What companies can learn from Target

Posted Dec 5th 2008 5:05PM by Jamie Dlugosch
Filed under: Wal-Mart (WMT), Target Corp. (TGT)

It's old news that we are now facing the economic crisis of our lifetimes. It has not been this bad since the Great Depression. How we react as individuals and managers of companies will go a long way in determining how deep into the abyss we go. When we look back we will learn some very important lessons that should help us going forward.

On the retail side, a lifetime of lessons can be learned by examining the performance of retail giants Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). Though complex, the story really comes down to pricing.

The mistake made by many is to keep prices too high for too long. As is the case with Target. Having won the game during the boom times, Target faced a very tough decision earlier in the year when the economy was starting to weaken. The question they faced was whether or not to keep prices steady or lower them to keep and attract customers?

So far, Target has decided to keep margins steady as much as possible by leaving prices alone. You can't blame them for that given the years spent building the higher margin value model that delivered huge profits. The result of the strategy is not pretty. Target has been losing the battle to Wal Mart, and it shows in their stock prices. Target is down more than 40% whereas Wal Mart is up double digits.

It's a striking story of results. The problem, of course, is that this recession, which started in December of 2007, is set to be a long and deep one. That is problematic for those firms that refuse to lower prices. On Thursday, Target was out with news affirming this very fact. At a time when Wal Mart reported same store sales that increased in the month of November, Target announced that same store sales dropped by more than 10%.

The results are a stark contrast, and investors should expect the news at Target to get worse. Unless, of course, management wakes up and decides to cut prices. Target stock may already be down significantly, but I think it can fall more from here.

Jamie Dlugosch is a contributor to InvestorPlace.com.

Tags: big retail, BigRetail, recession, retail, target, walmart

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Reader Comments (Page 1 of 1)

12-06-2008 @ 1:39AM

Jessy Scholl said...

I wouldn't call Target a problem yet. Yes their prices may seem high, but they are currently on par with Wal-Mart's. What most investors refuse to understand that Wal-Mart is doing pretty well due to the Supercenters. Most people come in for the grocerics and that might make the rest of the store inviting. But, with credit tighting, it might not be a bad thing. At one point, Wal-Mart may not have enough inventory and people will shift to Target or other stores.

12-09-2008 @ 1:48PM

Roudy said...

Target management has a blatant disregard for what the customer wants which is lower prices. I remember not long ago they said they were catering to the $50-$100K customers.Well look at them now! I understand that most of these customers went over to Wal-Mart even though it was a step down for them.The problem starts with the Target board who obviously are "wennie fuzzes" which means no back bone.I feel like I am visiting a funeral home every time I go in mine meaning it is so quiet and solemn. It is really sad to think I almost bought more stock right before it crashed. RoudMan

12-27-2008 @ 4:26PM

paul said...

Yes and what else people don't know is that Target has laid off hundreds of people,
did away with their penison plan and put more of a work load on their already over burdened store management staff.