Target Corporation: Internal and External Environments
Introduction
Target Corporation is one of the leading retail companies in the United States. With a nationwide footprint that includes 1,790 stores, the company has been recognized as one of the top ten global retail brands (MarketLine, 2016). Although the company recognized an increase in sales for the 2015 fiscal year, Target did experience a decline in operating and net profits (MarketLine, 2016). In the past, Target has been able to differentiate itself by offering product lines that emphasize value. Target’s product lines have offered its consumers products that are slightly upscale for a discount chain, but at a price point the demographic finds reasonable (MarketLine, 2016). Although this point of differentiation remains, it has been eroded by competitive and economic forces. In other words, Target’s brand and product lines are becoming less differentiated in the mind of its target consumer. In addition, the target consumer is more price sensitive and the company’s 2013 data breach caused damage to its reputation (MarketLine, 2016). As a result, the two market environmental segments that are impacting Target are the economic segment and the technological segment. Of Porter’s five competitive forces, the two impacting Target the most are threat of substitutes and the bargaining power of customers/buyers.
Strategically, Target’s management needs to evaluate the retailer’s product lines. Management should consider eliminating product lines that overlap. Product lines that do not help differentiate the retailer from its competitors should also be eliminated. Likewise, the company may need to bring in new product lines that help accomplish reestablishing Target’s competitive advantage of offering higher quality for less. The problem is that the company’s slogan of “Expect More, Pay Less” is too similar to Wal-Mart’s “Save Money, Live Better.” Target does seem to be responding to consumers’ increasing price sensitivity, by offering discounts through its Cartwheel mobile app and REDCard loyalty program (Target Corporation, 2016). Since the majority of Target’s sales revenue stems from household essentials and food and pet supplies (Target Corporation, 2016), management should continue to focus on providing streamlined, quality product lines that the competition cannot offer. The company’s opportunities lie in hardlines, and home furnishings and décor. It would be best to find suppliers and brands that not only appeal to the Target consumer’s need for an upscale-like product at a discount price, but further separate the retailer’s offerings from its competitors. As operating and profit margins are shrinking, management will need to either justify a larger markup on its product offerings or find ways to reduce expenses.
Resources, Capabilities, and Core Competencies
In terms of resources, Target Corporation had total assets valued at $40,262 in millions as of January 2016 (U.S. Securities and Exchange Commission, 2016). The company’s cash and cash equivalents is valued at approximately 4 million, with slightly 8.6 million dollars worth of inventory (U.S. Securities and Exchange Commission, 2016). Target’s long term assets are in greater proportion to its current assets, which the bulk of long term assets being buildings and property improvements. Accumulation depreciation also comprises a significant portion of Target’s long-term assets; it is assumed that this depreciation stems from buildings. Target has accumulated approximately 8.1 million in retained earnings (U.S. Securities and Exchange Commission, 2016). Although management may decide at a future date to pay a portion of those retained earnings to shareholders in the form of dividends, this is a substantial amount that could potentially be reinvested in the company’s operations.
In terms of human resources, the company employs approximately 347,000 individuals (MarketLine, 2016). Target also has a substantial amount of brand equity and recognition in the marketplace. The company is often considered Wal-Mart’s main competitor, although the Target brand also competes with retailers such as Kohl’s and Kmart (MarketLine, 2016). Target has formed partnerships with national chains, such as Starbucks, to offer its guests additional food choices within its stores. Although Wal-Mart has formed similar partnerships with fast food chains, such as McDonald’s, the appeal of the Starbucks brand to Target’s market segment helps generate additional foot traffic.
As the nation’s second largest retailer, Target is capable of influencing the purchase behavior of consumers. The company is adept at generating sales revenue and appealing to consumer needs. Target’s loyalty program’s success and growth demonstrates the retailer’s ability to adapt to changing consumer preferences. The success and growth of the REDCard and Cartwheel mobile app illustrates that Target has a large, loyal consumer base, and that the company is able to implement several methods of rewarding consumers for their loyalty. The Cartwheel mobile app takes advantage of social media platforms, such as Facebook, in order to generate additional interest in discounted items. This shows Target’s ability to keep abreast of market trends and leverage the digital age’s form of word-of-mouth advertising. Target obviously has vast technical resources, the ability to command and maintain a strong market presence, leverage shopping center appeal and generate foot traffic by anchoring rental space, mass market to consumers who are looking for stylish, slightly higher quality merchandise for a reasonable price, and leverage its own brands. The company sells merchandise under quite a few of its own brands, including Market Pantry, Simply Balanced, Cherokee, and Up & Up (MarketLine, 2016). Target’s core competencies include forming retail partnerships, differentiating its merchandise from competitors, securing and maintaining customer loyalty, and market adaptation.
Environmental Segments
Of the six general environmental segments, the economic and technological segments are impacting Target the most. The economic segment includes factors that apply to the macro economy, such as consumer confidence, saving rates, inflation, interest rates, trade deficits, and gross domestic product (GDP) (Kotler & Keller, 2008). In contrast, the technological segment includes factors such as the introduction of new communications technology, new product developments, creative product solutions, and implementation of knowledge (Kotler & Keller, 2008). The main reasons why both of these segments contain the most impact for Target are changing consumer perceptions of Target’s product offerings, increased consumer price sensitivity, product overlaps, the 2013 data breach, and changes in payment technologies.
Even though the U.S. economy has made substantial improvements since the 2008 financial crisis, consumers have become increasingly price sensitive. This is likely due to stagnant and declining wages. Unemployment may be down, but that does not necessarily mean that American households are earning enough income to afford the basics and get ahead. Part-time and freelance positions that lack benefits are becoming the norm, as are lower-paid service oriented jobs. It is also probable that consumers are still wary from the after effects of the 2008 economic downturn and as a consequence are more vigilant about product value. As Target is a retailer that primarily sells what is known as commodity products, price points and value tend to become a focal point for consumers. Many substitutes are available for consumers, and those who face tighter budget constrictions will be more likely to purchase the product that is available at the lower cost. Although Target’s REDCard program and Cartwheel mobile app help offset the price differentials between competitors, consumers need a more compelling reason to choose Target’s product lines.
Target stores feature a large variety of product lines that sometimes overlap with products offered by the company’s major competitors. The retail chain has also been struggling with its grocery and food sales (MarketLine, 2016). Target has implemented superstores in select markets, as well as stores that feature a reduced offering of food and grocery items in other markets. The company’s main competitor, Wal-Mart, has been successful in implementing grocery sales and has experienced growth in this category (MarketLine, 2016). Target has been able to differentiate its product offerings through its apparel and home furnishing products in the past (MarketLine, 2016). As consumers have become more price sensitive and competitors such as Kohl’s have offered similar or higher quality products at or near the same price points, Target’s reputation for offering higher quality products at discount level pricing has eroded. Offering discounts through the REDCard program and the Cartwheel mobile app have likely cut into Target’s ability to maintain healthy profit and operating margins, as the discount retail market has become increasingly competitive and consumers’ price sensitivity has increased in response to economic fluctuations. Increasing labor costs, spurred by federal and state government legislation to increase the minimum wage, has also put pressure on Target’s operating and profit margins (MarketLine, 2016).
The technological segment has had a monumental impact on Target Corporation within the past three years. At the end of 2013, the company experienced a massive data breach that resulted in the theft of customer data and credit/debit account information (MarketLine, 2016). The data breach occurred during one of the busiest shopping periods of the year – the start of the Christmas shopping season. While Target is certainly not the only business to be impacted by a data breach, this occurrence became widely known and publicized. Consumers were inconvenienced by unauthorized charges on their accounts, had to have debit and credit cards reissued, and Target’s customer service centers were unprepared for the amount of requests to reissue or close REDCard accounts. The data breach revealed a number of possible vulnerabilities in Target’s technological infrastructure, as well as its vendor management policies. The media spotlight on the data breach due to the number of customers affected more than likely eroded consumer trust in the retailer. Target not only because fiscally responsible for unauthorized charges, but had to pay for the costs of identity theft monitoring for an undisclosed amount of consumers (MarketLine, 2016).
Although the company’s response was swift once the malware was discovered on its point of sale systems, the fact that this type of large scale breach occurred in the first place makes consumers uneasy with using non-cash payment methods. The United States government has begun implementing legislation that requires card makers to integrate chipset technology. This has a financial impact and technological infrastructure impact on retails that must now install upgraded point of sale card readers. Target, like other retailers, has begun upgrading its point of sale hardware to accommodate this enhanced security feature. The chipset security feature is thought to prevent unauthorized users from obtaining card account information as easily as they have been able to from magnetic stripes. The United States is one of the last developed countries to require the chipset technology, a fact that has made consumers and retailers within the United States particularly vulnerable to data breaches.
Competitive Forces
Porter’s five competitive forces represent external environmental factors that can put pressure on a business. Depending up on the strength of the forces, the corporation’s internal environment and management’s ability to successfully implement new strategies, a business can succumb or experience significant financial loss. The two competitive forces that are having the most impact on Target include the threat of substitutes and the threat of buyer bargaining power. As mentioned in the previous section, the macroeconomic environment in the United States has not only made consumers more price sensitive, but opened up opportunities for competitors to grab Target’s market share based on price.
Target’s ability to differentiate its commodity products from competitors has eroded, but the company has been able to respond by emphasizing customer rewards in the form of regular discounts, a more pleasant shopping experience, and superior customer service. Some stores have implemented self-checkout stands to help alleviate long lines at the register, and provide guests with more control over their checkout experience. Target does offer a wide variety of its own brands, many which become internal sources of competition. For example, the company’s line of Market Pantry food items competes with its Simply Balanced organic food items. In addition, the high prevalence of Target brands that overlap with each other may cause friction with name brand suppliers, particularly in terms of desired shelf space. If consumers do not have an incentive to purchase product lines from Target, either on the basis of value, promotional discount, loyalty discount, prestige or product uniqueness, price sensitive consumers will likely choose a similar product with the lowest price point.
The bargaining power of buyers in Target’s case is its consumer base. As a mass merchandise discount retailer, the company’s strategy is to achieve as much market penetration as possible. In other words, the level of market segmentation is lower than that of a specialty retailer (e.g. a vitamin and supplement store) appealing to specific needs or lifestyles. While Target does seem to be targeting a mass consumer segment that has a higher level of income and is less price sensitive than Wal-Mart’s consumer base, the two overlap quite a bit. Although it is unlikely that a new major discount retailer will be able to enter the market, consumers have a plethora of choices when it comes to brands, product lines and stores.
Strategic Recommendations
In response to the increasing price sensitivity of consumers and eroding product line differentiation, it is recommended that Target’s executive management implement the following:
A complete analysis of what product lines overlap, which product lines can be consolidated or eliminated, and which product lines loyal REDCard holders and Cartwheel mobile app users are more likely to buy.
Evaluate the current uniqueness and level of differentiation of product lines. Determine if the product lines needs to be rebranded and/or repositioned. Also, determine if new unique product lines need to be brought in at the retail level.
Continue to find ways to differentiate the Target brand when it comes to in-store service, online service, and loyalty program rewards. Integrate data analytics on purchases to help narrow down which product lines can be streamlined.
Introduce product lines that can carry a higher markup to cover overhead costs and profit margins.
Consider customizing the consumer’s shopping experience via the loyalty program and identify separate niche consumer segments for better product targeting and positioning.
Conclusion
Target Corporation is a formidable retail giant that has been able to successfully over high quality, differentiated product lines to its consumers at a discount price. The company has witnessed increased sales revenues in recent years, but falling profit and operating margins. Increased consumer price sensitivity, overlapping product lines, and an erosion in product differentiation have contributed to Target’s margin declines. In addition, macroeconomic and technology-related challenges –including a major data breach of customer data – has kept Target struggling to maintain a competitive advantage. As the brand still enjoys a good reputation and large retail footprint, it would be in management’s best interest to start streamlining product lines, continue to differentiate based on service and established customer loyalty, and leverage data analytics to better appeal to customer needs.
References
Kotler, Phillip & Keller, Kevin Lane (2008). Marketing Management. New York: Pearson
Prentice Hall.
MarketLine (2016). Target Corporation SWOT Analysis, 1-10. Retrieved from
http://search.ebscohost.com/login.aspx?direct=true&db=bah&AN=113279807&site=ehost-live
Target Brands, Inc. (2016). About. Retrieved from https://corporate.target.com/about/
U.S. Securities and Exchange Commission (2016). Target Corp. Retrieved from
http://www.sec.gov/cgi-bin/viewer?action=view&cik=27419&accession_number=0000027419-16-000043&xbrl_type=v#
