As the recession deepened, the discounter struggled to convince cost-conscious shoppers of its discount prices. But here is why top executives see sunny days ahead.
What a year it has been for Target Corp. When longtime leader Bob Ulrich retired in May 2008, the company already was facing challenges. Home foreclosures were skyrocketing, gasoline prices were approaching the $4 mark, and Target's same-store sales growth had dipped below Wal-Mart's for the first time in more than three years.
Then things got worse.
The global financial crisis dried up credit and ravaged retirement accounts. Target failed to convince consumers that its prices were as good as those of Wal-Mart, Costco or T.J. Maxx. Sales among existing stores declined by unheard-of percentages -- 4 percent, 6 percent, 10 percent. The company made contingency plans for 15 percent, which never occurred.
"Our business model had never been tested to the degree that it was," said Gregg Steinhafel, who took over as CEO from Ulrich. "It was a very unnerving time for all of us about what's going to happen, how bad is it going to get and what are the implications."
Target laid off a record 1,100 workers in January -- 9 percent of workers at its downtown Minneapolis headquarters. By March, shares were trading at their lowest level since 2000 and had lost 65 percent of their value from a 2007 high.
Then for the first time in its 47-year history the company went to battle against an activist shareholder. Target spent $11 million this spring successfully fending off William Ackman's quest to take five seats on its board of directors.
Target has walked a tightrope between maintaining its high hip factor and trying to assure tightfisted shoppers they don't have to go elsewhere for the basics -- and its sales figures show it. But Steinhafel says consumers are starting to get the message. Target's stock price has started to rebound, rising more than one-third since the beginning of the year, while Wal-Mart shares have dropped modestly.
Time will tell whether the nation's second-largest discount chain has started to regain its footing. But in interviews with the four people most responsible for figuring out what goods to put on Target's shelves and how to get shoppers to buy them, it's clear the company has spent the past year soul-searching and retooling.
Steinhafel and three of his top lieutenants say they're more committed than ever to affordable design and fashion, while offering good prices on the basics. Here is their view on how Target has responded to the economic downturn and what the future may hold.
CHIEF EXECUTIVE OFFICER SINCE MAY 2008
First job at Target: Merchandising trainee in the paints department, 1979
Gregg Steinhafel moved into a new corner office in February, but he's hardly taken time to enjoy the view. The CEO has focused his attention inside the company instead, turning over every rock in the business model to see what was worth keeping and what should be tossed.
"Anything that was a sacred cow is no longer a sacred cow," he said, sitting at a table in his sunny office on the 26th floor of company headquarters. "You can't just do the same thing with fewer people. That doesn't work. You have to re-engineer a lot of your processes and rethink paradigms of the past. We've done a lot of self-reflection."
Target responded to the recession by accelerating pretty much everything. New merchandising initiatives now are being tested and rolled out more swiftly. Stores that might have taken two years to get built now could be ready to go within 12 to 15 months when the economy picks up.
Efforts already underway became urgent missions. Target began to see cost savings by revamping its one-size-fits-all approach to stocking and managing stores. It also has changed the look and scope of several of its store brands, including the current relaunch of its Up & Up brand of basics that has a new look and broader assortment.
But Target's most vital -- and most nagging -- problem as the recession has dragged on has been determining why the discounter's promise of low prices has been lost on cost-conscious consumers. Although Target was always within pennies of Wal-Mart on basic items, consumers just didn't believe when their budgets depended on it. In May, Target began advertising its price-matching guarantee.
"We're not seeing a lot of adjustments," Steinhafel said. "That tells us that, yes, it's been about perception more than anything."
Target's falling sales forced Steinhafel and top executives to take a hard look at the company's slogan, "Expect More. Pay Less." In the end, they agreed the message was "still dead on," said one manager, but the recession highlighted how badly out of balance it was in consumer's minds. Boom-time shoppers thought of Target as a place to buy a new outfit, bath towels or glassware at the turn of every season -- not necessarily where they'd find the cheapest dish soap when every penny mattered.
Target's struggle has been to align the marketing message with consumers' new frugal outlook, while not losing the sassiness that gave Target an edge over other discounters.
"The consumer has experienced something they didn't anticipate ever experiencing in their lifetime," Steinhafel said, suspecting that a recovery in the months ahead may be more W-shaped than a straight climb out of the recession. "I think they'll think twice about paying $4 for a cup of coffee. Or maybe they're going to think twice, 'Do I really need that item at Target?' So it's got to be the right item at the right price."
In monthly meetings with top marketing and merchandisers, Steinhafel makes sure Target is "aggressively funding the priorities that really are going to move the needle," he said. Right now, that means food, as well as emerging designers. More recently, it has included a big push to tout Target's new price-match guarantee.
"We've worked so hard to develop an experience and a brand that you wouldn't want to throw it away because you had three, six or nine months of a tough economic climate," he said.
Through the "very large external threats" that have defined his first year -- namely the proxy fight with Ackman and an economy that led to forced layoffs and reduced hours at stores -- Steinhafel held more town hall meetings and conference calls with store managers.
He takes heart in an annual survey of some 200,000 employees that identified problems, but also showed that most workers had not lost faith in the company or its leadership.
"There's a lot to complain about," Steinhafel said. "We like winning. But we're a little short on the winning right now. As soon as we get the winning part back, it's going to be even more fun to be around here."
EXECUTIVE VICE PRESIDENT AND CHIEF MARKETING OFFICER SINCE AUGUST 2008
First job at Target: Media manager in the department stores division, 1990
Last fall, Target put its "Expect More. Pay Less" slogan to a head-to-head test against slogans of such competitors as Wal-Mart, J.C. Penney and Kohl's, and asked customers how they felt about it. Target's top marketing executive Michael Francis said the slogan scored higher than most of the others, and in lock step with Wal-Mart.
The only problem: People didn't associate it with Target.
"Where we fell short is that we weren't always clear about stating it," Francis said. "That was a big shift in our energy. We began to devote more marketing muscle to it."
Analysts and retail experts took Target to the woodshed for not fully grasping consumers' money worries, and for being too slow to make strong price-point pitches on household staples.
Francis and other Target executives defend their cautious approach. They didn't want to overreact and make drastic marketing changes that could undermine the very qualities that make Target stand out from Wal-Mart -- that so-called "Tar-jhay" cachet.
So, with 26 million customers a week walking through Target stores, the marketing division dove into consumer research as never before. It held focus groups and did shop-alongs and in-home audits. It tapped into research from Procter & Gamble and other vendors. It did eye-tracking studies to see whether in-store signs caught shoppers' attention -- and made them want to buy.
"There really wasn't an aspect of this business that didn't get completely reinvented over the last 18 months -- often multiple times," said Francis, a fast-talking, high-energy executive who seats guests to his office in sleek, white leather chairs.
The consumer intelligence became so vital that Target ended up forming a permanent and sizable staff of marketers who are in the field every day "bringing back reconnaissance," Francis said.
Target also began testing more things. Multiple versions of circulars and in-store signs are shown to consumers for feedback. Last fall, as the holidays approached, Francis said he redid the Christmas marketing plan "no fewer than three times" as Target shoppers became increasingly worried about their jobs, homes and 401(k) plans.
The tone of the 53 million weekly circulars, the company's single-biggest advertising expenditure, has shifted dramatically from the beginning of the year. They have bolder headlines, more price comparisons and fewer featured products.
Television ads play up the more trendy side of the business with what executives like to call that "wink and a nod." But the recession changed that, too.
"It changed our photography style, our set design, the entire composition of our broadcast [ads]," Francis said. "It doesn't mean we have to go cut and copy price points in our broadcast, but we did need to demonstrate that we 'get it,' that we're in this with the consumer and we can be an effective guide in this economy."
EXECUTIVE VICE PRESIDENT, MERCHANDISING SINCE MAY 2008
First job at Target: Merchandise analyst, 1986
A typical Target store contains some 80,000 items, and Kathee Tesija can tell how sales are going with each of them by the hour if she wants.
Because nonessentials such as furniture and home items make up about 40 percent of Target's revenue, those readings haven't given Target's top merchandiser much to cheer about in the past year, aside from the food and health care aisles.
"It tests your mettle," Tesija said.
Yet after seeing same-store sales decline 12 of the last 13 months, Target has more designers and new fashion lines in its pipeline than at any other time in its history. Why? Because consumers say they still want it.
"There's a lot of mixing going on," Tesija said. "It's not quite so simple as consumers skipping past all of the high end and going right to the lowest common denominator product. They're being very choiceful."
Target's customers are a complex breed. Most are women, and one-third are mothers. About half are college-educated and have a household income of $62,000. They've pulled back on discretionary purchases but not necessarily on spending money for what they think is a good value, Tesija said.
Sales of Calphalon, a line of higher-end cookware, are strong as people stay home and cook, Tesija said. And Target's introduction this year of a $62 Olay Prox skin care packet is doing "incredibly well," Tesija said, as customers who once spent much more on department store products trade down to Target.
When busy mothers said they wanted hamburger to go with their Hamburger Helper, Target tested small grocery sections in some of its regular stores. It was an instant sales boost, and Target plans to add fresh meat and produce to 100 stores by year's end.
Target also "got under the hood" of each of its store brands to see what needed fixing. In the toy area, shoppers couldn't tell the difference among some smaller store brands. So Target pulled everything in toys under its already well-known Circo label.
Consumers also said they loved Target's brand of basics such as window cleaner and sunscreen, but that the bullseye label had become blasé. Target changed the packaging completely, and is in the midst of relaunching more than 800 items under the Up & Up label, which now includes laundry detergent, cotton balls and baby food.
Changes in the Home brand will come this fall with more colors and a new furniture line. And in the next few months, shoppers will see Anna Sheffield jewelry, Carlos Falchi handbags and Anna Sui clothes -- continuing the cheap-chic push Target became know for.
"There are a lot of critics, a lot of opinions about what's right for us," Tesija said. "For us, we just keep talking and staying close to our guests."
EXECUTIVE VICE PRESIDENT, STORES SINCE 2006
First job at Target: Area manager in Duluth, 1992
When the recession began, Target had to figure out how to dial back its store staff and trim other expenses without shoppers noticing. It was up to Troy Risch to make stores run more efficiently and profitably. Risch became executive vice president of stores three years ago, when then-president Steinhafel already was pushing what Target calls a "segmentation strategy." The recession lit a fire under it.
More than simply making flip flops available year-around in warmer climes or putting more Spam and touristy gizmos in Hawaiian stores, segmentation meant figuring out the smallest details of what worked well at individual stores. The idea wasn't to turn whole stores around. But Steinhafel believed that focusing on 10 to 20 percent of products or on a few key back-room operations could lead to exponentially large differences when carried across Target's chain of 1,719 stores.
Some Targets needed to adjust store hours. Others needed to stagger delivery times better, or stack only a portion of bottled water on the shelves at a time to improve efficiencies. Because stores range in sales from $15 million to $120 million, moving merchandise through a busy store in New York City's Queens borough requires a different approach than it does in Macon, Ga.
"In the past, we would do something in one store and roll it out to all of the stores," Risch said. "We realized some things don't work in all stores."
But some things do. Stand in any thoroughfare in a Target store these days, and the prices nearly scream at you. Big red capital "SALE" signs mean it's a weeklong deal. "Temporary price cuts" could go for a couple of weeks or more than a month. More often than not, there's a single product -- electric skillets or stacks of canned soft drinks. Another display might make bold price comparisons between Listerine and Target's new Up & Up brand of mouthwash at a fraction of Listerine's price.
On tour at the Ridgedale store in Minnetonka, Risch pointed out promotional signs in men's clothing: "Incredible!" or "Gotta have it!" The signs are evidence of Target's realization that its marketing strategy can no longer be subtle in conveying discounts.
The signs have made it easier for consumers to pick out deals and compare Target brands against national labels. But focusing on them also has led to cost savings. A new design to highlight sales of smaller items stays up longer than previous versions, which tended to get knocked off easily from passing shopping carts. They're also easier to put up and take down, which Risch said saves 25 hours per store.
"We sometimes think in seconds here," he said. "A second on every transaction when you've got 1,719 stores is worth real money."
But anyone who has walked around a retail store in search of help knows the downside of running a tight ship in payroll.
Target relies on the 100,000 shopper surveys it gets each week to stay in touch with consumers. The surveys cover everything from customer service to the cleanliness of restrooms. Risch takes them to heart.
"In times when we've had more sales than payroll, guests tell us our service isn't up to snuff," he said. "When you have a lot of problems on the survey, it's a barometer for how your stores are doing."
Feedback from store surveys prompted Target to give employees who work in the electronics area additional training and certification, because the products had become so complicated. Brochures and giant signs help shoppers figure out the difference in screen sizes and necessary cables. Customer satisfaction is at an all-time high, Risch said, but is highest in service and electronics.
Satisfied guests, Risch said, will put Target in the driver's seat when the economy turns.
"We're running on the tightest numbers we've ever run. It's a significant challenge," he said. "It's been a healthy exercise in some ways. We've been able to do things to help stores be more productive, that maybe would have taken longer to work through when the economy was better."