Schafer: Target, Wal-Mart face similar challenges

It took a minute last week to fully grasp that Target is actually going to be led by an executive, Brian Cornell, with Wal-Mart Stores on his résumé.

It’s one thing to go outside for a new leader, but to Wal-Mart?

Cornell has a varied background and wasn’t at Wal-Mart long, but it’s certainly fair to wonder if Target now becomes a little bit more like the world’s biggest retailer.

Let’s hope not. Becoming more like Wal-Mart was already one of Target’s biggest problems.

Target is hardly a twin of Arkansas-based Wal-Mart, of course, but today both companies are struggling in their core retailing operations and for very similar reasons.

The most telling number may be store traffic. Wal-Mart in May reported that traffic declined for the sixth consecutive quarter, this time down 1.4 percent. Meanwhile, Target in its last quarter said traffic in its U.S. segment was down 2.3 percent — also its sixth straight quarter of decline.

It wasn’t that long ago that Wal-Mart was one of the most celebrated companies in America. Minneapolis-based Target had a reputation for managerial excellence, too. Until maybe Costco came along, Target was regarded by investors as the only retailer that could take on Wal-Mart and hold its own.

When it came to distribution, however, Wal-Mart was a company with a rare genius.

What Wal-Mart perfected was a way to get consumer goods from the loading dock of a manufacturer and into a big store cheaper than its competitors, cheaper than anybody else has ever done it.

Target’s plenty skilled at working with suppliers and running lean distribution centers, but it wasn’t going to beat Wal-Mart at that game. Target got its start in a department store company, so it was going to win on merchandising. In its DNA is the department store merchant’s art of delighting and surprising customers with what gets put on display.

Like Wal-Mart, Target also sells the basics, the kind of stuff that consumers go to the store once or twice a week to pick up. When the strategy was really working best for Target, consumers took a list of 12 everyday items to the store, then came out with those 12 items plus fashionable outfits for the kids, a new rug for the bathroom or even a Michael Graves-designed toaster.

Target kept looking for interesting new things to sell, hoping to give customers a reason to leave the deodorant aisle to shop the rest of the store to see what might be interesting.

“Target management highlights that new products are less an asset than they used to be,” Miller said. “Is it because Target has lost sight of that? Or has the market shifted?”

Well, one explanation is that great recessions aren’t a time to try a funky new line of kitchen gadgets. The bigger factor, of course, was that Target had committed to selling groceries in a big way, giving more space to consumables at the expense of more fashion-oriented or seasonal items.

In short, a Target store began to look a lot more like a Wal-Mart store.

And coming out of the Great Recession, selling a big assortment of groceries and other everyday products wasn’t going that well for Wal-Mart anymore. Another company with a genius for distribution, Amazon.com, had done Wal-Mart one better, figuring out how to cheaply get stuff from the loading dock of a manufacturer all the way to the consumer’s front step.

It didn’t help that the customer base of both companies remained under a lot of financial pressure. Target has a more affluent customer base than Wal-Mart, but “to a large extent, they share that same problem,” said David Strasser, analyst with the firm Janney Montgomery Scott. “The low-end consumer is toast. The middle-class consumer is only a little bit better off. The high end has gotten all the wage growth.”

So far, McMillon has been refreshingly open about the need for reinvention. For a retailing CEO, for instance, McMillon has sure talked a lot about the potential of 3-D printing and the ability to create a product made-to-order for a customer right in the store.

“Customers will decide what they want,” he told analysts and investors in July, reflecting on the “omnichannel” strategy of selling, making it easy for folks to buy over a smartphone, over an Internet connection or in a store, and decide where to pick up the items, too.

The Wall Street analysts, while impressed with McMillon’s candor and charisma, suggest Wal-Mart’s challenges are not for the faint of heart. They expect McMillon to have to increase spending on e-commerce and a host of other initiatives to try to make Wal-Mart a better fit for the way customers shop in 2014.

Cornell is likely to reach the same conclusion once he gets to work here in Minneapolis,

“The ways out for Target are merchandising and omnichannel, in the way that Nordstrom is doing omnichannel,” Miller said. “It’s very hard, because you need to step up your investments at the same time as being a great retailer. And in the early stages, it’s not accretive to earnings or returns on capital.”