Is Target Changing Its Strategy By Cutting Down Innovation Initiatives?
Reports suggest that Target (NYSE:TGT) is cutting down on its innovation initiatives and the company is no longer pursuing “Goldfish”, its secretive e-commerce start-up. Target has also reportedly shelved a prototype of a robot infused store of the future along-with several other smaller projects of the innovation team. These reports come at a time when Amazon is heavily banking on technology to create the most innovative grocery store of the future in the form of Amazon Go. Walmart is also looking to step up its e-commerce initiatives and experimenting with several initiatives including a patent for a self-driving cart. Target officials stated that the company regularly pauses to evaluate its business and the changes in the innovation projects are to refocus its efforts on supporting its core business, both in stores and online. The company is struggling to grow revenues and maintain a balance between attracting customers to its stores and growing online sales. During the combined November-December period, comparable sales in its stores decreased by 3% and these were offset by digital sales growth of more than 30%. The overall decline in comparable sales during this period was 1.3%.
The company has a two pronged focus to grow revenues: 1) Develop new store formats to reach new customers in dense urban and suburban markets; and, 2) Transform its supply chain and technology to support different channels of shopping, especially e-commerce sales. We believe Target is still working on establishing a robust e-commerce platform along-with omni channel sales strategies that allow shoppers to seamlessly transact online and in-store. Walmart and Amazon already have smooth running omni channel platforms and are focusing on advanced innovations for customer engagement. Target is still looking to develop a strong platform that attracts customers to its stores and allows them to shop online. In this scenario, committing resources to other innovation initiatives might not be the right strategy for the company.
According to our estimates, Target’s revenue per square foot is likely to increase from $302 in 2017 to nearly $320 by the end of our forecast period.
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We believe Target’s focus on groceries, its online business and smaller format stores in urban areas are likely to contribute towards this increase. Online sales form a very small portion of Target’s total revenues (less than 5%) but are witnessing strong growth. With comparable sales in stores declining, Target needs to focus on a strategy which integrates online and in-store sales to offer convenience and the ability to choose fresh grocery items at the same time. These initiatives need a strong supply chain and logistics network. We believe Target’s strategy to focus on its core areas and identify ways to attract traffic to its stores and digital channels should aid in its long term growth. Eliminating innovation projects which are not directly tied down to this strategy will ensure that the company is able to deploy resources on its key focus areas. While Target is lagging behind competitors in terms of technology innovations, making its e commerce platform efficient and attracting customers to its stores are rightly the key focus areas for the company.
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