Target’s Woes Reflect Broad Pressures on Retail Sector

Move to “lower gross margin” is a warning sign of a race to the bottom

Author: Andria Cheng

February 28, 2017

For the already discount-addicted retail industry, the price still doesn’t seem right.

A large portion of the retail sector is facing renewed pressure on pricing as the key driver to get shoppers to buy. Target became the latest to buckle under this new strain, conceding that it will compete aggressively on price amid disappointing results.

Target’s shares slumped on Tuesday after the company reported downbeat fourth-quarter same-store sales and profit and gave disappointing full-year forecast. That was a sobering change for Target: Its comparable sales, after having outperformed those of Walmart for the most part since 2010, fell for third straight quarter, lagging gains at both Walmart and the sector average, according to Retail Metrics data.

Target CEO Brian Cornell blamed its results on the impact of “rapidly-changing consumer behavior,” which sent its comparable online sales up 34% while physical-store sales declined. The bifurcation of online vs store sales was also evident at other retailers from Macy’s to JC Penney. Cornell also repeated another issue echoed by many of his retail counterparts: consumers are spending more on experiences and things that make them feel they are buying “into a greater purpose.”

“Our industry is in the midst of seismic shift,” Cornell said at the company’s annual investor and analyst meeting. “There’s a profound shift in the consumer mindset. The shift in channel preference is real and only gaining momentum. We’ve not seen this number of distressed retailers in the sector since 2009.”

In a poignant slide presentation during the presentation, Cornell showed store closings or liquidations by retailers from American Apparel and The Limited to Macy’s and Sears. In another slide, there were the highlights of outperforming retailers from Costco to T.J. Maxx parent TJX, the winning camp he promised to put Target in.

To do that, he said Target will aggressively compete on price, remodel 600 stores the next few years and open its smaller-format Target stores in cities and college campuses and roll out more products only available at its stores, such as its new Cat & Jack line of kids’ clothing. He also vowed to revamp the company’s supply chain to cut costs and increase speed.

While those strategies sound sensible, Target, like many retailers, still has a tall order ahead. Lowering prices on consumer goods and grocery to attract more mid-week fill-in shoppers still leaves it competing with Amazon on the online front and and Walmart, Kroger and others on the physical store side. Walmart, for its part, also has vowed to “invest in price” and has purchased among moves to help it vie against Amazon at the sacrifice of its own gross margin.

"The worst thing you want is to get caught in the muddled middle."

“The worst thing you want is to get caught in the muddled middle, and perhaps that’s where Target is,” said Don Stuart, a managing partner at Cadent Consulting Group, which counts large and small CPG manufacturers among clients. “All of a sudden when your competitors start to move up and down, you get left in the middle. Target isn’t competing just against Walmart and Kroger but also increasingly against Amazon.”

Retailers’ attempts to compete on price also will likely pressure the already struggling packaged goods companies, which are in the midst of their own challenges to react to consumers, especially millennials, increasingly seeking fresh, natural and less processed food and consumer goods. Retailers’ low-price move will trickle down to manufacturers as they will have to help pay for retailers’ lower-price strategy, Stuart said. Trade promotions, or what CPG manufacturers pay to their retail customers to help drive sales, remains the biggest portion of manufacturers’ marketing spending, a recent Cadent survey of CPG manufacturers found.

“It does feel like a race to the bottom,” said Ken Perkins at Retail Metrics. “I don’t believe [Target] has any other choice unless it wishes to continue to cede market share to competitors.”

While Target’s move on Tuesday didn’t involve any closing of its over 1,800 U.S. stores, it remains to be seen how that may pan out. According to commercial real estate research firm CoStar, more than 10% of retail space, or nearly a billion square feet in the U.S., still needs to be “rationalized.”

“We have an overstored America,” Cadent’s Stuart said.

Photo credit: Flickr