Target walks fine line on stocking stores; some shoppers frustrated

Jennifer Healy is one of Target's most loyal customers. She frequently shops at the retailer, owns a Redcard and often looks for deals through the company's new digital tool called Cartwheel.

But loyal doesn't always mean happy. Each time Healy shops at the SuperTarget in Edina, she says the store seems to be out of basic goods like flour and corn syrup.

"I don't understand it," said Healy, a resident of southwest Minneapolis. "They are able to know so much about shoppers with all of their technology. But they always run out of things they know people will want. It makes me very frustrated."

Large big-box chains like Target and Wal-Mart operate thousands of stores with complicated inventory systems, so the occasional out-of-stock is not unusual. But some consumers and analysts say Target's ambition has at times outpaced its supply chain, especially as the retailer expands into food and groceries, opens new international stores and faces brutal price wars during the holiday shopping season.

Target officials strongly deny that stores frequently run out of goods. Of the 2 million customers who took weekly online surveys this year, "overwhelmingly the guests are highly satisfied not just for the overall shopping experience but for being able to buy what they came to purchase," said Keri Jones, senior vice president of merchandise planning.

But Target's debut in Canada earlier this year, the company's first international expansion, was marred by reports of empty shelves and shortages of grocery products.

And after Black Friday weekend, Target.com was already out of stock on nearly 60 percent of the top holiday toys, according to a Bloomberg Industries analysis. That percentage is much higher than rivals Wal-Mart, Kmart and Amazon.com.

Out-of-stocks seem to be more frequent in groceries, with customers complaining that even SuperTargets frequently run out of basic items.

"I went to Target two days before Thanksgiving and they were completely out of fried green beans — something I consider to be a Thanksgiving staple," Twin Cities resident Alyssa Beck wrote in an e-mail. "I went to Cub [Foods] and found displays of fried green beans in two different parts of the store."

Historically, Target tends to keep its inventory lean. The number of times Target resupplies its stockrooms each year is noticeably fewer than its peers. In 2012, Target on average replaced its entire inventory just 6.4 times, according to the Kantar Retail consulting firm, based in Boston.

By comparison, Amazon and Wal-Mart turned their inventory 8.3 times. In fact, Target's inventory is much closer to that of Walgreens, a pharmacy chain.

Target has worked hard to avoid ordering too much inventory because profits would suffer if it needed to cut prices to clear unsold goods. But experts say Target's perceived shortages in food and household items are problematic because they are staples.

"It's absolutely true that Target has focused on maintaining a lean inventory and, generally speaking, that's a good thing," said Gerald Storch, a former CEO of Toys R Us and former vice chairman at Target who oversaw the company's supply chain. "Out-of-stocks, however, are not a good thing."

Target spokeswoman Katie Boylan acknowledged that shortages sometimes happen but said the company is committed to the needs of both its customers and investors.

"Managing inventory effectively is one of Target's strengths, and has always been a strategic tool for us as we aim to provide a great experience for our guests and manage the business responsibly," Boylan said. "We think first about our guests, and what they will be looking for when they are shopping at Target. At the same time, we have a responsibility to our shareholders."

Added Boylan: "Of course, from time to time, we will not be able to meet the expectations of every guest." "

Some analysts wonder if Target's inventory strategy is costing the company much-needed sales.

"You have to win on the top line," said Storch, who now runs Storch Advisors consulting firm in New York. "If you don't win on the top line, you can't win on the bottom line."

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.

Frequent out-of-stock items means "you're not able to provide customers what you said what you will provide," Koo said. "It will be a wasted trip for them."

Thomas Lee • 612-673-4113