Target (TGT +1.37%), the third-largest discount retailer in the U.S, is struggling with various weaknesses, strategic mishaps, and fierce competition from online retailers such as Amazon.com (AMZN 0.87%).
The recent resignation of Target's CEO Gregg Steinhafel, a 35-year employee of the company, symbolized the fact that the retailer is desperately trying to change its business strategy to avoid following in the footsteps of other mammoth retail enterprises. Once a cool company, Target's corporate culture may have become too stagnant and bureaucratic to survive the battle against Amazon.com, known for its fierce take on pricing and creative cross-selling strategies. In this difficult context, could Target see a turnaround?
Source: Target
Earnings
In the most recent quarter, Target's profit fell 16%, missing the Street consensus. Losses from Target's Canadian operation and extraordinary costs related to a data breach that took place in December last year, when information from more than 40 million credit and debit cards was stolen, contributed to this.
What went wrong
Sales came in at $17 billion, representing a 2.1% increase over last year. However, this was not enough for Target to avoid a decrease in earnings. The company had to spend $18 million in the first quarter just to deal with the massive data breach it experienced over the holiday season.
However, Target's issues go beyond a massive data breach. The company's customer transaction numbers have decreased for several quarters. And the company has lost more than $1.6 billion since it entered Canada.
These problems may have partially resulted from a poor corporate culture. According to the Wall Street Journal, the company was long known for a "cheap chic" style that drew shoppers who were looking to spend a few dollars on everyday basic items, but left with $100 worth of items that they did not expect to buy in the first place.
This was only possible because the company created a culture that let managers make their own calls on product picks and special promotions. The situation may be quite different now. Interviews with various executives suggest that the company may have become too bureaucratic.
The turnaround
After CEO Gregg Steinhafel's resignation, a group of executives headed by CFO John Mulligan have taken over the company's leadership until Target finds a replacement.
This could be an opportunity to turn around the corporate culture. In a nutshell, the company needs to become a fashion trend-setter. To achieve this, the company needs to enhance a creative corporate culture. It needs to give more power to local managers so they can make their own calls again on promotion strategies and product picks.
More important, the company needs to make better use of its physical space. The company has more than 1,700 stores in the United States and nearly 130 stores in Canada. It could use some of its physical space to create stores "within-a-store". This would require it to establish partnerships with top fashion brands interested in promoting their products via Target.
Fighting against Amazon.com
The store-within-a-store concept has been successfully employed by Best Buy to promote Samsung products. It is probably the most effective way to fight against Amazon.com, which generated more than $74 billion in revenue last year.
Unlike traditional retailers, Amazon.com does not need to employ a massive sales force or rely on physical stores to generate revenue. The online retailer can do great by just operating a network of efficient distribution centers.
However, Amazon.com's lack of physical stores makes it difficult for customers to "see" or "experience" the products before buying them. This is why a great number of customers check out products at physical stores first and buy them later on Amazon.com. This trend is certainly not good for a physical retailer that uses product sales as its only revenue source. However, physical retailers could take advantage of this trend by selling their space to brands interested in building exhibition rooms.
Final Foolish takeaway
There's still plenty of value left in Target. After all, this is the third-largest retailer in the United States and the eleventh-largest retailer in the world. The turnaround certainly won't be easy. The first step will be finding a new chief executive capable of bringing a creative, innovative corporate culture back to Target. Finally, it should use a store-within-a-store concept widely to promote key brands, diversify revenue, and fight against Amazon.com.
