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Sales versus margins? What's a retailer to do?

Posted by: under Best Buy, Department stores, Retail, Target Updated: February 27, 2012 - 3:03 PM

Target Corp. and Best Buy Co. Inc. may compete for consumer electronics shoppers. But the two Minnesota-based retail giants took decidedly opposite tracks during last year's holiday shopping season.

Last week, Target admitted that it took a beating in holiday sales because other retailers slashed prices more deeply than Target. But CEO Gregg Steinhafel said Target would gladly sacrifice some sales in order to protect its profits.

"We think that's a good trade-off to make because we're not going to get into this race to the bottom and give [merchandise] away at all costs," Steinhafel said. "We don't think it's healthy over the long term."

Best Buy said pretty much the same thing two years ago. But last November, the retailer switched gears and said it would step up price cutting  to win market share from competitors like Wal-Mart and Amazon.

So why is Best Buy is from Mars and Target from Venus?

Retailers have always struggled with the classic tension between sales and profit margins: you want to capture market share and drive same-store sales, but at what price?

In Best Buy's case, the retailer used to imply higher margin services like Geek Squad and Internet growth could somehow offset its eroding in-store sales. But last year, Dunn concluded that it must first drive people to stores before it can do anything else.

It's no secret that Best Buy is under serious attack from Amazon, a situation made worse by falling consumer electronics sales. Best Buy said same-store sales in December fell 1.2 percent in December, a number that surely would've been worse had the retailer not resorted to more discounting.

Target, on the other hand, doesn't face the same kind of existential pressure as Best Buy so I suppose the retailer can afford to be more high minded about the "race to the bottom."

As if to prove its own point, Target said January same-store sales rose  a strong 4 percent, a number the retailer says it will likely surpass in February.

But not all analysts feel as confident as Target.

In recent research note, David Strasser, an analyst with Janney Capital Markets, doesn't think Target's strategy of margins over sales makes much sense in this still weak economy. In addition, competitors like Wal-Mart and JC Penney are ramping up this year  to capture more sales through discounting.

In other words, Target risks losing more market share to its competitors, Strasser said.

"We still struggle with the strategic decision to defend margins in this environment," Strasser wrote. "We find it ironic that a company that seems extremely focused on driving long term customer loyalty would manage gross margin so tightly at a time when consumers are cash-strapped, competitors are investing margin to drive traffic, and as pricing transparency is much greater due to the Internet."

"Time will tell if it was the prudent decision," he wrote.
 

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