electricals has been a tough spot for all retailers thanks to a weak release cycle for tablets and phones, but Target has suffered more than most here. Grocery, however, is the real issue and this is a severely underweight area of Target’s business. Admittedly, the company has tried to remedy this with initiatives like private label launches and enhancements, but these have been insufficient to drive up trade; and our data show Target’s share of customers on grocery has been declining in terms of the main grocery shop.
“Rip up the grocery rule book”
In terms of individual products, Target’s grocery proposition is not bad. However, when taken as a whole, the offer is murky: it has neither the sharp prices of Walmart or Aldi, nor the quality and sense of experience of Whole Foods, Wegmans or Trader Joe’s. In essence, Target needs to decide where its grocery proposition sits and then develop accordingly. It needs to create a more aspirational and exciting experience, including more hot food counters, takeaway options and innovative products. This has to be the mainstay of the offer, especially on fresh and perishable.
It should not, of course, sacrifice the low prices on grocery staples like washing detergent or soda, but it cannot use these as the primary driver of trade given that such offers are so ubiquitous. The focus has to be on the more aspirational shopper who doesn’t mind spending slightly more on treats and indulgences, but still wants good value for money on everyday items. This position is fairly aligned with Target’s core customer base and should also generate interest among younger consumers.
In our view, there is also an argument for providing a degree of aesthetic and physical separation between grocery and non-food. In essence, Target needs to rip up the grocery rule book and start again. Getting grocery right matters, if only because it is such an important driver of traffic to stores.
Despite these results Target has a stronger positioning than many other general retailers, but a slower retail environment is exposing its weak spots. It has a lot more work and thinking to do if it is to thrive.
- Neil Saunders is CEO of Conlumino.