Is Target too upscale?

Chris Serres
Star Tribune

Target Corp. has been working extra hard to appear hip.

The discount retailer last month paid $1.5 million to have its red-and-white, bull's-eye logo peppered throughout the New Yorker magazine. It hired a team of acrobats to leap off the Rockefeller Center (with harnesses) in clothing from its fall collection. Even its pet department is taking on a new look, with "Black Bling" T-shirts and leopard-print chenille sweaters for pooches.

But could Target's trendy image become a liability in a world of soaring gasoline prices, declining consumer confidence and economists raising the specter of a recession?

Target's stylish ads and savvy merchandising might have won it a loyal following among younger and more fashion-conscious shoppers, but some industry analysts believe the company must do more to emphasize its low prices at a time when consumers are expected to tighten their purse strings.

"It doesn't matter how high your income, when gas hits $4 a gallon, you're going to start paying attention to prices," said Richard Guha, a principal at the New England Consulting Group in Westport, Conn. "Now is the time for Target to change its advertising to the world at large ... and to reassure people that, yes, you can find low prices here."

For the time being, there is a perception among many shoppers that Target is more expensive than its chief competitor, Wal-Mart Stores Inc. of Bentonville, Ark. In July, BigResearch of Columbus, Ohio asked 900 women shoppers who buy clothing only on sale or at a discount where they most often buy their clothing. Target ranked a distant No. 5, behind both Wal-Mart and Kmart.

Yet industry analysts who cover the discount retailers insist this perception is not grounded in reality. Jeffrey Klinefelter, a retail analyst at Piper Jaffray & Co., insists that Target's prices for basic items are frequently lower than Wal-Mart's, and rarely more than 2 percent higher on any given item.

The Star Tribune recently conducted a survey and came to the same conclusion. We compared a basket of 14 identical items from various departments at local Target, Wal-Mart and Kmart stores. Included were liquid detergent, movie DVDs, jeans, crayons, shaving cream, soda and diapers.

The result: Target's tab for the 14 items came to $106.08, 87 cents cheaper than Wal-Mart's and $17.08 cheaper than Kmart's.

At the Target store on E. Lake Street in Minneapolis, for example, men's Wrangler jeans were priced at $14.99. A pack of 24 Crayola crayons cost just 25 cents. Printed T-shirts were as low as $4.99.

"It's not widely known, but Target shops every one of its competitors within a five-mile radius of its stores each week," Klinefelter said. "They have a deliberate strategy to be competitive, particularly on commodity items."

Style over price
Yet unlike its Bentonville competitor, Target continues to emphasize style over price. In one of its latest back-to-school shopping ads, Target features children dancing in circles to hip-hop music; prices aren't even mentioned. They are a marked contrast to Wal-Mart, which continues to use its price-slashing smiley face in its TV ads.

Target's strategy is deliberate. "At Target, value is about more than low prices -- it's about trend-driven merchandise with the everyday basics, a unique shopping experience, and a commitment to the community," said Paula Thornton-Greear, a spokeswoman at Target.

It's also one that has served Target well, helping the retailer outperform its peers month after month. Target's same-store sales have increased an average of 6.1 percent in the past 12 months, compared with 2.9 percent at Wal-Mart.

By emphasizing style over pricing, Target has attracted wealthier shoppers who are willing to buy higher-margin, discretionary items -- from high-definition televisions to leather couches, analysts said. Target's operating margin, a key measure of profitability because it strips out interest expenses and one-time write-offs, is 9.4 percent -- compared with 5.9 percent at Wal-Mart, according to Morningstar Inc.

"Because Target has differentiated itself from its competitors as a cool place to shop, it attracts people who may be willing to pay a bit more for a pair of jeans," said Joseph Beaulieu, an analyst at Morningstar.

Synonymous with expensive
The downside, of course, is that many shoppers think style is synonymous with expensive.

Steve Hansberry, 51, an engineer from Sandstone, finds Target appealing. He likes the retailer's wide aisles, uncluttered shelves and its shorter checkout lines.

But when Hansberry and his wife make their monthly shopping trip to Duluth, which has both a Wal-Mart and a Target, they usually visit Wal-Mart for basic items. "I see Target as cleaner, better organized and less trashy" than Wal-Mart. "But a cleaner store usually is more expensive."

Target's image as an upscale discounter has hurt the company in the past. In the aftermath of the 9/11 attacks, Target struggled as consumers pared back their discretionary spending. Target's same-store sales rose by a modest 2.2 percent in 2002.

Analysts fear a repeat if gas prices continue to rise. "If people are going to become more concerned about their expenses, they might shift from Target to Wal-Mart," Klinefelter warned. "If people recognize that pricing is comparable, they won't make that shift."

Even before Hurricane Katrina devastated Gulf Coast oil rigs, there were signs that higher gas prices were beginning to affect shopping habits. In May, 33 percent of consumers surveyed in a poll by WSL Strategic Research of New York said they were cutting back on spending because of gas prices. Thirty-seven percent said they had postponed big purchases, according to the poll.

Though Target should not abandon its focus on style, the company should make an extra effort in the coming months to highlight its low prices, Guha said. If, for instance, Target is charging 50 cents less for a tube of toothpaste than Wal-Mart, then it should have signs in its stores pointing out the differences, Guha said.

In Europe, such price-comparison signs are commonplace. Tesco, Britain's largest supermarket chain, posts signs above its aisles highlighting examples where its items cost less than its prime competitor, Asda, which is owned by Wal-Mart.

"Target really needs to communicate to people that, you can find cool stuff here, but you can actually save money, too," Guha said.