Inflation, recession and shoplifters - omni-channel retail bellwether Target doesn't have its problems to look for

As noted yesterday, Walmart managed something of a turnaround in its fortunes this week. Fellow ‘big box’ retailer Target however had a considerably bumpier ride with Q3 profit collapsing by 52% year-on-year and a soft Holidays outlook ahead.

Revenue was up by three percent year-on-year to $26.52 billion. But the company, which enjoyed a growth rate of over 40% at the height of the pandemic, had suffered in recent quarter from excess inventory, much of which has now been dealt with, but with the impact of seeing net income drop from $1.49 billion this time last year to $712 million.

Store sales grew 3.2% year-on-year, compared to 10% in the same quarter last year, while digital sales of 30% last year shrunk to 0.3% this year. The firm is now looking for $3 billion of cuts in total costs over the next three years as the new realities of the Vaccine Economy take shape.

For CEO Brian Cornell, more used to delivering good news about Target’s omni-channel leadership, it’s clearly a difficult time for the retailer, with some problems coming from the macro-economic climate:

Consumers are feeling increasing levels of stress, driven by persistently high inflation, rapidly rising interest rates, and an elevated sense of uncertainty about their economic prospects. With high rates of inflation continuing to erode their purchasing power, many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets. But for many consumers, those options are starting to run out. As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responsive to promotions and more hesitant to purchase at full price. 

Chief Growth Officer Christina Hennington expands:

The current retail environment requires tremendous levels of flexibility, resilience, stamina, and focus, a balance our team continues to carry out at every guest interaction. Consumers are strained as they work to support their family's day-to-day needs while looking for the occasional affordable luxury, prepping for the changing seasons, and planning for the holidays. It's a difficult balance to strike and getting increasingly difficult each week as more and more of their household budget goes toward the needs of the family, which limits the amount available for discretionary purchases.

So, it follows that of the many considerations that our guests are currently juggling, we consistently hear that value remains at the top of the list. We see our guests holding out for and expecting promotions more than ever, spending less on regularly priced items. When they shop our frequency categories, some guests are trading into smaller-pack sizes, opening price point options for owned brands to reduce their spending on a single trip. Others are opting for larger-pack sizes for stocking up when items are on promotion, knowing they will receive greater per-unit value.

And these trends only became more pronounced toward the end of the third quarter, when spending patterns changed dramatically. With inflationary food prices absorbing more of their spending, those costs are crowding out other categories, including spending on discretionary items and, in some cases, even household essentials.

Supply-chain cheer

It’s left to Chief Operating Officer John Mulligan to produce some kind of cheer in terms of improvements in supply chain and fulfilment:

The good news is that the lead times in global shipping have started to move in the right direction. More specifically, compared with the second quarter, lead times improved by about 15% in Q3 and were more than three weeks shorter than a year ago. While we were really pleased to see this improvement, the acceleration was faster than we expected, causing many overseas orders to arrive earlier than needed.

As a result, the team has been reducing lead times on our future orders just as they extended them during the pandemic. In addition, to prevent earlier rivals from entering our distribution and store network before they are needed, the team has implemented multiple strategies and tactics, including new processes to efficiently segment shipping containers as they arrive at domestic ports, allowing early arriving containers to age before sending them downstream into our regional distribution centers.

The Holiday season is now here and Hennington argues that customer sentiment appears focused on ensuring that this is a positive experience. Whether that translates into more positive results remains to be seen. Mulligan concludes:

It's in times like these that we feel most fortunate to have a durable business model which can sustain us through an ever more challenging economic and consumer backdrop and allow us to emerge with additional profitable growth and market share opportunities over time. That's why we're ensuring our teams are staying focused on our guests and taking the right actions to continue deepening our relationship with them. If we maintain that guest focus, I'm confident we'll find ourselves in an even stronger competitive position over time.

My take

 

As if all this wasn’t bad enough, Target also has a problem with shoplifters that needs to be dealt with. Cornell says:

Along with other retailers, we've seen a significant increase in theft and organized retail crime across our business. As a result, we're making significant investments in training and technology that can deter theft and keep our guests and store team members safe.

Working on the premise that stolen items often end up being sold online, Target is advocating the passage of legislation “to increase accountability and prevent criminals from selling stolen goods through online marketplaces”. That’s an interesting long term challenge for the retail sector in a digital age.

In the short term, it’s a case of ‘keep calm and carry on’ from Cornell:

While the circumstances we're facing are difficult and certainly not what anyone would wish for, we need to embrace the moment, focus on what we can control, and lean into our strengths. Because even as we face multiple challenges all at the same time, we have an even longer list of strengths on our side. There are quite a few headwinds, but we've shown time and time again that our strengths can overcome any challenge we face.

Onwards!