Data Breach Impacted Traffic
Target's (NYSE:TGT) data breach severely impacted sales and traffic. On the 2013 Q4 Conference call, Greg Melich, ISI Group, asked "...I mean traffic was down 5.5% in the quarter. Presumably post the breach it was down - pick a number like 7% or 8%...". Gregg Steinhafel, CEO, responded "Yes, on traffic your view of what happened post the breach is pretty accurate...." The data breach caused Target's traffic to fall 5.5%, during the 4th quarter. The 4th quarter is Target's most important quarter. Unfortunately, Target's traffic issues have continued into the first quarter, of 2014.
Target's Plan To Bring Back Traffic
Target is pushing hard to regain their traffic. Target has decided to ramp up their discounts and deals. The discounts and deals have brought back some traffic. However, the discounts and deals are impacting the bottom line. On the 2014 Q1 conference call, John Mulligan, CEO, stated "...we ramped up the intensity of our deals in the first quarter to get guests back into our stores and this decision was reflected both in better sales in traffic and a lower gross margin rate." Target's discount strategy isn't a sustainable way to increase traffic. Constant discounting will erode Target's already low net income margin. From 2008-2013, Target's average net income was 3.8%. Target needs another way to increase traffic.
Don't Follow Retail Trend
Brick and Mortar retailers live and die by foot traffic. Over the last several years, retailers have been trying to expand their product offerings to lure customers into their stores. According to the Wall Street Journal, Home Depot (NYSE:HD), Staples (NASDAQ:SPLS), and Best Buy (NYSE:BBY) stock items normally found in grocery markets. For example, Staples stocks deodorant. Staples' strategy is simply: Stock items customers purchase frequently and hopefully customers will keep coming back for those items. Yet, the effectiveness of this type of product expansion is debatable. Are customers really going to Staples specifically for deodorant? More likely, customers purchase deodorant at Staples because it is convenient. Customers already at Staples can save themselves a trip to another store. Even though a discount retailer, Target can't start stocking their shelves with random items. Target shouldn't open up floor space for a large display of table saws. They need to find a more natural traffic generator. Luckily, Target already stocks such an item.
Groceries Are A Traffic Generator
Wal-Mart (NYSE:WMT) is the largest retailer in the world. They generated $476 billion of revenue, during 2013. Wal-Mart generated $267 billion (56%) from groceries. Groceries are a low margin product but add significant value to a retail store. Some grocery shoppers (85%) visit the physical store once a week and 42% of shoppers visit more than twice a week, according to KSC Kreate. Grocery shoppers visit frequently and grocery demand is consistent, in most economic environments. Currently, Target generates 21% or $15 billion of their revenue from food and pet supplies. Why does Target only generate a fifth of their sales from groceries?
Target Needs REDcard To Compete With Wal-Mart
According to Twin Cities Business, a Kantar Retail study revealed a basket of products from Wal-Mart was 3.8% cheaper than Target, in 2014. Wal-Mart has a significant price advantage which is hindering Target's growth. The study did give Target some hope. The study showed Target was cheaper than Wal-Mart, for REDcard members. After the REDcard's 5% discount, Target's basket of products were 1.4% cheaper than Wal-Mart.
This is why Target plans on increasing their push for more REDcard members. On the 2013 Q4 conference call, John Mulligan, CFO, said "...as part of our broader effort to rebuild traffic and sales in 2014 we will work to reaccelerate REDcard growth in light of the recent slowdown in growth we've seen following the data breach." Naturally, Target's push to acquire more REDcard members has been difficult because of the data breach. Yet, Target needs the REDcard to compete with Wal-Mart's lower prices.
REDcard Growth Important To Future Sales Growth
Target's data breach has caused significant near term damage. However, consumers will eventually move on and focus on selection and price. Target has always had a problem competing with Wal-Mart on price. In 2014, they were 3.8% more expensive, according to Kantar Retail. Target's REDcard can help reduce Wal-Mart's significant price advantage. The data breach has made it difficult to increase REDcard members. Yet, the data breach's impact will eventually wane.
Target needs to increase foot traffic. Groceries are a great way to increase foot traffic. However, Target needs the REDcard to make their groceries cheaper than Wal-Mart. To gain market share, Target needs to offer similar or lower prices than Wal-Mart. Ultimately, Target's ability to acquire REDcard members should be a good indicator of Target's future sales growth.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.