Target Aims for 600 More Stores
By George Anderson
Target is on roll and the company’s chairman and chief executive, Bob Ulrich, said the retailer has an ambitious plan in place that will see it add 600 new stores over the next five years.
Beyond that period, said Mr. Ulrich, Target believes it can double its current number of stores (1,330) before it runs out of room to grow in the U.S.
The company is looking for available space in both urban as well as typical suburban locations. “We’re in the South Loop of Chicago. We’re in Brooklyn and we’re in Queens. We’re certainly looking at a lot of metro locations,” said Mr. Ulrich.
Experts warn that challenges lie ahead for Target as it pursues its growth strategy.
Joseph Beaulieu, a retail analyst at Morningstar, told the Minneapolis Star Tribune, “If Target really does double in size within the next decade, it will inevitably attract more attention from big labor, consumer advocates and city planning commissions.”
The retailer has already gotten the attention of the United Food and Commercial Workers Union (UFCW). The trade labor group staged a protest outside Target’s annual shareholders’ meeting and distributed leaflets claiming Mr. Ulrich made $19,050 an hour in 2004, compared to $13,000 a year for the average employee working in one of the company’s stores.
Moderator’s Comment: What is Target doing right that it should continue to build on and how do you believe it should deal with the inevitable challenges
such as big box building restrictions, unions, etc. that it will face as it grows? –
George Anderson – Moderator
Target has the in-store experience exactly right. They have an innovative and interesting product assortment. Their pricing is reasonable.
The issues target is most likely to confront will come from behind the scenes. It is challenging to be a minimum wage employee, particularly in the more urban environments Target is – well – targeting. In order to offer competitive pricing, while avoiding labor issues will remain a challenge.
However, so far they have managed to avoid the very loud labor issues that Wal-Mart confronts. Should they keep their noses clean, they stand every chance of succeeding, because the P&Z resistance can be avoided if consumers actively want the stores in their areas.
Then they only have to worry about the next threat: how to stay on top.
The 2004 annual report indicates an average net addition of approximately 80 stores a year in the last 5 fiscal years. In order to meet the 600 goal, Target would have to average 120. Put one way, this is only 40 additional locations a year. Put another way, this is a 50% increase in the net store opening rate.
I don’t care who you are. Planning a 50% increase in your ability to do anything as complex as opening new stores is extremely ambitious.
Several elements must be present to support such a statement. First, the firm must have the free cash or access to credit necessary to fund the investment. Target spends and average of roughly $3 billion in expenditures for property and equipment over the past 3 years. Not all of this is on new stores, but the vast bulk would be. If we assume that $2.5 billion at least is store openings, then the average goal of 120 stores translates into a net increase of $1.25 billion. The balance sheet ratios indicate that between growth in free cash from earnings and significant room left in the debt/equity ration, Target can pay for the plans.
The second element are the people, resources, and infrastructure. Adding stores from a merchandising side is a bit like adding zeroes to your check book. It’s possible to make the thing really complicated, but also not so much at all. Adding the physical plant, however, means a ton more people. At least 50% more than they are hiring now. I have no idea if Target has the infrastructure designed and growing in place to support this mammoth undertaking.
One word of caution. When major sports leagues expand their team count, everyone talks about “talent dilution.” Target may very well feel this phenomenon. On the other hand, with over 1300 stores to draw from, and a glut of talent on the retail market, maybe it IS the best possible time to expand at this rate!
Mr. Delzell’s comments point out all the likely difficulties and realities of how difficult it will be for Target to achieve their goal. It is a monstrous endeavor.
Think of it this way; it’s two stores in every state each year along with a third store in 20 states. No matter who you are, that is big.
I’ll just throw out this thought – If this were Wal-Mart making the announcement of their intent, would anyone be skeptical of their ability to accomplish the goal? Wal-Mart is not the only mousetrap. In Wal-Mart’s case its likely 300 stores per year equaling Target’s goal in 2 years not five.
Great things don’t happen as a result of modest goals.
The comment that Target should look for other formats is right on. They advertise in the New York Times, yet they have no stores in Manhattan. That gets me thinking that they’d be quite successful with a very small format (25,000 to 40,000 sf) store that would be positioned against Crate & Barrel, Urban Outfitters and Walgreen’s (without the pharmacy) — cheap chic for everyone, easy to find and readily available. They could blanket urban areas with them without the difficulty they’d have in assembling full Target – or SuperTarget-sized spaces. Starting in New York and Boston, this concept could easily be adapted to less dense areas as well — I’d probably spend even more money there if I could just pop into one of these stores on a whim, rather than fight the huge crowds at my local SuperTarget.
What would this TargetMini carry? Clothing, housewares, small electronics, music & video. Very little food (just seasonal items, and maybe a C-store in the front for quick basic needs). It would have a complete seasonal department, with full range of holiday ornaments in the fall and garden/balcony accessories in the spring. It would emphasize their exclusive products, with Michael Graves or Isaac Mizrahi boutiques, where all items by those (and their other) designers could be grouped together.
Best of all, TargetMini could easily enable them to add 600 locations in five years.
I agree with Karen. Target has done an exceptional job of not only creating a great shopping experience but also one that fits in perfectly with their larger branding and corporate image work.
However, I am worried that telling investors they will have 600 new stores in 5 years reduces Target’s options over the next 5 years. Now everyone has an easy metric to track to see if Target is living up to its plan. The world is rarely as orderly as 600 new stores in 60 months. I will never understand why companies consistently pump up their stock prices today at the expense of the long-term value of the company (greed isn’t always good).
I am amazed and confused by the accolades that Target receives. We have several new or fairly new Targets in our area including two SuperTargets. I will give them high marks for the stores being clean and not full of customers. I suspect that it’s much easier to keep a store clean when you don’t have high customer counts. Their out-of-stock problem shouldn’t be so hard to control for the same reason.
But it is the food section that is the hardest to understand. They have such little variety and small crowded sections that is like a local, poorly-run independent grocery store attached to a mass merchant. As an example, the dairy section is the smallest of any store in the area. Their prices are better than the local supermarkets, but not nearly as good as Wal-Mart or Meijer. The only reason I could see for shopping there might be location, but in every instance there is a Meijer or Wal-Mart so close that, why bother?
In terms of the store experience, I agree with David that food is a real weakness. I tend to think of it as a work in progress though (rather than an utter failure). I always use the spice area as an example and as recently as yesterday, it didn’t disappoint … cumin out of stock but four kinds of exotic SALT readily available. Couldn’t find fresh bunch spinach or basil but thank God there was escarole? “Spotty” doesn’t begin to describe it. On the good side of things, the new pet presentation is unbelievable and will really give Pets Mart and Petco a run for their money (one they have deserved for a long time) … something Wal-Mart should emulate. In terms of apparel, I have to agree with something I read a couple of weeks ago … Target under-delivers in relation to their hip marketing promise … J.C. Penney over-delivers in relation to their more staid promise.
Target is doing what Target has always done — continually refining their stores and their merchandising to simply make it a more pleasant and interesting place to shop.
Another 600 stores is certainly feasible. But my question is, what other types of stores is Target looking at? I would think they are looking at different formats — other than the traditional Target and SuperTarget. With their expertise, access to both national brand and private label product, would it not be feasible for Target to get into specialty retailing?
As to issues, they are usually more welcome than Wal-Mart. But someday the UFCW or another union is going to wake up and see that this is a huge nonunion operation which doesn’t pay much more (if at all) than Wal-Mart. That’s when stuff will hit the fan.
I never take companies too seriously when they tout numbers such as “the retailer has an ambitious plan in place that will see it add 600 new stores over the next five years.” No one can hold them to that. That is just hype to get employees and investors excited. Target will most likely continue on their normal growth plan. No doubt that getting bigger will attract the negative attention that Wal-Mart has received. Still they will be miles behind Wal-Mart, who will continue to be the primary magnet for the radical anti-big box extremists. With Wal-Mart taking the bullet, this helps clear a path for growth for Target. This Super Target concept really does not seem to be working. The sales and sales per square foot figures on the “food ops” side of Target are at Winn Dixiesque levels. Even the Twin Cities food sales are not all that impressive. Target needs to own up to its failure there and move on, but I don’t think their ego will let them.
As a former Target team member, I can say that Target is on the right track. When you look at Kmart and Wal-Mart, they were quick to expand, open stores at a fast pace, and in essence “oversaturate” their presence in the marketplace. Although that was a demise in the end for Kmart, Wal-Mart is still holding heavy to their expansion plans, and beginning to convert their stores into supercenters (which is now a head-on fight with Grand Rapids, MI based Meijer).
Target has taken their time to study which areas they would like to open in, how this will have an impact on their business over time, and has not saturated the market. This is a strategic move on their part, because Target has already created a brand and loyalty image for themselves. Target is the only “upscale discount department store,” and prides itself on creating a comfortable, easy-to-navigate shopping experience for all guests that come through their door. Expanding by adding over 600 stores may seem like a lot over “X” amount of years, but they are still a small operation when you compare it to Wal-Mart. Not bad for being the #2 discount retailer.
In addition, another thing that may have helped Target in the long run is the sale of Marshall Field’s and Mervyn’s. True, the company was created by The Dayton Corporation, but Target touched a nerve with the community, and it took off successfully. How can you make a company a success, when you in a sense don’t know what to make of your two other divisions? Target has become more successful and in essence “reinvented” themselves even more successfully when they sold Marshall Field’s to May and Mervyn’s to Sun Capital Partners.
Making a long story short, Target is still expanding at a slow to moderate rate, and that is good as far as their strategy goes. Wal-Mart, on the other hand, I see falling into the same demise that Kmart did…opening too many stores, too fast. I give Wal-Mart at least 10 years before they start closing underproducing stores as fast as they opened them.
Target’s measured growth is a winning plan–600% return on TGT stock over the past seven years. What has Wal-Mart done? It’s had a negative performance. It’s called investing where the Smart Money goes. Wal-Mart is good at filling the world’s richest people list with $20 Billion heirs.
TARGET: They are including the year 2005 so that means that they are really opening 100 stores a year by 2005. They could build 200 stores a year, but they aren’t because the law of big numbers creates diminishing returns. Wal-Mart would have to do $600 Billion in revenue a year to double–now that’s daunting. Target is relevant and contemporary unlike the Mart’s. They are constantly remodeling their stores to the latest prototype. They’ve added a freezer section to all of their stores to increase customer traffic and they have added pharmacies to the majority of their stores. SuperTargets are being built in locations where it makes sense from a competition and demographic standpoint. They will not make the mistake Wal-Mart has by investing in a 1% margin business for the majority of their stores. Target’s differentiation has made it a completely different destination–so the two aren’t thought of as being the same– Wal-Mart is ubiquitous with the low end, low standards, and notoriously bad PR.