Innovation & Design

Ducking the Price War, Target Highlights Fashion


Instead of fighting on Wal-Mart's terms, discount retailer Target is accentuating its core strength: Affordable chic

Just a couple of years ago, Target (TGT) was the darling of discount shoppers. The retailer profited from exclusive, stylish goods created by such big-name designers as Isaac Mizrahi and Michael Graves. But in today's rocky economy, Target seems out of fashion. Same-store sales are down, and net income is sinking. Even Target executives pin the troubles in part on the widespread perception that the chain is more expensive than Wal-Mart (WMT) because of its focus on trendy clothes and home accessories.

So how is Target revising its sales strategy as it heads into the holidays? It is actually ramping up its designer collection, with more labels than ever. But the $63.4 billion company is also recalibrating its marketing pitch to highlight low prices. In other words, customers can have hip brands and afford them, too.

Target is smart to stick with discount chic, retail analysts say, because it highlights the chain's differences from rivals. "During the economic downturn, it is critical to give the consumer the ability to say, 'This is special,' when buying," says Marshal Cohen, chief industry analyst at market researcher NPD Group in Port Washington, N.Y. "Designer partnerships become even more important to give stores added value."

Trendy Labels

This fall, Target will feature 22 top designers, including Jonathan Saunders and Anya Hindmarch, in its 1,648 stores and on Target.com. That will be Target's largest roster of trendy labels since the retailer first promoted its "design for all" brand message in 1999.

Consumers may think otherwise, but Target's average prices fall within 1% to 2% of Wal-Mart's, including designer collections, says Charles Grom, a retail analyst at JPMorgan Chase (JPM). To drive that point home, Target is playing up deals in newspaper ads, says Kathryn A. Tesija, executive vice-president for merchandising. And in stores, new, prominent signs shout out not only designers' names, but also how much their products cost. "Our emphasis is now on the 'pay less' side of our 'expect more, pay less' brand message," she says.

The Minneapolis company is also trying other tactics to take on discounters such as Kohl's (KSS) and fast-fashion chain H&M, which have taken pages from Target's designer playbook. For example, limited-edition clothes from young fashion designers under Target's Go International banner are now on store shelves for 45 days at most. That's down from two months last year and three months in 2006, when Target launched this initiative. The newest Go International designer, Jonathan Saunders, whose high-end skirts cost $1,600 in boutiques, will be selling $26.99 miniskirts in Target from Oct. 5 through early November.

There's no doubt that Target could use some sizzle. In its fiscal second quarter, which ended on Aug. 2, profit slipped almost 8%, to $634 million, with sales at existing stores declining 0.6%. By comparison, Wal-Mart Stores, which seems more in tune with tough times thanks to its everyday-low-prices message, reported a 17% rise in second-quarter earnings, to $3.45 billion, while its same-store sales increased 4.5%.

Still, designer fashion is a magnet. Heather Windham, a 35-year-old social worker in Columbia, Mo., says she has trimmed her clothing budget because of higher food and fuel prices and recession worries. But when she shops at Target for inexpensive necessities such as kitchen utensils, she always strolls by women's apparel to see what trendy clothes are on display, like the $15 shirt by designer Mossimo Gianulli she picked up recently. "I know I might find a cute top there," she says. "And I like the clothes better at Target than at Wal-Mart."

But the most telling sign that Target's design strategy resonates comes from Wal-Mart. This fall, Wal-Mart will roll out dresses, pants, and skirts by high-end designer Norma Kamali in 350 of its 3,500 U.S. stores. And at $20 and under, they'll be priced even lower than Target's designer threads.

Jana is the Innovation Dept. editor for BusinessWeek.

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