How Target Got Off Target

0:05For decades, Target has held a special place in the hearts of American consumers. It's not just a place to shop. It's a cool place to shop. I mean, part of what I find really interesting about Target is that people have this passion for it. That's our colleague Sarah Nassauer, who covers retail. And there's this sort of thing where Target has been able to kind of transcend like just utilitarian shopping, right? And be like a fun thing to do. I mean, it's really, it's the Target thing. I'm sure you've heard that term. Do you say Target or Target? Because that's going to tell me all I need to know.

0:44Target. No, it ain't. It's Target. Look at the tones. Target haul.

0:53Now, if you say you're going to Target, I know you're bougie. You're hip. You're with it. And it was this idea that, yes, I'm going to, like, buy whatever, shampoo and socks and, you know, maybe a gallon of milk, but it will be kind of a nice experience because I'm going to Target. I'm going to Target.

1:19But recently, shopping at Target has become a lot less fun. Shoppers have been complaining about empty store shelves, more products being locked up, and long lines at checkout counters. These troubles are having an impact on Target's business. Its sales are flat, and its profits are weaker than expected. The company's stock is down more than 50 % from its high three years ago. This is not a moment where the economy is so weak that everyone's sales are down. Everyone's profits are down, right? That's not what's happening. But they are seeing flat and weak sales. So it means they're losing market share.

1:56Losing market share to companies like Walmart, Costco, and Amazon. How big of a problem is that going to be for Target? I definitely had a few conversations with analysts. sort of questioning, like, okay, well, we didn't know if they were going to be part of this group of retailers like Walmart and Costco and Amazon that are, you know, vacuuming up market share, or would they sort of be victims of those folks? And we're starting to think they're going to be the victims.

2:26Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Thursday, December 5th.

2:39Coming up on the show, what's going on at Target?

3:07In the sense, it's about how a real strength can arise from a almost-fuck. Now listen to the podcast channel for good businesses of credit reform everywhere, where there are podcasts.

3:37Target was a department store retailer. So they were coming at this discounting concept with sort of the lens of a department store. And so Target was sort of always had a little bit of a, you know, approach that was a little bit more premium, a little bit more about the experience, even though it was a discounter. Target went after customers that were slightly higher income. And it catered to their tastes with products that felt just a little fancier than what you could find elsewhere. One way the company did that was through exclusive collaborations with high-end designers. Where they would like drop, you know, 200 products from a fashion designer into a store and then people would mob the store and buy up all that stuff and you couldn't get it.

4:24One of the best examples or an example that I really like is back in the day they did this design partnership with Michael Graves for a teapot that's like a silver teapot and has like a blue handle. But it was like a sensation, right? It was like a remake of something he had done in a high-end way. Target has done dozens of these collaborations. Stanley Cups, Missoni Dresses, and Philippe Stark Crystal Wear, just a few of them. They also like rotated these things very quickly, right? So you wouldn't necessarily see the same thing on even if you shop there quite frequently when you went. So there was this sense of like finding something really cool and exploration about it.

5:06It was this sort of mix of, you know, exciting and fun place to shop with like checking things off the list. Like I need toothpaste. I need milk. But I also I found this cool thing. I've talked to friends who are moms and one in particular who is the boss of an office where a lot of moms work. And she's talked about how for years, when she asked her mostly female employee base, like, what's your favorite thing to do when she's trying to come up with gifts for her employees? They say, like, go to Target without my children. And so she gets her employees Target gift cards every year.

5:50Target's try-to-be-cool strategy worked well for decades. And during the pandemic, Target saw sales boom. But for the past couple of years, it's been in a slump. Target's trouble started last year, when the company faced an inventory problem. Target had stocked up on a bunch of products that were popular during the pandemic that it suddenly couldn't sell. And then, last summer, Its yearly Pride collection faced significant backlash. And they then made an announcement that they were going to remove a lot of the products. And then that kind of spiraled into more attention. And sort of put them in this spot.

6:27This was also in the wake of sort of like Bud Light having some of its sales impacted because of working with a trans influencer or posting things. And they kind of got blowback both from people that didn't like those products and then also people that didn't like their reaction taking those products off shelf. And they did say in the quarters after that that they saw a meaningful drop in the number of people visiting their stores because of that controversy. So it actually did have an impact on sales and traffic. The company has said it remains committed to supporting the LGBTQ community. Target's customers have also been complaining about the stores themselves and how the shopping experience just doesn't seem as fun as it used to.

7:11I don't know what's going on at Target these days, but this store is a disaster. I spent$47. Why is Target so expensive? They're locking up the toothpaste. I went to Target last night, and I was wondering why the line was so long, why were people so angry? We're hearing from shoppers that they're basically noticing a few things, that things are out of stock when they want them, that some of the anti-theft measures in stores have made it inconvenient to shop because things are locked up behind glass, for example. Lines are longer at checkouts. The self-checkout is closed down more often, again, as an anti-theft thing.

7:52And maybe it's just not as exciting as it used to be. Lots of retailers have locked up their products to guard against shoplifting. And many still struggle with supply chains that leave products out of stock. But these problems seem to be hurting Target more. Because, remember, shopping there is supposed to be fun. And when I talk to shoppers that are upset with the long lines and the anti-theft measures and just not being able to find what they like or think is fun, it's almost with this sense of loss, right? They're kind of sad. One even said something like, it feels like I'm slowly growing apart from an old friend.

8:31How is the economy playing a role in what's going on at Target? it. Consumers are just buying less stuff and they're having to prioritize needs like food and health care and child care. Inflation is cooling, but prices are still a lot higher than they were a few years ago for things you need. And that means Target, which tends to sell more of what is called general merchandise, the non-food things, than other retailers, more of its sales are dependent on that kind of buying behavior and people are buying less of that stuff. Target's investors didn't seem to be aware of how bad the company's problems were until late last month, when the company reported financial results.

9:11People weren't expecting it to be a quarter of gangbuster results, but they were expecting it to be sort of in line with what Target had said. And, you know, a few days before that, Walmart had reported really strong numbers. And so had Costco and Amazon, too. But Target? Welcome back. Shares of Target are plunging today, having their worst day since May 2022. That's after the company posted its biggest earnings miss in two years and cut guidance. And so when they reported then unexpectedly weak numbers, it kind of was like a double whammy of not only was it not what you expected, and also the market isn't in line with what you reported.

9:53And so almost, you know, immediately when those numbers come out, as they do, the stock dropped. It dropped over 20 % on the day. And there was also several analysts who downgraded the stock. The company said there was some good news in the results. For instance, it said the number of people visiting its stores in the last quarter increased, and that customer surveys showed people are enjoying shopping there more. Target's CEO said the company was facing some, quote, short-term headwinds, that over time, Target would turn things around. Coming up, how can Target turn things around?

10:43After last month's earnings report, Target's CEO, Brian Cornell, said the company needed to double down on what it does well, selling affordable, slightly upmarket products. He said, one, that a lot of what's going on at Target is about this drop in spending on wants, on discretionary spending, and that discretionary spending will come back and Target's going to be ready. He said that Target, as it has all year, needs to continue to focus on value. They are lowering prices, right? And they continue to focus on that. And this idea of what he calls sort of distinctive product. Like that's what they're known for.

11:20They need to really lean into that, both to do better now, but also kind of to be ready for the long-term future of the company and maintain that distinctiveness. But Sarah says that Target executives have debated whether more drastic moves might be necessary. Their big existential issue is something that has lingered for decades, which is how do they do well when people aren't spending a lot on splurges? And that's something, if you look at their sales, that has been a pattern over many years, like the 2008 recession. You know, that was hard for them to come out of. And so their model is really dependent on the distinctive part.

11:59And it seems like they've lost their way a little bit when it comes to experience and the distinctiveness. And so now they're in a position where they need to figure that out and figure out a strategy that works even when people don't have a lot of money to spend. One way they could do that is to sell more groceries. You can already buy groceries at most Target stores, things like eggs, milk, and frozen foods. But while groceries are a growing part of Target's business, it doesn't offer as much fresh produce as rivals like Walmart or traditional grocery stores. Leaning into groceries would give shoppers a reason to go to Target more regularly, and not just for those fun splurges that can be hard to justify in tough financial times.

12:42I had mentioned before just sort of this idea, like, what do they do in down times? What do they do when people don't want to spend a lot of money on just stuff? Well, grocery plays that role for a lot of companies that sell groceries, because you still got to go out for your groceries. But ever since they opened their first foray into like a wider, fresh food, full grocery department in the mid-90s, they sort of have taken steps into grocery and fits and starts. And there's always been tension since those 1995 over, should we be a full grocery store or should we not be? Because grocery is lower margin than those other things that you sell in the big box store.

13:24And the more space you give to grocery, you're taking away from other stuff.

13:32Is it possible that we might see Target do more groceries in the short term if they think that more consumers are spending more on groceries than other stuff? Groceries are a growing part of their business. They, you know, as a percentage of sales, they're up the last few years. And that's somewhat intentional. That's a little different, though, than saying, let's reimagine the store footprint so that it feels more like a grocery store on one side when you walk in. That's a whole other level of investment, and I haven't seen any signs that that's where they're headed. What's the fear for Target if it isn't able to get itself back on track?

14:11Well, it means that they're going to continue to kind of underperform versus competitors. They're going to slowly, slowly give up a little bit more of their business to folks that are growing really fast and are already bigger, like Walmart and Amazon. And you see Costco doing really well. So, you know, there'll be a slow drip, drip, drip of business over to those other guys. Is it possible that this could be the end of Target? I don't think we're at the end of Target. We're not at the end of Target. And it'll become like Tar Lame? What would be the next? I don't think we're quite to that point yet, right?

14:50Like, they're not going bankrupt. We're not there. I think, though, we're at a point where people are questioning, how do they get bigger? How do they keep getting stronger if, you know, it's difficult for them now, basically. And so I think that, you know, Target's at this place where people have those associations with the company for sure. But it's just, you know, they're thinking about how much groceries cost. And so they need to like go to Walmart and Aldi and other places when they're shopping for groceries. And if it's not that fun to go there, they're going to go there a little less. So that is, you know, a risk for Target and something that if you're on the shareholder investor side, you know, you're watching carefully because that's a little bit the magic of it.

15:42And also it's like past success is not necessarily an indication of future success. I mean, there was a lot of great stores that didn't necessarily last. And there's always inflection points as to like whether they're going to turn it around and continue to become great or even greater. Or if it sort of marks like the beginning of a long and slow downward trajectory. Yeah, I think that's it. I think it's, you know, it just sort of planted a seed to see these bad numbers that were unexpected and out of step with the market in people's minds. Like, hmm, you know, this could not work out, you know, the way that we thought it would.

16:19I mean, Target has been a really strong retailer for a long time. They've had ups and downs, but they've been solid. And so it just, you know, planted a little seed of doubt for some folks.

16:41That's all for today. Thursday, December 5th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow.