Target’s top line has suffered. For the first nine months of this year, sales at stores open for at least a year barely grew 0.5 percent. The company also recently abandoned its goal of hitting $100 billion in annual sales by 2017 because of soft sales in the United States.
“Target always knows that it’s missing out on sales,” said Kanta analyst Amy Koo. “But the company is fine with that if it means preserving profits.”
Target’s lean inventory philosophy dates to its origins as the privately owned Dayton Hudson Co., Storch said. Like all department stores, the retailer hated using clearance sales to sell leftover clothing because big price cuts meant big profit cuts, he said.
“Target comes from apparel background,” Storch said. “Target is very focused on keeping inventory lean because having too much inventory in apparel will kill you.”
The Dayton family took that approach especially close to heart.
“We decided that profit, not harmony, would be the goal,” Bruce Dayton wrote in his book on Target’s origins. “Profit would produce family harmony in the long run. Profit would fuel growth. And the business must do both — produce profit and grow — at the same time.”
Target’s emphasis on profit helped create its “cheap chic” persona, in which the retailer would create exclusive design collections in apparel and home merchandise. The strategy helped distinguish Target from Wal-Mart, which relentlessly drove sales by undercutting competitors on price.
“Target has succeeded through a differentiation-based strategy in adding elements to the mix other than just price,” Storch said. “There are still customers who will not walk into a Wal-Mart. They find it too disgusting, too dirty, too downscale. ”
However, Target also drove its profits by keeping its inventory thin. About 33 percent of Target’s Executive Short-Term Incentive Plan depends on a financial metric called “Economic Value Add” (EVA), which measures how well Target grows sales profitably.
So Target executives have a financial incentive to keep inventories low. If Target ordered too much merchandise, it would be forced to heavily discount those products and its EVA would fall.
For most of its history, Target’s strategy has worked nicely, with Wall Street regularly praising the company for generating good profits in an industry known for low margins.
But since the Great Recession, sales of “discretionary” products like clothing and electronics have declined because consumers have spent less. In response, Target launched its PFresh grocery format to lure more people into its stores more often. By the middle of this year, Target had established PFresh at 1,206 of its regular discount stores.
“In a very short period of time, [PFresh] has become our core format,” CEO Gregg Steinhafel told analysts in a previous conference call.
Yet Target continues to replenish its inventory at the same pace, a little over six times a year. Since consumers buy food items like milk and bread much more often than they do clothes and electronics, the company’s low number of inventory turns means consumers might continue to see empty shelves.
“My wife asked me to run to a local Target for a few Christmas lights to finish what she was working on,” Russ Huhner of Apple Valley wrote in an e-mail. “I noticed the shelves that contain laundry detergent were about 75 percent empty. It did not look good.”
Target executive Jones acknowledges that grocery is a different business than apparel. That’s why the company has spent millions upgrading its inventory systems to focus on food.
“We have invested not only what you see in the store but also the infrastructure to support the business and we are going to continue to do that,” Jones said.
Kantar’s Koo, though, believes Target is walking a fine line. Next year, the company plans to launch a major marketing campaign called Essentials to convince consumers to shop more often at Target for food, groceries and everyday household items.