Target copies Walmart and Amazon to get out of sales slump

Target’s declining sales continue and the company is trying multiple strategies at once in an effort to compete with Walmart, which is winning the retail war.

The Minnesota retailer reported a 58% increase in profit on Tuesday, and quarterly revenue rose nearly 2% to $31.92 billion, decisively beating Wall Street expectations. But Target still isn’t breathing a sigh of relief.

Comparable sales fell 4.4%, continuing – albeit slowing – a downward trend for Target. The situation is not likely to change anytime soon. According to its fourth-quarter earnings report, the company expects a 3 to 5% decline in revenue in the first quarter of 2024.

Neil Saunders, director of GlobalData, said in a note on Tuesday that the sales decline is a “worrying sign that consumers are in dire straits.”

“The weak earnings reflect the broader economic trend of Americans to cut back on non-essential spending, which has hit Target, with its discretionary offerings, particularly hard,” he said.

McKinsey & Company reported in February that while customers are shopping as often as before, they are purchasing fewer items. More than three-quarters of consumers say they have changed the number of groceries they buy because the price has risen. Nearly the same percentage said they would buy or sell a lower quality product to save money.

Customers under pressure are cutting back on shopping almost everywhere. The Commerce Department reported a 0.8% decline in retail sales in January, larger than expected. Macy’s announced last month that it will close 150 stores over three years after sales fell in the fourth quarter. Other retail chains face the same problem. Victoria’s Secret had a pessimistic forecast for 2024 on Thursday, predicting a third straight year of sales decline. Nordstrom’s fourth-quarter earnings released Tuesday said 2024 sales could fall as much as 2%.

Walmart is the notable exception to the tough road ahead for the retail industry, with the company reporting a 4% increase in year-over-year comparable store sales last month, exceeding expectations. That’s bad news for Target, which, despite similar challenges to Walmart, has failed to achieve the same success.

Target has been able to improve its traffic and comparable sales thanks to its conservative inventory management, part of its strategy to become more resource efficient. Target CEO and Chairman Brian Cornell said customers have responded to new products and private brands.

“Throughout the season, guests responded to newness, value and the inspiration and convenience of our in-store and digital shopping experience. Looking ahead, we will continue to invest in the strengths and differentiators that have delivered strong financial performance over time,” Cornell said in Target’s 2023 earnings report.

However, some of Target’s strategies have turned off customers, Saunders warned. To combat the shrinkage caused by theft, Target has begun limiting the number of items customers can purchase through its self-checkout lines at some locations and locking more inventory behind display cases, forcing customers to wait longer waiting to get help. Walmart has done the same.

Saunders argued that Target also struggles with a “lack of newness” in products, especially apparel, which runs counter to its once-touted cheap-chic image and priority to develop exclusive brands.

“We don’t believe Target always helps itself,” Saunders said. “We think a general malaise is creeping into a company that was once always at the forefront.”

Target didn’t respond Fortune‘s request for comment.

Target hopes to hit its markdown market

Target has ditched its spark plug “Tar-jay” rep to accommodate consumer budget cuts and is copying notes from competitors.

Target has made significant inventory and model changes in recent months in hopes of boosting sales. In February, it launched its deal-worthy line of 400 budget items, mostly essential items and clothing under $10. The decision aligns with McKinsey’s consumer behavior data, as well as the Food Industry Association’s 2023 survey, which shows that more than half of consumers plan to buy more private label products. But Marshall Fisher, professor of operations, information and decisions at Wharton, told it Fortune last month, the product line challenges Target’s strategic position. The retailer could also struggle to compete with Walmart’s low prices.

“Producing a bundle of 400 cheap products could be seen as a Hail Mary, as if they are desperate,” Fisher said.

The retailer took another page from Walmart’s playbook on Tuesday when it launched the Target Circle 360 ​​loyalty membership service. In an effort to compete with similar membership programs like Walmart+ and Amazon Prime, Target Circle 360 ​​– which will cost customers $99 per year – promises free two-day shipping on online orders and unlimited same-day delivery within one hour on orders over $35.

Walmart has already responded by expanding the on-demand delivery services that are part of its Walmart+ subscription service to orders placed as early as 6 a.m. The subscription program has been a boon for Walmart, as online and in-person grocery sales not only grow the retail giant’s sales, but also eclipse Amazon in the online grocery market.

Walmart’s success with Walmart+ suggests Target could successfully mirror the strategy. Saunders said that at a time when customers are feeling pressured and turning away from Target, there is added pressure on the company to return to its innovative ways.

“Target must do everything it can to make shopping attractive, fun and easy,” he says. “This is Target’s heritage, but great care must be taken to maintain and enhance these skills.”

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