Business Model of Target Corporation

Target Corporation: An Introduction

Founded in 1902 as Dayton Dry Goods Company, Target started its first store in 1962 in Minnesota. Unlike Costco or Walmart, Target’s market is limited to the United States. However, the company has been ramping up its e-commerce capabilities and is experiencing faster growth in this area. Target is a general merchandise retailer that has its stores operational across the United States in all 50 states. The company had 1868 stores operational as of 2019. Due to the high density of Target stores in the US, around 75% of the residents have a Target store within their easy reach. There are 41 distribution centers to support the operation of 1868 Target stores within the United States.

Target has differentiated its business model from other retailers by creating its own range of private label brands. These company-owned brands and products account for around one-third of the total sales of the company. There are 41 brands owned by Target which are both a major source of revenue and a source of competitive advantage for the brand. While Target Corporation sources products from suppliers located all over the world, a large part of its merchandise is made up of the brands owned by the company. The company either produces them in company-owned facilities or gets them manufactured by external manufacturers according to the company guidelines. This has helped it differentiate its product line which drives higher demand for the company. The company generates substantially all of its revenue from the United States. Moreover, Target Corporation operates its entire business as one segment. Efficient supply chain management has also helped the company keep product prices low. 

The retail industry in the United State has grown highly competitive and that has led to a lot of price competition. The challenge before Target mainly comes from Walmart and Costco who are the two leading retail players in the United States as well as the E-commerce leader Amazon. Apart from that, there are also several big and small players in the United States retail industry that compete with Target. The company employs an economy pricing model which is particularly useful for the brands interested in keeping their overhead low. 

However, Target does not employ a membership model which is the primary driver of sales and customer loyalty for Costco. Instead, it uses other channels and methods to drive customer loyalty and higher sales. The company offers products at discounted prices to attract customers in larger numbers. The discounted pricing strategy and a focus on customer experience have also helped the brand retain its competitive position in the retail industry.

Another method that the company utilizes to drive customer loyalty is the use of branded debit and credit cards. The branded debit and credit cards offered by Target are collectively known as Red cards. Apart from free shipping, the customers receive a discount of 5% on nearly all products sold at Target stores when they purchase using a Red card. The company also provides several more personalized offerings for the Red Card holders.  They receive in-app coupons as well as 1% earning on every Target run nationwide for free. 

Target Corporation Merchandising:

Target’s merchandise is limited when compared to Walmart and Costco but it mixes national brands that the customers in the US already know with the private label and company-owned brands. National brands are a major driver of sales and revenue for the company. Of the 41 brands that the company owns Target has launched around 20 since 2017. The company-owned and exclusive brands include the following:

Target Corporation Owned Brands

  •  A New Day 
  • JoyLab 
  • Smartly 
  • Archer Farms Knox Rose
  •  Smith & Hawken 
  • Art Class 
  • Kona Sol 
  • Sonia Kashuk 
  • Ava & Viv 
  • Made By Design 
  • Spritz 
  • Boots & Barkley 
  • Market Pantry 
  • Sutton & Dodge 
  • Bullseye’s Playground 
  • Opalhouse 
  • Threshold 
  • Cat & Jack 
  • Original Use 
  • Universal Thread 
  • Cloud Island 
  • Pillowfort 
  • up & up 
  • Embark 
  • Prologue 
  • Who What Wear 
  • Gilligan & O’Malley 
  • Project 62 
  • Wild Fable 
  • Goodfellow & Co. 
  • Room Essentials 
  • Wine Cube 
  • heyday 
  • Shade & Shore 
  • Wondershop 
  • Hyde & Eek! Boutique 
  • Simply Balanced 
  • Xhilaration 

Target Corporation Exclusive Brands 

  • C9 by Champion 
  • Hand Made Modern 
  • Kid Made Modern 
  • DENIZEN from Levi’s 
  • Hearth & Hand with Magnolia 
  • Nate Berkus for Target 
  • Fieldcrest 
  • Isabel Maternity by Ingrid & Isabel 
  • Oh Joy! for Target
  •  Genuine Kids from OshKosh
  •  Just One You made by carter’s 
  • Umbro for Target

The company also partners with designers and brands regularly to launch an exclusive range that sells only at Target. While this helps the company churn demand, it also works as a promotional method. Apart from these, the company deals in a wide range of food and grocery products and general merchandise. The merchandise range sold at Target Stores includes the following: 

  • Food & beverages
  • Apparel & accessories for men, women, and kids
  • Baby
  • Household essentials
  • Home decor
  • Furniture
  • Patio & garden
  • Kitchen & dining
  • Toys
  • Electronics
  • Musical instruments
  • Movies, music, video games & books
  • Sports & outdoors
  • Beauty
  • Personal care
  • Pets
  • Luggage
  • School & office supplies
  • Party supplies

Target Corporation Marketing and Promotions:

Within a few years, a lot has changed in the retail industry with the rise of digital technology. While digital is driving a lot of sales and revenue, it has also emerged as a source of competitive advantage in the field of marketing for retailers. Retail companies now heavily rely on paid digital promotions including in-app promotions to drive sales higher except Costco. This is an area where there is a major difference between the business model of Costco and Target Corporation. Costco is known for its no marketing business strategy. Instead of investing in marketing, the company focuses on strong branding and a strong social image which helps it drive demand higher and maintain customer loyalty. However, Target on the other hand invests in digital promotions, media advertising, and other advertising and promotional channels to grow sales and revenue. In 2019, it spent $1.65 billion on advertising compared to $1.5 billion in 2018 (Target form 10K). Apart from digital advertising and media broadcast, the company also spends on newspaper advertising for creating demand and generating sales. Social media is also an important promotional channel for Target corporation. Another important factor that affects sales in the retail industry in the US is the social image of the business. All the leading retailers maintain a heavy focus on their social image in order to maintain the loyalty of their customers. Target corporation also invests in CSR to maintain a strong social image.

Target Corporation Organizational Culture and HR management.

In the US retail industry, the social image and reputation of companies have also become important factors determining their sales and growth rate. While Costco is already a leader in this area, the other retail brands including Walmart have also increased their focus on how they manage their human capital. For Costco, its organizational culture is one of its fundamental strengths and a source of competitive advantage. Most business leaders recognize the importance of managing human capital strategically since their people are the basic drivers of all the leading sources of competitive advantage for these businesses. 

Target Corporation also focuses heavily on managing its people strategically so as to drive higher performance and productivity. Apart from offering them career growth through continuous training and the use of development programs, the company also offers several financial and health benefits that make working at Target an outstanding experience for the Target employees. The company also invests in inclusion and diversity to make its team stand out. Having a more diverse team helps retail businesses cater more effectively to the needs and preferences of their diverse customer base. 

In terms of organizational culture and HRM while Costco is highly successful and a leader in the retail industry, Target has also retained a heavy focus on HRM since it is a differentiating factor as well as a driver of competitive advantage for the company. Target’s organizational culture and HRM have also been hailed as outstanding industrywide.  The company also appeared on the Forbes list of the best employers for diversity in 2020 at the 90th position. 

Business and Growth strategy of Target

As a part of its new business growth strategy, the company has grown its focus on customer experience. Apart from an omnichannel shopping experience, the company is also offering its customers an outstanding shopping experience at the Target stores. The company has made several strategic investments over the past several years to build a durable operating and financial business model that differentiates Target further from its competitors in the US market. The company has done this in order to drive sustainable sales and profitable growth. 

The investment strategy of the company over the past several years has focused on the following main areas:

  • Over the past three years, Target Corporation has remodeled more than 700 stores. It remodeled around 300 stores in 2019 and plans to remodel 300 more in 2020.
  • The company has been growing its store network strategically. Now, it has more than 100 small format stores located in key urban markets and on college campuses.
  • In order to provide better customer service, the company has redesigned its store operating model and redefines the roles for hundreds and thousands of team members working inside Target stores. 
  • To grow the performance and productivity of its human resources, the company has been strategically growing its investment in its people. The starting hourly wage at Target is $13 and the company has committed to increasing it to $15 by 2020. 
  • The company is strategically growing its assortment of products over the past few years. During the last new years, the company has introduced more than 25 new owned and exclusive brands. In 2019, the company launched its Good and Gather food and beverages brand which it expects to become its largest company-owned brand in the longer term.
  • The company has been steadily growing its fulfillment capabilities to make e-commerce more attractive and profitable. Same-day fulfillment options drove around 70% of the comparable digital sales growth at Target. The same day fulfillment options at Target include: Order Pickup, Drive Up, and delivery via our wholly-owned subsidiary, Shipt. (Target form 10K 2019)

Main Sources of competitive advantage for Target Corporation 

Large sales and distribution network:

One of the main factors supporting the fast growth of Target Corporation in the United States is its extensive nationwide presence. Target has established a large network of company-owned stores throughout the United States. It operates its business throughout the 50 states of the country. According to Target, more than 75% of the nation’s population lives within close proximity of a Target store. However, the company has grown its focus on e-commerce to grow its presence and penetration of the US market. There are 41 distribution centers that support the operations of 1,868 Target stores in the United States. The company has also steadily increased the fulfillment options for digital shoppers.

Quality and Pricing:

Product quality and competitive pricing are also among leading drivers of demand and competitive advantage for Target Corporation. Apart from pricing its products competitively and running regular discounts and deals, the company also offers more attractive deals through branded credit and debit cards for its loyal customers. Other benefits include free shipping and a 5% discount for Red card holders on nearly all products. 

Human resources:

Human resource management is also an important source of competitive advantage for the company and it places heavy focus upon employee management to improve their performance and productivity. The retail industry has grown highly competitive and companies are investing in human resource management to strengthen their competitive advantage. Target has also introduced a large number of health and financial benefits for its employees. This has helped the company maximize employee satisfaction as well as grow employee productivity. 

Marketing:

Marketing is also an important source of competitive advantage for retail brands in the United States. Retail companies except Costco invest heavy sums in advertising and promotions to grow their sales and customer loyalty. Target invested around $1.65 billion in advertising during 2019. Its advertising expenses grew by around $150 million in 2019 compared to the previous year. 

The company utilizes both digital and traditional channels for promotions and advertising. Apart from that, it maintains a heavy focus on branding to maintain its competitive position in the market. It has achieved strong brand recognition in the United States owing to consistent branding and a heavy focus on customer experience.  In the last three years, it has made several efforts to redesign the in-store experience for its customers.

Private label and exclusive brands:

Another important source of competitive advantage for the company is its large range of private label and exclusive brands. The company generated around a third of its total sales in 20109 from company-owned and exclusive brands.  In 2019, it also introduced its own food and beverage brand called Good and Gather. The company expects it to become the largest company-owned brand in the longer term. Of its total 41 owned and exclusive brands, the company introduced more than 25 new ones in the last year. The private and exclusive brands are a driver of demand as well as a competitive advantage for the company. 

Brand Equity:

Brand equity has become an important factor affecting popularity and sales in the retail industry.  Brand recognition, social image, and reputation affect demand, popularity, and sales to a large extent in the retail industry. Apart from that brand equity also helps maintain customer loyalty in the retail industry. 

Target enjoys strong brand equity which is because of consistent focus on branding and customer experience. 

Financial Performance of Target Corporation over the past two years:

The strategic investments that Target made in its business over the past several years have started to translate into growth and reflected clearly in its performance during the latest fiscal. 

Revenue of the brand climbed by 3.6% in 2019 compared to the previous year and reached $78.1 billion from $75.4 billion in 2018. Retail sales drove most of the growth for Target. Net retail sales of the brand in 2019 reached $77.1 billion while the company generated around $1 billion from the other sources of revenue. During 2018, net sales of the company were $74.4 billion while the company generated $923 million from other sources of revenue. 

GAAP Earnings per share from continuing operations in 2019 – $6.34.

Adjusted earnings per share from continuing operations in 2019 – $6.39.

Target corporation’s comparable sales grew by 3.4% in 2019, driven mainly a 2.7% increase in traffic. While the comparable store sales grew only 1.4% in 2019, digital channel sales increased by 29%, leading to a growth of 1.9% in comparable sales. The operating income of the company grew by 13.3% in 2019 reaching $4.7 billion.

Target Corporation’s operating cash flow provided by continuing operations reached $7.1 billion for 2019, an increase of $1.13 billion, or 18.9 percent, from $5.97 billion for 2018.

Sales from digital channels grew in 2019. Digital sales accounted for 8.8% of the net sales of the brand compared to 7.1% in 2018. 

Gross Margin rate was 28.9% in 2019 and 28.4% in 2018. 

One last word about the business model of Target:

Despite the intense competitive rivalry in the retail industry in the United States, Target has maintained a strong competitive position. It continues to find growth in sales and its customer base. The company is also investing in technology to grow its e-commerce sales.  Apart from that, the company is focusing on strengthening its fulfillment network to grow the demand for online sales. Target Corporation has established a strong business model that is supported by quality products and a competitive pricing strategy. All of this has resulted in an impressive growth for the brand. The company is also enjoying an impressive gross margin. Over the past several years, the company has kept investing strategically in key areas to strengthen its operating and financial business model. The company owns a large number of private label brands and exclusive brands that are also among its drivers of sales and revenue. However, another key area where strategic investment has helped Target grow its influence is HR management. Overall, Target is in a strong position in the United States retail industry and will sustain its growth momentum in the future. The impact of Covid-19 has been felt by all retailers alike. However, at this time, the importance of digital sales channels has also grown a lot since a larger number of customers are shopping from their homes. Having a large sales and delivery network is going to prove profitable for retail brands like Target Corporation.

Other sources: Target Corporation Form 10K 2019.

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.