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Look Who's Stalking Wal-Mart


Target is increasingly going downmarket to get through the consumer recession. But can it ape its rival and retain its cachet?

At a Target store, the visual sizzle usually comes from the photos of all the fabulous-looking people wearing fabulous clothes and doing fabulous things. Of late, though, there's an entirely new vibe—supersize signs screaming dirt-cheap prices. Past the cashiers is something else unmistakably novel: a sleek Euro-style mart carrying fresh cuts of sirloin, cheery piles of fruit, and hormone-free dairy.

The lowest prices on the planet! Plus a grocery store. Wait. Doesn't that sound an awful lot like Wal-Mart (WMT)?

Target reinvented American retailing. By democratizing design, it rescued the family budgeter from the aesthetic provinces of dinette sets and acid-washed jeans. Target was one of the first to use famous fashion designers to cast a halo over its brand and draw people into its stores. Before long hipsters had dubbed the retailer "Tarzhay," and everyone from J.C. Penney (JCP) to Wal-Mart was ripping off Target's cheap-chic playbook.

Now the charge is that Target is copying its archrival, and its executives are bristling. They insist they provide a superior store experience. Nor have they any plans to abandon their 15-year-old slogan: "Expect more, pay less." "We're not trying to be anyone else," says Chief Executive Gregg W. Steinhafel. "We're working hard to convey both sides of our brand."

All the same, a kind of role reversal is under way in Retail Land. Wal-Mart has long borrowed from Target. Now Target is stalking Wal-Mart. Target's magic has always been about pushing its low-cost business model relentlessly upmarket. But to get itself through the Great Recession, it appears to be going downmarket. Some critics say the strategy smacks of desperation. Others, pointing to a rebounding stock price and better-than-expected earnings last quarter, believe the strategy may be working. The challenge for Steinhafel is to compete on price without losing the Target twist.

Steinhafel's ascension as CEO in May 2008 represented mostly a change in style rather than substance. His predecessor, Bob Ulrich, the press-allergic, cowboy-booted visionary who made Target a retailing juggernaut and cultural phenomenon, was known as an authoritarian. Meeting with him, says one executive, was "a sphincter-tightening experience." (Ulrich was unavailable for comment.) Steinhafel, by contrast, is a leader people can rally behind. During nine years as president, he became known as Target's nice dad. So while he was expected to change the tone at Target, he wasn't considered likely to deviate much from his predecessor's modus operandi. After all, it was working.

Until it wasn't. The economy imploded, Americans stopped shopping, and Steinhafel found himself confronting a different world. "This was a wake-up call," he says. "We had to do a lot of soul-searching." It didn't help that as the news flashed pictures of Lehman Brothers employees carrying boxes out of their offices in September last year, Target was rolling out pop-up stores selling 22 new things from 22 new designers. The pop-ups, which came and went in four days, were in the works long before the crash and did well. But for the first time, Target seemed out of touch. Wal-Mart, with its megajugs of cheap contact lens solution, seemed prescient by contrast.

EXTREME MESSAGE MAKEOVER

At Target's Minneapolis headquarters, Steinhafel turned his airy offices on the 26th floor into a war room. The data pouring in were shocking: Sales at stores open more than a year were falling 3%, then 5%, then 10%. As the stock slid and slid, says Jefferies (JEF) managing partner Daniel Binder, people were asking: "Is there something wrong here with Target that has changed structurally?"

Target had long emphasized the first part of the "Expect More, Pay Less" equation. Research showed consumers perceived Target as pricier than Wal-Mart, when in fact they were only a few cents apart on most items. Given the state of the economy, stressing "Pay Less" seemed eminently rational. Yet Steinhafel hesitated. If he pushed too hard on price, would he lose what made Target "Tarzhay," upending a strategy Ulrich spent 20 years perfecting? Would Target—God forbid—start to look like Wal-Mart? "That's why they were reluctant to do it at first," says Telsey Research chief Joe Feldman. "They don't want to be Wal-Mart."

Steinhafel, however, soon saw that American consumers might never return to their free-spending ways. It was time to start making a big deal about low prices.

With sales in free fall, Steinhafel needed to move fast. Fortunately, Target is a quick executor. In big-box retail circles, the company is legendary for its ability to tear down and rebuild stores in less than nine months. Inside Target, the store rehab process is called Phoenix. Steinhafel needed to pull a Phoenix on marketing. His partner in this extreme message makeover was Michael Francis, the natty chief marketing officer. Francis draws his marketing philosophy from the 1952 book about retailer Marshall Field, Give the Lady What She Wants! "It's all about making sure we know who the lady is and making sure we know what she wants," says Francis.

That "lady" is a working mother in her 40s. And over the years Target has spent tens of millions of marketing dollars appealing to her. In TV and print ads, it has long cast her as the hip hero in her own life. (Even her own kids think she's cool.) But as Francis scoured his charts and graphs late last year, he could see that the Target fashionista was turning into a frugalista. "She wasn't seeing herself in the shiny, happy people advertising," he recalls. "It was no longer aligned with what she was dealing with in her life." The trick was to focus on low prices without making Target's target customer feel cheap.

Francis and his team hit on a marketing strategy in which Target essentially plays the empathetic personal shopper. In highly produced two-minute Webisodes on Target's site, Marie Claire fashion director Nina Garcia mentors frayed, broke moms on how they may feel poor but can still look rich. In the show, a riff on TLC channel's What Not To Wear, Garcia teaches shoppers such as "Katie" how to be "frugalista fabulous." We see Katie—who has no winter coat—looking fierce in a double-breasted topcoat ($59.99), a classic peacoat in red ($40), and a motorcycle jacket ($29.99). "Ooo la la," says Katie as she twirls in a Lanvinesque gray cape ($44.99).

For years, Target has focused on the aspirational image of the designers behind its apparel. Now, Francis decided, the company would highlight the notion that good value can be chic, too. This fall, for example, Target introduced designer Anna Sui's collection, starting at $19.99, based on her favorite television show, Gossip Girl. The ads show a grainy, cinema verité New York City with waifs sashaying down the runway in Bohemian glam. Then Sui's voice over: "Anna Sui. Prices to gossip about."

FILLING THE PANTRY

Steinhafel's decision to move more aggressively into groceries represents an even tougher challenge. Wal-Mart has been selling food for years, using groceries to boost store traffic. But selling food is a difficult, low-margin business, and Target has refrained from pushing as hard into groceries as its rival. So while Target has long sold food at its 252 SuperTargets, its regular stores have carried mostly dry goods, cans of soup, and jars of peanut butter. Yet the retailer was desperate for traffic. And Steinhafel couldn't ignore two facts. Target's working-mom customer was obsessing not about thigh-high boots but about the price of milk. Plus, industry and in-house research showed she was popping into the grocery store twice a week but visiting Target only three times a month.

Last fall, Steinhafel began testing a prototype grocery that sold fresh food, which typically commands higher margins than packaged groceries. The company commandeered part of an existing store and quickly turned the space into a sleek, rock-bottom-price grocery with everything one could possibly need to fill the family pantry. The rollout was done stealthily, with almost no publicity. Before long, the food marts were lifting sales at test stores an average 5% to 10%.

When retail chains launch a concept, they usually back it up with a national advertising campaign. But often the items are available only at "select stores." With this effort, Target is going hyperlocal. Instead of a gradual rollout across the U.S., it focused on one market, Philadelphia. In September it began putting food marts in all 30 urban Philly stores. Once they were ready to go online in October, Target carpet-bombed the city with its message of "Fresh food for less green" and "Quality cuts, lean prices." The blitz was everywhere: e-mail, radio, newspaper circulars, TV, and what seemed like nearly every billboard in town. "If you don't know about it and you live in Philly, you have to be living under a rock," says Citigroup (C) retail analyst Deborah Weinswig. By testing in a single market, Target was able to measure immediately the efficacy of the marketing. The results have been promising, with sales exceeding expectations. Steinhafel plans to roll out the concept to 350 more stores in 2010.

As Target's CEO and his executives take stock and look back on the past year or so, they regret not moving faster. "We may have been a bit slower than we should have been due to how rapidly the economy shifted and to our own advance planning processes," says Francis.

Still, the course correction seems to have helped stop the bleeding. On Nov. 17, Target said net earnings rose 18.4% during its third quarter, the first positive result in eight quarters. It also reported that its gross margins, excluding its credit-card division, rose to 30.8%, from 30.6% in the third quarter of 2008. Meanwhile, Target says its research shows consumers are starting to believe it is indeed competitive with Wal-Mart on price. "Based on our price checks, the price gap between Wal-Mart and Target is the narrowest it has ever been," says Weinswig. "They are now at price parity. But Target does it with a better customer experience." While Target did cut prices on some merchandise, its marketing onslaught is mostly responsible for changing consumers' perception.

Target usually doesn't hammer the price message during the crucial holiday shopping season. Now it does. The company is devoting 75% of its advertising budget to price, vs. 25% last year. Target is making a big bet this holiday season that people will be shopping for key must-have items and solution-oriented products. Door busters include a 32-inch flat-panel TV for $246, electronic hamsters for $7.99, and a $3 coffeemaker.

In truth, Target's focus on price and groceries looks less like strategy than a tactic to buy time. "They have to reinvent themselves," says Nigel Hollis, of the branding shop Millward Brown. "The 'pay less' strategy may not be the one, but at least they can hold their ground until they figure out the next big thing." The trick will be executing a me-too strategy without turning into You Know Who. As marketing chief Francis says: "The world doesn't need a second Wal-Mart."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

Japanese Standout

Most Americans have never heard of it, but Japan's Fast Retailing is intent on becoming a household name the world over. The clothing retailer's same-store sales soared 36% in November, reports Bloomberg. Growth has been led by Uniqlo, a chain of affordably priced casual-clothing stores, which in October unveiled a line of apparel developed in collaboration with high-fashion German designer Jil Sander.

To read more about Fast Retailing, go to http://bx.businessweek.com/clothing-retailers/


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