Target vs Walmart | Bricks and Bytes | 4

0:08At a Washington, D.C. Target store in December 2013, shoppers crowd the checkouts, their carts loaded to the brim with holiday buys. In one lane, the cashier raises an eyebrow as he scans a pair of Christmas jammies. Wow, these are soft. The customer smiles. I know, right? The moment I touched them, I had to get them. Okay, totals$98.48. The cashier takes the woman's credit card and runs it through the checkout terminal. Seems like just another everyday transaction. But it's not. As he slides the card through the reader, something inside the checkout terminal wakes. Something that shouldn't be there.

0:53Its name is Black POS, and it's a tiny sliver of malware that's been put there by criminal hackers. Before the transaction's complete, it clones the woman's credit card details. By the time the cashier gives back her card, her stolen information is already on the move. The data zips through the wires, joining the card details lifted from customers at the other checkouts. Within milliseconds, their data's out of the store. It shoots down the information highway, merging into the flood of payment details stolen at Target stores across the nation. and all that swiped data is headed to the same place, Target's central servers in Minneapolis.

1:43Once there, another piece of malware bundles up all those stolen card and PIN numbers before firing them out of Target's network and onto a compromised server owned by a business in South Florida. The business that owns that server has no idea it's a stopover for this mammoth cyber heist. But soon, its server will forward that data onto servers in Brazil, Eastern Europe, and beyond. And it's from these foreign servers that the shadowy Russians behind this theft will download the millions of credit and debit card details they stole, including the details of the woman buying Christmas PJs in Washington DC.

2:29Within hours, her card data will be up for sale on the dark web to the highest bidder. And before the week's out, the crook who bought her card details will be using them for fraudulent purchases. She's just become a victim of one of the biggest data heists in US history and it's about to ruin her Christmas. And when she and tens of millions of other customers hear the news that they may be among the victims, target executives will find themselves racing to restore the brand's shattered trust.

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4:42From Wondery, I'm David Brown, and this is Business Wars.

5:09On the last episode, Walmart's trendy threads failed to fly with fashionistas. The recession forced shoppers to put savings before style, and Target paid billions to break into Canada. But Target's first step outside the USA is already in trouble. Problems with its inventory database are leaving its Canadian stores with stock shortages. And now, Target's facing another tech nightmare, a major hack of customer data that shattered trust in its brand. This is Episode 4, Bricks and Bites.

5:50Target Head Office, Minneapolis, January 2014. In a conference room on the 32nd floor, Target CEO Greg Steinhoffel is brainstorming with his team about how to restore trust in sales after the hack ruined Christmas revenues. But right now, he feels like the walls are closing in on him. He looks at Target's finance chief. Sorry, was that 17 or 70 million? 70. Seven. Zero. Steinhoffel buries his head in his hands. It's three weeks since the data breach was discovered, and ever since, he's been in a world of pain. The hackers stole information from more than 40 million payment cards. When news of the breach broke in the week before Christmas, shoppers deserted Target.

6:39Its fourth quarter earnings are almost half of what they were a year before. Now, Target's spending more than a billion dollars reimbursing defrauded customers, refunding banks for reissued cards, paying fines, settling lawsuits, and trying to tempt people back to its stores with hefty discounts. But the bad news keeps coming. This morning, the Secret Service told Target that the hackers also swiped the names, phone numbers, and emails of up to 70 million customers. Steinhoffel lifts his head from his hands and looks at his senior executives. We'll have to go public with this. One executive objects.

7:21Greg, wait a second. No, no, 70 million guests have their data stolen. Target's embattled technology chief interjects. Up to 70 million. It's probably less. Steinhoffel pauses. The executive who tried to object seizes his chance. Let's think this through. There's no legal obligation to go public with this figure. She's right. 70 million could be an overestimate. Steinhoffel scowls. You're splitting hairs. Whatever the exact figure is, it's still millions of guests. Keeping this from them is disrespectful. We have to be transparent. That's the only way we can restore trust. The executive crosses his arms.

8:09Or how we destroy trust for good. I've made the call. We're going public. Yes, there's the public. But Steinhoffel knows that inside this conference room, some of his team are losing faith in him. Since he took charge in 2009, Target's growth has stalled and decision-making has often been hamstrung by indecision. Steinhoffel's big push into groceries isn't paying off as hope. Target Canada is losing tens of millions every month and Walmart and Amazon are winning online. This hack could finish him. The next day, Target shares the 70 million figure and promises free identity theft insurance for customers.

8:56But FESSING UP GENERATES ANOTHER WAVE OF BAD HEADLINES. NEW INFORMATION TONIGHT SHOWS THE TARGET DATA HACK HAS GONE FROM BAD TO WORSE. TARGET GAVE AN UPDATE ON THEIR HACKING INVESTIGATION, AND THEY SAY THE BREACH IS ACTUALLY MUCH BROADER THAN EXPECTED AND AFFECTS MANY MORE SHOPPERS THAN THEY HAD ORIGINALLY REPORTED. NBC26'S KC HOT IS LIVE AT 6 WITH THE VERY LATEST. BUT AS TARGET'S REP TAKES ANOTHER HIT, The consequences of the hack are popping up at Walmart

9:32McAllen, Texas, just a few miles from the Mexican border It's less than a week since Target's latest revelation about the hack And in the security offices of a Walmart supercenter Two Secret Service agents are trawling the store's camera footage The previous Sunday, someone went on a major shopping spree in the city using counterfeit cards created using some of the data stolen from Target customers. In a few hours of frantic shopping, they bought more than$35 ,000 of electronics, toys, and other goods from stores across the area. But now, the Secret Service is hoping to hunt them down. One of the agents leans forward as a Walmart employee fast-forwards through the checkout camera footage.

10:17Stop. Those two right there. Didn't we see them over at Best Buy, too? Her colleague peers at the frozen image of a 20-something man and a woman paying for a bunch of electronics with a credit card. Yeah, that's him. Let's check the parking lot footage and see if we can get a vehicle registration this time. The following Sunday at the Mexican border, the police and Secret Service arrest the two suspects as they try to cross back into the U.S. at an international checkpoint. They're a man and woman from Monterrey, Mexico, and were carrying 96 fake cards created using details stolen in the Target hack.

10:55Their plan was to use the fraudulent cards to load up on goods to sell south of the border. But even as law enforcers chase down the fraudsters, there's more bad news about the hack headed Target's way. In March, the Verizon cybersecurity consultants hired by Target to investigate the hack finished their report. The criminals piggybacked on the computers of an air conditioning company that worked for Target. By using that company's credentials, the hackers were able to log in to Target's network. They probably expected Target's network would be heavily protected. But instead of high-tech fortifications, they found open doors, servers using default passwords, and a lack of virtual tripwires set to sound the alarm if there's any unusual activity.

11:47So the hackers loaded their malware onto 62 ,000 checkouts and staged one of the biggest cyber heists in U.S. history, before vanishing into the digital ether. After Verizon's report, Target's technology chief resigns. Steinhoffel clings on, promising upgraded security and rapid rollout of more secure chip and pen readers in stores. But he won't last long enough to see these measures through. In early May, senior executives go to Target's board and demand his resignation. By the end of the week, Steinhoffel's out and Target's seeking a new leader and a fresh start.

12:38Minneapolis Convention Center, August 2014. On the stage, Brian Cornell looks out at several thousand Target employees. It's his second day as Target's CEO, and he's introducing himself to the company with a Q &A. He hones in on a raised hand in the middle row. Okay, the woman over there in the blue t-shirt. Yeah, you. Cornell waits as a crew member runs over with a handheld mic. Target's new 55-year-old CEO is a break from tradition. He's the first outsider to become CEO, and he's more casual, too. Decked out in jeans, blazer, and a white shirt unbuttoned at the neck. The employee in the blue tee speaks into the mic.

13:21Thanks for taking my question. I wondered, since you worked at Safeway, whether you'll be expanding groceries in stores. No, I will not turn Target into a grocery store. Style and apparel are core to this company. Next, let's have, well, the lady in the yellow top, then the guy with the goatee down there. The woman in yellow poses her question. What would you say our biggest challenge is? Canada. It's no secret we're losing money there. That's why I'm heading there tomorrow to better understand the situation. Okay, next question. The guy with the goatee stands. How do you see the future of retail?

14:03Will there be a future in big box stores when so much business is moving online? Cornell smiles. Wow, big question. Now, first, I believe our best days lie ahead. We must do better in e-commerce, but e-commerce is still less than 7 % of all retail sales. Did you know that? So bricks and mortar still very much matter. I think retail's future is omni-channel, a mixture of physical and online. Things like click-and-collect services, where you order online and your shopping's ready when you reach the store. But before Cornell can take Target into the omni-channel future, he's got to deal with Canada.

14:52Minneapolis, January 2015. In Target's head office, the board members listen as Cornell walks them through his assessment of the company's Canadian operation. I spent the weekend before Christmas visiting stores in Ontario and Quebec. Busiest shopping weekend of the year, and the stores were quiet. The board members look unsettled by Cornell's report. In its first year, Target Canada lost nearly a billion dollars and struggled to stock its shelves. Now, its distribution headaches are over, but its 133 stores are short on shoppers. Cornell continues his briefing. Our early mistakes hurt the brand.

15:35Canadians think Target has empty shelves and overcharges in Canada compared to the U.S. We also underestimated Walmart's strength in Canada. So far, we've lost more than$8 billion in Canada. The best-case scenario is we break even in 2021. One board member sits up. That's six years away. Yes. And until then, Canada will be a drag on our stock price and our ability to invest in our stores at home. I think maybe we should get out. What? You mean leave Canada entirely? Uh-huh. Yep. Another board member speaks up. Couldn't we just scale back? Keep the strongest stores and shut the rest? Won't we break even sooner that way?

16:22We looked at that. It'd take even longer to recoup our investment in Canada with fewer stores. The board members look disturbed, as the enormity of what they're about to do sinks in. One member leans forward. How many people are we about to put out of work? 17 ,600. Damn. Believe me, this is the most unpleasant decision of my career. If I thought there was a better way, I'd take it. I propose we offer the employees 16 weeks of compensation, including benefits. That'll cost around$70 million. The board members fall silent. It's a humiliating retreat and signals the end of Target's global ambitions.

17:10Walmart is already a world power with stores in 27 countries. But for Target, the world now stops at the U.S. border. As Target heads home, it's got to figure out how to wring growth out of a market saturated with big-box stores. And to do that, it has to find a way to hold its own against Walmart and Amazon in the increasingly fierce fight for online shoppers.

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19:46Bentonville, Arkansas, June 2015. Two miles southwest of Walmart's head office, Doug McMillan drives his black Jeep Rubicon down Walton Boulevard. It's nearly 6 p.m., and Walmart's 48-year-old CEO is running late. He needs to get the groceries and still make it to his son's soccer game. But that also gives him a chance to showcase Walmart's latest retail experiment to the fortune journalist sitting in his passenger seat. McMillan takes a left, and the journalist sits up. In front of them is a large squat building with a gas station-style canopy outside and no visible entrance. The sign on the building reads, Walmart Pickup Grocery, order online, pick up here.

20:32McMillan follows the arrows, guiding him to neon green kiosks that look like fast food drive-thru speakers. He stops at one of the kiosks and turns to the journalist. So, here you enter your order number. The journalist jots down notes as McMillan uses the kiosk's touchscreen interface. Okay, we're in Bay 11. McMillan parks the car under the canopy and the pair exit the Jeep. McMillan checks his watch. Moments later, a Walmart employee appears, pushing a dolly loaded with McMillan's bagged groceries. As the employee loads bags into the trunk, McMillan chats with the reporter. When this opened, we offered customers a choice of 10 ,000 items, but it was hard to keep everything stocked, so we reduced the range.

21:22By how much? From 10 ,000 to 8 ,000 items. That solved the out-of-stock issues. The employee finishes loading groceries into Macmillan's trunk. That's everything. You have a good evening now. Macmillan checks his watch and smiles. He's got the groceries, and there's still plenty of time before the soccer game. And he hopes that same convenience will be so appreciated by shoppers that Walmart will reap billions. Walmart might be the number two online retailer in America, but it's miles behind Amazon. For every dollar spent online, Amazon pockets 50 cents. Walmart gets just eight. But Amazon still wants more.

22:13And its next target is groceries. For Walmart, that's an existential threat. More than half of Walmart's sales come from groceries. Amazon's success is driving Walmart and Target to step up their online games. So, Macmillan's made it his mission to beat Amazon. Across the nation, Walmart's testing different ways to leverage its 4 ,500 stores to bring the fight to Jeff Bezos' crew. Macmillan senses that Walmart's store network could be a powerful advantage. Many online stores cover the cost of delivering to people's doorsteps with annual subscriptions, delivery fees, and higher prices. But Walmart's discovering that many shoppers prefer to order and collect their groceries when they're ready, rather than being stuck at home waiting for a delivery.

23:09And with 70 % of Americans living within five miles of a Walmart, This fusion of bricks and bytes seems to offer Walmart a way to face down Amazon. Macmillan wants to cut into Amazon's online lead fast. So in 2016, he makes a bold move designed to turbocharge Walmart's e-commerce operation. Walmart on Monday announced it would buy online shopping site Jet.com for about$3 billion. The deal appears to be the largest ever acquisition of an e-commerce company, and it comes as Walmart tries to close a big gap between itself and Amazon in online shopping revenue. $3 billion is a high price to pay for a two-year-old startup that's nowhere near profitable.

23:57But Macmillan sees Jet.com as a chance to power up Walmart's e-commerce operation. Jet.com's novel smart cart system lets online shoppers save at the checkout if they forgo free returns or accept longer delivery times. It's a feature tailor-made for the price-conscious middle Americans who shop at Walmart. But Macmillan also wants Jet.com's founder, Mark Lohr. Lohr is an e-commerce wunderkind who made his fortune by selling his business Diapers.com to Amazon. As part of the deal, Lore will take charge of Walmart's online operation. Lore hits the ground running. To counter Amazon Prime, he introduces free two-day shipping on orders over$35 with no membership fee.

24:48He forms a team in Silicon Valley to hatch new ideas and buys fashionable digital native apparel brands like Bonobos, ModCloth, and Moose Jaw. But while Walmart and Amazon are locked in digital battle, Target's out to rediscover its mojo.

25:13In a large meeting room on the 26th floor of Target headquarters in Minneapolis in July 2016, a group of kids and their parents are checking out Target's latest clothing line. The entire room has been transformed into a huge walk-in closet, with racks showing off hundreds of items. As the kids search the displays for pieces they like, the parents and Target employees watch. One girl pulls out a neon t-shirt with a slogan, OMG, slapped across it. She holds it up for her mom to see and grins. Mom pulls a face and turns to the Target employee standing next to her. Oh no, that's a definite no. I get enough sass for my kids already.

25:56I don't need them wearing it on a top. The target employee looks at the huge grin on the girl's face. Looks like she likes it a lot though. Maybe, but there's no way I'd ever buy her that. The target employee nods and makes a note. He knows these clothes need to strike the right balance. There's no point in stocking clothes kids want but mom and dad won't buy. especially when there's so much on the line with this new range. Last year, Target concluded its existing kids wear brands, Serco and Cherokee, were past their sell-by dates. Together, those two brands delivered a billion dollars in sales a year, but they felt tired.

26:40So Target's decided to replace them with one new brand, Cat & Jack. It's a line of 2 ,000 items of clothing ranging from blue leggings and brown suede shoes to striped neon dresses and slogan-adorned T-shirts. But if they don't catch on, Target could watch a billion dollars of sales fade away. And a few weeks after this final focus test, Cat and Jack arrives at all 1 ,800 Targets. I'm going to show you my fierce moves now. A robot space look? Cool. They have hearts on their knees. I love being me, and everyone should love being themselves. Say hello to Cat and Jack. Hello, how are you? Kids clothing with an imagination of its own.

27:29So good. Only at Target. The new vibrant clothes hit the bullseye. In its first year, Cat and Jack will deliver$2 billion in sales, double what Serco and Cherokee managed to do. And that bodes well for CEO Brian Cornell's plan to revitalize Target. He wants to light a rocket under Target's sales by refreshing the company's brands. But Target's still got a ways to go before it gains altitude.

28:03New York City, February 2017. In his hotel room, Target CEO Brian Cornell laces his shoes, while keeping an eye on the TV that's playing CNBC with a sound off. He's prepping for what promises to be a bruising day. This morning, he'll face an auditorium full of Wall Street movers and shakers. To explain why, despite Cat and Jack's success, the holidays brought little cheer for Target. The company's fourth quarter results just came out, and they make for disappointing reading for investors. Earnings were down 43 percent, and now Target's stock is tumbling. But Cornell hopes the turnaround strategy he's announcing today will reassure spooked stockholders.