Target Corporation Shoots for Customer Engagement and Smaller Stores to Help Lift Its Fortunes

By Motley Fool Staff Markets Fool.com

Of the many growth initiatives Target(NYSE: TGT) introduced during its most recent earnings call, two in particular show long-term promise.

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In this segment fromIndustry Focus: Consumer Goods, wecontinue our discussion of Target's strategy shift. Learn why a focus on experiential shopping and newer store formats could be critical for the big box retailer's planned resurgence.

A full transcript follows the video.

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This video was recorded on April 4, 2017.

Vincent Shen: They address certain things that resonated with me personally. Here's another quote from that call, they said, "Put a guest in the store, they are looking for inspiration, they enjoy discovery, they enjoy shopping. But very often a visit to Target.com, it's far more transactional. One item at a time, logon, check out, as fast as possible, friction free." I think that reflects a lot of the challenges that these brick-and-mortar operations face, which is declining customer traffic. That's affected the other industry we've talked about today, which is restaurants, especially with chain restaurants. You see less traffic at malls and shopping centers, and that has hurt a lot of the restaurants that are located near them, as well. But ultimately, the expression "friction free" speaks to a lot of people, younger consumers especially, who want to be efficient with their time, and technology overall has generally made shopping this very informed, competitive process, where you can price check, you can compare, at any time and place, and then press a button for very fast, often free delivery to your doorstep.

Ultimately, the company is trying to think about what is going to get their shoppers out the door and into stores. They mentioned the importance of things like experiences, and how that can be addressed in two ways. You can either have a really wide breadth of offerings, like a Costcomodel, or the fact that Wal-Marthas expanded into groceries; or you have a convenience model where, even Amazon, the company that's putting a lot of pressure on Target, where they're opening locations for their pick up concepts. And now Target is pushing some of their smaller-store concepts. I think they have 30 of them in operation now. They've talked about doubling that base with another 30 stores this year, 40 more in 2018. Some of the things they've learned from this test location, I think it was in LA, they really want to expand the aesthetics of the store, update them, make them more of an attraction, more of a place that people want to go, to boost that traffic. So, on the more positive side, I hear things like that and I think that's the right move. But, again, some of the finer details when it comes down to how they're going to try and step up the business, especially, like you mentioned, the investments in the gross margin, what that means is basically, they're going to be discounting and trying to get into a price war, essentially, with other bigger retailers like Wal-Mart. And that's really not a place I think Target ultimately wants to be. Any last thoughts for Target before we move on?

Asit Sharma: Briefly, I like going toward fact in this comparison, the great case that you've laid out, Vince. One thing that you said that I will grant is a method for Target to turn this more into fact than fluff, and that is that smaller store format. When it comes down to it, this future for brick-and-mortar retailers is about smaller spaces, so less fixed cost per square foot. When you have anchor stores and these very large 20,000 to 40,000 sq. ft. stores, you're competing against Amazon'sand Wal-Mart's fixed costs, which are now in warehouses. That's where they are investing their dollars, in technology warehouses and distribution. By experimenting with these smaller stores, which are more experiential, I think Target might have a way to turn some of this fluff into fact. I think it's a great point that you make. I also do think their brand resonates more than other brands. I think they have an edge over Wal-Mart, and it is a brand that customers, if you give them something to come into the store for, they'll return. So, there are some positives here. Still say fluff, but there is at least a narrow path to getting back to fact for Target. We'll see what 2017 brings.

Shen: Absolutely. I think this is a company that both investors and consumers are rooting for. They want to have that reason to shop with Target.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Costco Wholesale. The Motley Fool has a disclosure policy.