During the period of 2015 -16, Target was in a serious decline. The stock price went from the $84 per share range in early 2015 to $64 by late 2016. As pointed out by Fortune magazine recently, Target was being outflanked by Walmart and others in the retail sector price wars, particularly in apparel, where most of its older brands no longer had enough appeal to draw customers away from cheaper rivals.
Target’s operational problems were equally severe. It wanted to bolster its e-commerce with “ship from store” operations, using store inventory to fill online orders. But inventory management was so bad that the COO had to pause an early pilot project. Target had long struggled with being out of stock on popular items. Another big problem area was the stores themselves. They looked shabby after years of insufficient upkeep. Few had the infrastructure to support e-commerce. Often customer who stopped by a store to pick up their online order had to wait while an employee ran around the store collecting the items off the shelves.
The “prevailing wisdom” in the struggling retail sector at the time, supported by the profit-hungry Wall Street analysts, was to close poor performing stores. That is exactly what many of the other big retailers were doing, such as Macy’s, J.C. Penny, Gap, and Bed Bath & Beyond, while seeking growth online to hopefully make up for their declining store presence.
For Target’s relatively new CEO at the time, the easy route would have been just to follow that so-called “wisdom.” Instead, as a result of a thorough review of the key problems facing Target, the CEO developed a strong belief that Target could not succeed unless its core franchise, its store, was strong. Hence, in early 2017 at Target’s annual investor meeting, the CEO announced Target would sacrifice short-term profit to make its prices more competitive with those of Walmart and Amazon. It would junk and replace some of its best-known brands. It would undertake a massive store renovation program, raise wages for a large portion of its 320,000 employees, and completely overhaul its e-commerce effort. In conclusion, he cited that the cost of all of this would be $7 billion over three years.
Immediately the Wall Street folks called the CEO crazy, and the press could not believe Target was not going in the direction of the other big retailers and closing stores. The stock price dropped 14% the day of the announcement, and one financial analyst asked the CEO in a public interview that day: “how long do you think you will be in your job?”
On February 24, 2017, when the CEO announced his plan, the stock price was $63.75. This week it was in the $108 per share range, and for each of the past four quarters, Target has had same-store-sales growth of over 4%. Given the strength of the core Target business, its stores, and the e-commerce overhaul, its past-12-month online business grew +36% versus a year ago. The CEO’s plan worked!
What can we learn from this? It’s obvious; beware of the conventional wisdom and the “safe” route of simply doing what others are doing. Study the situation deeply and make the gutsy move of doing what you think it right!