May 11, 2009

Getting Back on Target

Target Corporation, a strong mass merchant respected for its fashion and branding sense, has watched its stock drop as investors have turned toward Wal-Mart and its hyper-efficient operations. I read today that a big investor is agitating for new strategies and a new board to drive them at Target. In reply, Target management points to its expanded grocery department and ads emphasizing lower prices.

In other words, moves that will make it more Wal-Mart-like.

There are other ways to win against Wal-Mart' ones that Target is well prepared for. The one I favor is distribution-based differentiation. Wal-Mart does compete, vigorously, on this dimension. Using overwhelming market power, it forces suppliers to invest in expensive information and tracking technologies, deliver product to its specifications, and lower their prices to Wal-Mart from one year to the next. In the short term, Wal-Mart’s approach is great for consumers. They get better prices. In the long run, it’s not nearly so good because it leaves suppliers drained of the extra energy and reserves they need to innovate.

There are lots of manufacturers out there, Target, that would love nothing better than to regain healthy margin. I’d bet that many would even happily forgo Wal-Mart volume to get that. 

Just as attractive, suppliers would do handsprings if a market channel like Target worked with them cooperatively rather than punitively. This isn’t a guess. Plenty of manufacturing executives have said it to me; some are already embedding execs inside Target and others. They’ve also said they believe that a manufacturer and retailer  working together can not only devise better customer experiences for a Target, they could do it cost competitively.

And that is something that is very much in character with Target’s traditional, winning strategy.


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