Target's New Partner, and the Future of Big-Box Retail

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On the first day of this month, Target (NYSE: TGT  ) launched a relatively radical holiday shopping partnership with high-end retailer Neiman Marcus. The move was intended to establish Target as a cross-genre, multichannel retailer. It seems pretty ambitious for a discount store to share shelf space with a longtime leader in peddling haute couture. While this particular move doesn't strike me as being along the lines of earth-shattering brilliance, it is indicative of Target's new strategy to further set itself apart from the crowd, and more important, from the Internet.

A startling partnership
I try to keep a close eye on Target, as retail seems to be my accidental favorite sector. Admittedly, I initially missed the announcement of Target and Neiman shacking up for the holidays. When I did learn about it, I was trying to find the checkout lane that would get me home in time for Sunday night HBO (it was, after all, the season finale of Boardwalk Empire). Frustrated with the 1-to-2,000 cashier-to-customer ratio, I literally bumped into a freestanding display. It was here that I saw brands such as Tory Burch and Oscar de la Renta being sold for conspicuously reasonable prices. It was all extremely confusing, so I left hurriedly.

It turns out I had run into the Neiman Marcus display at Target. And I think my reaction may have been the reaction of many customers who weren't expecting this juxtaposition. It was like a corporate retail version of the wild dog and the orangutan that became friends. Is this the right direction for Target?

Maybe, maybe not
To me, it seems this partnership may estrange some loyal Target shoppers. I don't think I am alone in enjoying Target for its reasonable prices and relatively tame shopping experience. It's certainly better than T.J. Maxx, where you have to fight with an old lady for a $4.99 Armani underwear gift box lying abandoned on the ground. Even though that designer scarf is only $59.99 at Target compared to $200 at Saks, I didn't really come to the store to buy high-end things to begin with.

Luckily, the Neiman-Target team-up isn't the whole story. It's just one of what appears to be many efforts by CEO Gregg Steinhafel to transform Target into the big-box retailer of the future -- a phrase that some investors think is an oxymoron.

But Steinhafel may be on to something in his endeavors. Since the beginning of this year, the chief executive has been increasingly demanding of his suppliers -- requiring more exclusive items that cannot be "showroomed" and then purchased online at a discount. This makes sense. The reason stores like Best Buy (NYSE: BBY  ) and RadioShack (NASDAQOTH: RSHCQ  ) are going up (down, really) in flames is because they sell things we can buy online for less. That's the end of the story. We can debate the ins and outs of these companies until we are blue in the face, but if a Web-based company can sell a TV, or a battery, or a video game for less than a bricks-and-mortar store, then the consumer will choose that outlet over its physical counterpart over and over again. Nothing can change that, barring some massive disruption to the online retailing model.

Target aims to avoid at least some of this fallout by offering exclusive items that you can't find on the Web. As for the items that can be found elsewhere, there is a no-questions-asked price-matching policy. You can even scan an item's code at a Target store and then order it online with shipping gratis.

Bottom line
I'll say it again: Neiman and Target doesn't sound to me like something that will revolutionize the stores. Apparently, at some stores there were lines before the opening so people could get their hands on the high-end goods selling at low-end prices. As for my own impression, the store I visited in Burbank, Calif., looked incredibly well stocked. So either people weren't grabbing Diane von Furstenbergs off the shelves or the store just ordered a lot of them to make sure they didn't run out.

Either way, Target is making the right moves in distinguishing itself from the pack. Things have certainly gotten tougher for the bricks-and-mortar retailer, but I am not one who believes the model is dead. It just needs renovation.

If you have experienced the difficulty of checking out at a Target recently, you know the stores are moving a lot of product. From the investor side, sentiment is equally bullish. The company is trading close to its 52-week high, and at a forward P/E higher than that of many of its competitors. Keep an eye out for this one to continue its upward trend in 2013.

Other Retail Stories From The Motley Fool
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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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