On Target & the New Direction: Everyday Low Prices

Posted by Matthew Bugg on July 26, 2016

This article originally appeared in The Bugg Report and is being re-published via LIMA Australia

I recently had the chance to attend the Target Australia Supplier Forum in Melbourne last month, which was a platform to update the market on the new direction of Target. Guy Russo and his team gave an in-depth presentation on where the business is at and outlined the new direction.

“It’s something between two pieces of bread; chips and a Coke,” they are Guy Russo’s thoughts on the strategy of fast food restaurant McDonald’s. There’s nothing complicated about it; just a simple and logical approach to something that doesn’t require complication. Russo applied the same thought process when he took the helm at Kmart in 2008; a business struggling for direction was transformed into a business which has since had the simple goal of “making low prices irresistible”. Target will be similar; the goal is again to drive volume at low prices, but this time the average purchase price of Target products will be $15. Think of it like this; Kmart is where you will find the “lowest prices everyday” and Target is where you will find “everyday low prices”.

Who is Guy Russo?
Russo was born in Sydney after his parents moved to Australia early on in their lives and he is one of 7 children, which may explain his approach to business and his focus on simplicity and running a tight ship. His mother and father knew how to budget and save money and he learnt the importance of focus through his father’s business as a taxi driver and his appreciation of his customer base.

Since then, Russo spent 34 years at McDonald’s where he ended his time in Australia as CEO and then moved on to become President of Greater China. Following his time at McDonald’s Russo spent 7 years running Kmart before taking his now current position as Chief Executive Officer of Department Stores at Kmart & Target as well as becoming the acting Managing Director of Target. Russo believes that where business is concerned, it is important to focus on your job and your job only, not to get caught up in trying to be someone else which is what kills you in business.

Some analysts have labeled Russo “arrogant” and “overly confident” for his forecast on the future of Target, however he makes a very sound argument when he offers the opposite perspective, where he would say, “I am not confident and I don’t think it will work”. It’s a good point and one that is in-line with Russo’s general approach to most things; keep it simple and focus on what you are good at. For what it’s worth, he does think it will work and he is confident in what the future holds for Target. Russo is not a magician and anything can happen in business but his track record suggests he knows what he is doing.

Kmart as a Benchmark
When Russo took over the running of Kmart in August 2008, the task of getting the business back on track was significant and to go from 100,000 lines to 40,000 lines was no easy feat¹. Kmart is set to make a $500 million profit over the next 12-months which is a huge achievement considering that when Russo took over in 2008, Kmart’s first-half earnings were $75 million².

Think of Kmart as the brother and Target as the sister, one is not the same as the other and this is no “Karget” as some have suggested. Kmart is Kmart and Target is Target. What Russo implemented at Kmart has put the business back into a position in the market where they know who they are, and that is “lowest prices, everyday.”

Kmart’s new commercials which communicate this message to consumers are something created by Russo’s partner Andre Reich and his marketing team, and they certainly hit the mark. These commercials are fun, clever and they clearly get the message across as to who Kmart are and what they are trying to do. If you haven’t seen them, do yourself a favour and check them out here: www.kmart.com.au/tvadverts.

Who is Target?
That is the question that Russo has been employed to answer, and he knows that this will not be a “quick-fix.” It is Wesfarmers who have provided the opportunity to fix Target and by “fix,” I am referring to addressing the $140 million of write-downs and the $55 million loss Target will record in 2016. Target currently takes $3.5 billion through the till and records a loss, something that Russo refers to as “naughty.” The business also has enough product choices to fill every seat at the Melbourne Cricket Ground three times over and yes, that’s 300,000 for those who are counting.

In order to address the question of “Who is Target?”, the things that Target are not or will not continue to do are important. Firstly, the current problem with Target is not with people, it is a lack of strategy and direction. Having enough customers’ in-stores is not the problem either, Target doesn’t need to drive “more customers” to their stores, but better service the ones they already have.

Under Russo, Target will shift their focus to direct-sourcing and under-performers and loss makers will need to be demoted; four weeks cover in-store will be the goal. There will be no more “mid-year” catalogues or Toy sales and because people currently have difficulty finding what they want in-store, less choices will be required. The Cafes in some Target stores will also be removed because after all, Target is not in the coffee business. Of the 100 catalogues that Target currently produces, this will be cut in half and there will be no “new stores” or “renewal” programs (there will be one new store in QLD). To borrow a phrase from Russo to explain where things are at; it is clear that you can be “premium” or “volume,” but anywhere in between is no-mans land.

The New Target
As Target Chief Operating Officer Andre Reich would put it, Target is “Australia’s most loved retail brand” and this is something that is important to the business in terms of its future. Target is not exiting brands, however suppliers will need to fit the new strategy and in a nutshell the new Target will be focused on “volume and low prices,” where brands are concerned.

Fashion will again be a focus, fashion with a small ‘f’ that is, and Russo has brought back designer Anna Milner to re-ignite the division for Target. To be clear, Target is not getting out of Toys either. Russo likes to think in terms of bodies and not percentages, so there are 8 million kids in Australia who are opportunities for Target and all the more reason to continue to sell them, just with a new strategy.

The new direction is simplicity and Target will be a 365 days-per-year business with a motto of “better and best.” Where stores are currently a mixed-bag of appearances, the new direction will see a uniform approach and a standardised look and feel where products will be allocated to sections and this won’t be changing week-to-week or store-to-store. To use an example from Russo, you will find licensed mugs in the kitchenware department, not the licensed mugs department. You can think of the new Target as the knives, forks and plates that you use every night, not the ones you bust out for special occasions and as Russo would say, “If you breath, we want you as a Target customer”. If things go according to plan then growing Target to a $4-5 billion business is not out of the question.

The Future
There is a lot of uncertainty in the retail industry in Australia and questions are asked as to why there seems to be a lack of strategy and focus from retailers. The same cannot be said here. There is in no way a lack of direction with Target now and it is refreshing to learn about the new strategy. Quite simply, if you are a supplier and want to do business with Target you will need a product that can be purchased in large volumes at a low price and that sells 365 days of the year.

All things considered, that will mean re-thinking manufacturing, product and pricing for many suppliers, if not all of them. Like many things in the modern day and age though, it will come down to new innovation and providing products that customers want which they cannot get elsewhere. If suppliers can deliver something that fits the Target model that Target cannot source for themselves, then the future looks bright.

In summary, Target is only one retailer in the marketplace, however given the new guidelines; it is a great opportunity to look at new product offerings to fit the new direction. Like everything, changes happen and there will be things to address as the business evolves, but the direction is set and the focus is real for Target.
1 www.news.com.au
2 www.abc.net.au

Matthew is the Marketing Manager at Bugg Marketing Solutions and the Publishing Manager at The Bugg Report.