In the Retail Space, Is Market Positioning the Key to Retailer Gold?Published: June 13, 2007 in Knowledge@Emory
To quote the old Smokey Robinson and the Miracles’ song, the motto of consumers today is—“You better shop around.” For discount retailers like Wal-Mart Stores and Target, that philosophy presents a growing challenge. With more shopping options than ever before, from online merchants to retailers specializing in competitive pricing on electronics, household goods, canned foods, and beauty products, even the more well-known and larger stores are hard pressed to distinguish themselves from the pack. Reshma H. Shah, assistant professor in the practice of marketing at Emory University’s Goizueta Business School, says the key for these retailers is to make their store a destination for shoppers. “Target really redefined the nature of what an “economy retailer” can be.” By moving away from the more traditional approach of its discount competitors, the retailer has clearly defined its niche and target audience, she says.
Target’s marketing approach is more systematic and solid than that of its competitors, notes Shah, with the retailer using ads to convey to the shopper that “they already know they’re a fun, hip and cool place to shop.” This “reverse-positioning” made Target a standout. Says Shah, “They’re wise enough to know that their advertisements should follow the placement of the designer clothes, for instance, in the stores.” Many of the other discount retailers do it the opposite way, by first rolling out the ads and then putting the items in the stores. She adds, “It’s fairly common for marketing efforts to precede actual implementation.” This “signaling” approach is meant to eventually get shoppers to buy into the idea. But the risk of this approach, says Shah, is that it can be frustrating for consumers who go out to their local store quickly and then come up empty-handed on the newly advertised product.
Besides their marketing approach, Target’s management also has made an effort to avoid labeling the retailer as a discount outlet, says Douglas Bowman, an associate professor of marketing and a Caldwell Research Fellow at Goizueta Business School. Instead, the store plays up their ability to cater to the specific needs of the customer through promotion of their private labels, such as clothing crafted by well-known designer Isaac Mizrahi or housewares created by famed architect Michael Graves. Shah adds that Target has changed the definition of “discount retailer” by offering style, design and clean, wide store aisles—which is very different from its main discount competitors and more closely resembles the higher priced department stores. Bowman notes, “They’re also laser-focused on targeting women and children especially. Target has really done a good job of managing the items in the store, so that they set a tone. In the last few years, Wal-Mart has been trying to emulate that, by sprucing up stores, and giving themselves a less warehouse-store feel.”
According to Greg Thomas, director of research at the Emory Brand Institute, Target remains focused on non-price competition through use of captive brands, designer exclusives, trendy private label products, and partnerships with other well-known specialty retailers, such as gardening store Smith & Hawkin. Notes Thomas, “Target is creating an emotional attachment with celebrity endorsements, an exciting shopping environment, and heavy use of advertisement. Target has clear consistent positioning with their motto of “Expect more, play less.”
Interestingly, says Philip Rist, vice president/strategic initiatives for BIGresearch, a consumer market intelligence firm in Worthington, Ohio, research from his company shows that Target shoppers are also Wal-Mart shoppers. Value-conscious consumers simply tend to “shop around.” Rist adds, “The biggest question for retailers is how to keep the customers they have to keep coming back.” He notes that while Target appears to be particularly attuned to those shopping for health and beauty products, as well as women and teen clothing, they simply haven’t found as big a draw in the electronics aisle. “Consumers today have so many options, and so many choices to make,” he notes. “You have to please them in each category. For electronics, they might go to Best Buy or then to Wal-Mart.”
Rist also notes that customer service isn’t the Holy Grail for retailers that it once was, and it certainly doesn’t seem to be the deciding factor for customers when choosing a discount retailer. He adds, “The old thought that customer service needs to be strong may not necessarily be the case, depending on the store and the expectations of the shopper. There’s less of an expectation for personalized customer service at a store like Wal-Mart or even at one of the wholesale clubs. These are big-box places, and the shopper knows they are going there for the price savings. But at a place like Talbots, for instance, the shopper is looking for more personalized attention.”
For the discount merchant, price savings is the name of the game. And while Target may not be the most costly store in the world, they’ve chosen not to compete on the rock-bottom prices of their competitor Wal-Mart, says Shah. “They’ve made the decision to compete on the more non-intuitive elements of shopping—from the cachet of the brand to making the store a destination place to shop.” This approach presents a peculiar challenge for Wal-Mart, especially in their initial attempts to update and upscale their image. Target’s approo Hach, says Shah, parallels that of another successful player in the “store as a destination” strategy—IKEA. The big box furniture store took the reverse positioning route, as well, choosing to market and develop their locations as the “cool place to shop.”
Of course, even being a destination store presents a challenge on another level—repeat visits. While private labeling works well for profit margins, says Thomas, this assortment results in Target’s low trip frequencies compared with Wal-Mart, Costco, and Dollar Store. “To stay relevant, Target has been modifying its’ stores to attract seniors by expanding its pharmacies, advertising to Hispanics, creating dollar sections near the entrance, providing exclusive trend capturing merchandise, and offering substantial seasonal promotions.” Additionally, he notes that Target is going after the repeat shopper by offering even “more need driven consumables, like packaged foods.”
But Target isn’t merely thinking about private labeling and repeat shoppers, the company is also careful about managing the assortment of items in the store, says Bowman, while the other discount retailers, from Kmart to Wal-Mart, are still, for the most part, simply “throwing” items up on the shelf. “Target is shuffling their merchandise quicker, and they have a higher degree of seasonal items that all drives you to the store,” says Bowman. “Customers come to see what’s new on the shelf. This is a way they’re luring in shoppers.” Wal-Mart’s initial attempts at upscaling their image and their brands appears to be a limited move, and for now, the success of such lines as their Metro7 clothing line remains to be seen. “Private labeling is the way of the world,” says Shah. Captive store brands are big, but without customer traction on Wal-Mart’s new clothing line for women, for instance, the retailer is certainly at a disadvantage, she adds.
Of course, it seems odd that the management at Wal-Mart, the world’s largest retailer, should concern themselves with the goings-on at a much smaller competitor. However, certain indicators seem to point out that Target’s strategy does pay off. According to company documents and analysis from Emory Brand Institute, Target’s gross margin in 2006 was 33.6% vs. Wal-Mart’s 23.8% for the similar period. In 2006, the pre-tax profit margin for Target was 7.3%, while Wal-Mart posted 5.4%. However, Wal-Mart has the edge in the number of stores worldwide, and the behemoth retailer has even capitalized on their store big box design by packing in the items and succeeding on sales per square foot with Wal-Mart taking in $438 in 2006 vs. Target recording $307 for the same period.
Despite their edge, Wal-Mart also faces competition on a number of other fronts. Shah notes that the entry and appeal of the various dollar store chains—from Dollar General to Family Dollar—compete with the store for customers interested in rock bottom pricing. Wal-Mart must also battle for dollars from traditional supermarkets, cut-rate outfits, and organic food stores alike, as they market traditional, cheaper, and pricier organic food lines. “Retailing often depends on reinventing one’s self,” says Shah. “It will be interesting to see how Wal-Mart can evolve, and what they can do in new locations abroad, and what they will do here in the U.S.” The world’s largest retailer is continuing to expand its presence internationally, by looking to enter the Indian market, as well as buying a stake in Trust-Mart, China’s biggest retailer.
However, getting a handle on the regional tastes of shoppers here in the U.S. may be the big key for Wal-Mart, as they look to address their marketing and purchasing efforts nationally. According to Thomas, Wal-Mart has over 86% household penetration, which is 25 points higher than its nearest competitor. With its plethora of stores, Wal-Mart is within a 10-minute drive of half of American households. Bowman adds, “Wal-Mart has really saturated the market and to grow domestically they have to go to urban markets in the U.S., as well as expand internationally. The idea of homogeneous stores in Atlanta and New York and in rural America makes it much more difficult, when we’re talking about a diverse country. In one area of the country, their growth might be coming from home and garden products, but elsewhere it might be electronics. Their growth is slowing, and so they need to figure out how to increase same store sales or break their business model in some way to offer products that appeal to local tastes.” In February 2007, Wal-Mart announced a number of management changes, including the addition of John Fleming, the new chief merchandising officer, and Stephen Quinn, the new chief marketing officer—all moves that seem to signal Wal-Mart’s need to retool.
The even bigger struggle for retailers like Target and Wal-Mart, notes Rist, beyond that of fierce competition and marketing demands, may be the slowing economy and the shrinking pocketbook of the Baby Boomer set as they head into retirement. “Once you get to retirement age, you’re buying only what’s needed,” he says. As the biggest bulk of Americans moves into the age range where cutbacks on discretionary spending are common, retailers will then need to be creative to capture a younger and possibly more cash-strapped customer base. At that point, notes Rist, snazzy advertisements, cool clothing, and a hip image probably won’t be the best marketing approach.
The next critical phase in the retail world may be dominated and won by IT. According to Goizueta’s Thomas, Wal-Mart is readying itself by honing its ability to compete on analytics, with management recently announcing plans to incorporate geo-demographic analysis into its store planograms and merchandising. He adds, “Since Target has highly centralized planning, with the store manager’s role constrained to compliance and execution, this analysis based competition may eventually give Wal-Mart a new source of advantage over Target.”