Target’s Failures and Potential Consequences

We all know about the security breach at Target (NYSE: TGT  ) by now. What you might not know is what took place following the breach in regards to customer service and the potential cost implications to Target. Most importantly, how will this impact Target's business going forward, and how will it impact Wal-Mart Stores (NYSE: WMT  ) and Amazon.com (NASDAQ: AMZN  ) ?

What happened?
It was either an overseas criminal organization or an inside job, according to security reports. Whatever the case may be, the criminal party responsible for this mess chose Black Friday because of the high volume, which makes a security breach more difficult to detect. This seemed to be a successful approach, as 40 million credit and debit cards were affected. The only thing the wronging party didn't gain access to is PIN numbers. However, with the information they did collect, identity theft is possible.

Many retailers in today's world attempt to keep costs low by outsourcing software writing and maintenance. The risk here is that it gives criminals easy access to information. Regardless of who is at fault and what practices Target uses to keep costs low, the bottom line is that Target failed in regards to protecting its customers' personal information. This is going to lead to a lack of trust from its customers. This, naturally, will lead to many of those customers now opting for Wal-Mart or Amazon.

Target tends to attract a wide range of consumers, which has made it successful. There's a very good chance that some customers who are struggling financially will now feel safer at Wal-Mart. And higher-end consumers, or those looking for more convenience, will shop online at Amazon.com.

You also have to consider that people don't feel as safe carrying cash as in the past. Therefore, it they're worried about credit- and debit-card information being stolen, and they don't want to carry cash, then they're likely to shop online at Amazon. Of course, consumers use credit and debit cards on Amazon, but the perception is different because they're not using checkout machines. And...Amazon has maintained a stellar customer service and security reputation.

Customer-service failure
After the security breach, not only did Target.com not perform correctly (according to Dotcom-Monitor), but the Redcard phone and website was either busy or rang for two minutes until there was a disconnection. Target blamed extremely high volume for the customer-service failure. Poor excuse. 

I have been a big fan of Target from an investing standpoint up until now, but this is a massive miscue. In addition to a hurt reputation, Target is adding team members to deal with high volumes on the customer-service side. This will increase costs, but that's not all.

Potential damage
A breach even larger than this one hit The TJX Companies in 2007. The company has recovered exceptionally well, but only after information on 46 million credit and debit cards was stolen, and the company incurred costs in the hundreds of millions for reimbursement, legal fees, and technical adjustments.  

Target is highly likely to face lawsuits, and despite this being a slightly smaller case, it might be more affected than TJX. That's because it relies on its Redcard for 5% of its sales. Consumers will now hesitate to use these cards, and new member growth potential will be affected.

The bottom line
I'm not bearish on Target, but I'm no longer bullish, at least for the near-to-medium term. The good news for investors is that this incident is likely to lead to market share gains for Wal-Mart and Amazon, making them more appealing investments. 

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