Venerated discount retailer Target Corp. is in for some stiff competition from none other than the world’s largest company — Wal-Mart.
Increasingly, Wal-Mart is going head to head with Target, not only in the food department, but also in the key branded apparel arena.
That explains why analysts are now watching Target’s next moves very closely.
"All great companies undergo a continual reevaluation and adjust their strategies accordingly," says Michael Exstein, analyst with New York-based CS First Boston. "Target appears to be currently facing just such a crossroads. The company's upcoming analyst meeting on October 24th will provide an indication of whether and how they will rise to a new set of challenges."
Exstein says Target needs to address the following issues:
1) The retail industry including the discount segment is undergoing rapid structural change. The outcome of Kmart's bankruptcy stands to impact the entire retail industry, not just discounters.
2) Target's "trend" merchandise is being challenged. This has been the cornerstone of its differentiation strategy and its ability to generate higher gross margins vs. Wal-Mart. Following WMT's analyst meeting (in early October), it now appears WMT's second growth vehicle behind food is not just apparel, but more "trend-forward" merchandise.
3) Practices of steadfastly defending the company's Mervyn's, Marshall Field's and credit divisions may need to be rethought. Particularly as the company's valuation gap with WMT increases.
4) Food — TGT is offering food as an incremental purchase option, while WMT uses food as its traffic driver. Does TGT's strategy need to be modified to at least make food a category TGT shoppers seek out, rather than browse?
"How the company meets these types of challenges will be the best indication of its flexibility and adaptability," says Exstein.
"Following Wal-Mart's annual analyst meeting earlier this month, we learned that the company is setting up apparel, specifically its ‘George’ private-label line as its next growth vehicle as well as how WMT intends to improve Sam's Club execution. At Target's upcoming meeting (Oct. 24) we hope to not only learn how the company will continue to successfully grow and compete against the world's largest retailer, but also how it plans to adopt to a new set of challenges."