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HOW TARGET WON THE HEARTS OF LANDLORDS

BY NANCY COHEN

Its red-and-white bull’s-eye logo is recognized by more U.S. shoppers than the Nike swoosh. Its fresh, funky ads, innovative marketing tactics and designer partnerships have made it a media darling. Its revenues, which increased 11.8 percent in the third quarter of 2002, are a rare bright spot in an otherwise dull retail climate. And it continues to flourish in a discount field that Wal-Mart has otherwise all but mowed down.

Over the past few years, Minneapolis-based Target Corp. — by now so well known that neither the previous paragraph nor a recent ad campaign needed to mention the chain’s name — has grown from a regional discounter into a national powerhouse. Target operated 1,148 stores in 47 states as 2002 neared its close and still routinely appears on developers’ “most wanted” lists.

“Not enough!” replied Michael E. McCarty, president of Simon Property Group’s community shopping center division, when asked the number of Targets at Simon centers. “We have half a dozen deals now in the works with Target, and I’d love to have more.”

His wish may soon be granted. Target plans to expand its overall square footage by 8 percent to 10 percent a year, according to its 2001 annual report. A study published in September by Retail Forward, a Columbus, Ohio-based consulting and research firm, confirmed that there is ample opportunity to do so. With more than 40 percent of its stores in only five states (California, Florida, Illinois, Minnesota and Texas), the chain has yet to enter or fully tap many markets.

“Enough underpenetrated geographic pockets remain for Target to double its store base in the 100 biggest U.S. markets alone from 850 to 1,700,” said Sandra J. Skrovan, a vice president of Retail Forward and the author of the study. “Another 125 smaller markets could support a Target store.”

And as it expands, Target is moving closer to the shopping center. Though the company owns the vast majority of its stores (about 81 percent at year-end 2001) and has traditionally opened single-level suburban units, it is exploring new formats. The acquisition of 35 defunct Montgomery Ward stores and a number of Bradlees sites has facilitated Target’s experimentation with multilevel, urban and mall stores. The adjacency to malls “has proved very positive,” Simon’s McCarty said.

Although it was founded in 1962, Target’s growth spurt dates only from the mid-1990s. Between 1996 and 2001 its net square footage swelled by more than 50 percent; the number of stores rose 43 percent, from 736 units in 38 states to 1,053 in 47 states; and sales ballooned 83 percent, from $17.8 billion to $32.6 billion.

Yet during roughly the same period, from 1999 through 2002, discount chains of similar vintage — Ames, Bradlees and Caldor — went out of business, while Kmart, the longtime No. 2 discounter, filed for bankruptcy.

Target has succeeded where others have failed “because they were the only ones that didn’t try to out-Wal-Mart Wal-Mart,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting firm. “They went in between Wal-Mart and the department stores and built a different mousetrap.”

Instead of focusing solely on low, low prices, Target defined value as up-to-the-minute fashions, good quality and exclusive merchandise sold in clean, bright stores at excellent prices (some 40 percent less than at department stores, according to Davidowitz). The strategy is summed up in Target’s branding statement: “Expect more. Pay less.”

“Given our size, we knew we would never be able to compete strictly on price with the 900-pound gorilla of discounters,” said Michael Francis, Target’s senior vice president of marketing, in a presentation at ICSC’s 2002 Fall Marketing and Management Conference. (He and other Target executives declined to be interviewed for this article.) “Kmart tried that strategy, and look where it got them.”

In fact, in apparel and housewares Target has positioned itself as a competitor less to Wal-Mart than to department stores, industry experts say.

“Target is having an impact on all department stores where they operate, including Marshall Field’s [its corporate sibling], because of the price-quality differential,” said James McComb, president of the McComb Group, a retail consulting firm in Minneapolis. In bedding, for example, “they’re fabulous — half the price, but comparable quality to what’s in the department stores.”

Photo: St. Paul Pioneer Press

Target is experimenting with multilevel urban stores.

The qualities of the Target customer are also comparable to those found among department store customers: a median age of 44 and a median household income of approximately $54,000. Some 81 percent of its shoppers are female, about 40 percent have children at home, and roughly 51 percent have completed college. Department store roots are a source of Target’s strength, agility and knack for delivering affordable, trend-right product, observers say. The Dayton Co. (later Dayton Hudson Corp.) launched Target 41 years ago as a test of the fledgling discount concept. Ultimately, Dayton Hudson’s discount division outshined its department stores (including Mervyn’s and Marshall Field’s). In January 2000 the company renamed itself Target Corp., reflecting the fact that Target contributed more than 80 percent of total revenues.

“They built the discount sector around the fact that they had a great fashion-oriented operating structure in place,” Skrovan said. “They have an in-house sourcing arm, so they can take what their trend department sees and immediately deploy it. Target really has the pulse on what’s happening, which stems from its history as a department store company.”

By contrast, Kmart’s and Wal-Mart’s origins lie in the variety and hard-goods segments, McComb points out.

“Stores always play to their strength,” he said. “It’s difficult for Kmart and Wal-Mart to build the soft-goods business because their culture doesn’t understand it. But Target managed to have cotton polo shirts at $8.95, comparable to Ralph Lauren’s, just without the pony.”

Target has excelled not only at building its private-label business, but also at forging partnerships with designers and brands for unique products. Architects Michael Graves and Philippe Starck design an array of housewares for Target, bringing high design to items as humdrum as toilet brushes and baby bottles. Target is similarly allied with Eddie Bauer for outdoors gear; Mossimo for apparel and accessories for men, women and children; National Geographic for stuffed animals and educational toys; and Waverly and Woolrich for home textiles. The roster further includes fashion designers Marc Ecko, Liz Lange, Todd Oldham, Cynthia Rowley and Stephen Sprouse, and such brands as Calphalon, Sony and Tupperware.

Some might consider the parade of names dizzying, or wonder whether a given designer’s name means much to the average shopper. Target’s Francis remarked that the product lines were deliberately “not built around a single designer,” a pointed reference to Kmart’s arrangement with Martha Stewart, whose insider-trading imbroglio has tainted her image and her business. The array of designer partnerships is meant to “make great design accessible to everybody,” he said, as well as to make Target a unique destination.

The chain also seeks to distinguish itself through the appearance of its stores. It has won plaudits for handling mundane retail operations with a finesse that eludes many, if not most, merchants today. Target’s new flagship on Minneapolis’ pedestrian-zoned Nicollet Mall confirms the chain’s departure from the discounters of yore. Its clean, wide aisles are brightly lit, well organized and clearly signed, and its shelves are tidily and abundantly stocked.

“It all seems so simple, but it’s very hard to execute,” Davidowitz said.

Inviting, easy-to-shop displays come at a price, though.

“They have wider aisles, they don’t cram in as many goods, and their presentation impacts productivity,” Skrovan said. The chain’s growth in same-store sales and its sales-per-square-foot performance consistently lag Wal-Mart’s, she said. Over the past five years, Wal-Mart grew same-store sales by 6.1 percent; Target, by 4.1 percent. Similarly, Wal-Mart’s sales per square foot topped $400 in 2001, some 46 percent higher than Target’s $274 per square foot.

But Target’s presentation is a strategic trade-off. It is as much a part of the chain’s reason for being as its only-at-Target products.

Just as it does with housewares and apparel, Target is deploying its exclusive-brands strategy to the grocery business, through the SuperTarget format. SuperTarget combines a grocery store with general merchandise within about 175,000 square feet. (Typical Target stores average 126,000 square feet; Target Greatland stores are 145,000 square feet.)

The grocery selection is seasoned with items shoppers won’t find at their local supermarket: gourmet offerings from Silver Palate and Dean & Deluca, Asian-accented foods and kitchenware by celebrity chef Ming Tsai, sweets from the Cheesecake Factory and Cinnabon, and Starbucks coffee beans. In-store bakeries turn out Einstein Bros. bagels daily.

The company is pegging much of its expansion plan to the grocery concept, which accounted for about 40 percent of Target’s square footage growth in 2002. It will continue to do so over the next five to 10 years, Gregg Steinhafel, president of Target Stores, told Forbes last September. The first SuperTargets opened in 1995; by late 2002 they numbered 94.

A primary goal is to capitalize on shoppers’ more frequent need for food than for fashion, thus boosting the number of trips to Target’s stores, spurring cross-shopping and increasing the average sale. But the strategy is fraught with risk, say industry experts, who note that margins for foodstuffs are notoriously thin. They suggest that Target’s fashion distinction may not translate to groceries and worry about the chain’s incursion into territory that Wal-Mart, the nation’s No. 1 food retailer, has claimed as its own.

“Target is at an enormous disadvantage [there],” said Davidowitz. “They went out late, it’s a difficult business, and it’s hard to differentiate the way they do with general merchandise. How do you make food hip? Mom is not looking for Cinnabon on her shopping trip; she has to feed a family. It’s a different mission — a mission for peas and ketchup and soup, and the way to address it is what Wal-Mart’s great at: selection and price.”

In fact, the Retail Forward study found a high incidence of defection among frequent Target shoppers, who were heading to Wal-Mart for food and such commodities as school supplies and film. “It was all for the price aspect,” Skrovan said. In terms of the grocery business, she said, “Target has their work cut out for them.”

Partly for that reason, Salomon Smith Barney analyst Deborah Weinswig downgraded her stock rating for Target to “in-line” from “outperform” last September. “Our fear is that consumers are shopping Wal-Mart for food and basics, and Kohl’s [the value-oriented department store] for apparel and home in markets where they overlap.” Weinswig also cited Target’s reliance on fashion apparel and the aggressive rollout of its proprietary Visa card as vulnerabilities in an uncertain economy.

Such concerns have not clouded developers’ sunny views of Target, however. The chain’s stores and advertising draw abundant traffic, a prime demographic group and attractive co-tenants, they say.

“It’s one of the most desirable retailers you can have,” said Alex Dmyterko, retail division president of Crosland, a Charlotte, N.C., developer. “From a financial standpoint, they are the second- or third-strongest retailer after Wal-Mart and The Home Depot, consistently improving their revenue, balance sheet and net earnings — that tells you it’s a well-run operation. I’d certainly rather have them in my center than across the street, or be next to them rather than a mile away.” Crosland’s StoneCrest lifestyle center, in Charlotte, is home to a Target. A SuperTarget is slated to open in Poyner Place, which Crosland is developing in Raleigh.

The first and as-yet only SuperTarget to be attached to a mall opened last October in the former Ward’s at Simon’s Richardson (Texas) Square. It’s drawing more shoppers to and through the 760,000-square-foot center, mall manager Herb Dunnavant told The Dallas Morning News. “It’s what we wanted, and we are thrilled.”

Whether next to a mall or occupying a pad, Target “today is one of the leaders — one of several that can make your shopping center better than it is,” said Simon’s McCarty. “They draw a wonderful shopper and also help us to lease other spaces. The only negative is that they do so much business, you need more people to round up the shopping carts.”

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