Target misses the mark

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Noel King: Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation third quarter earnings release conference call. The next 68 minutes of that call in November were a mess. Oh, sure. Target CEO talked about having confidence in our proven long term strategy. But the company's earnings had missed their mark, their target, if you will. Americans seem to have fallen out of love with Target. They just haven't seen their sales, you know, bounce back at all from sort of the post-COVID era. But why? Well, on another November earnings call just across town, not literally, Walmart CEO Doug McMillan was gloating. All three segments of our business performed well. Sales for Walmart International grew 12.4% in constant currency.

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Noel King: Attention to all shoppers, there is a clearing. Today Explained, Sarah Nassauer, you are a retail reporter for the Wall Street Journal. Uh, I think I first heard the target name when I was maybe 19 or 20 or 21 and my friend very earnestly said tarjay and I was told that it was a fancy thing like it was an event to go shopping there so that would have been I guess the early 2000s. Where did Target start and how did it expand?

Sarah Nassauer: Yes. So the first Target store opened in 1962 in Roseville, Minnesota, which happens to be the town I grew up in primarily. And that was the year that the very first Walmart store opened also to the south in Arkansas. And they were both open in this era of discounting, sort of the rise of the concept of a discount store. The difference for Target is that it was a department store. And so Target approached the sort of idea of a big box discount store with a department store's mentality. Target is a fun place to shop. Which meant from the beginning, it was a little higher end. They were really trying to draw people in with specialized merchandise, and they were less concerned about being sort of the very lowest price on a commodity item.

Noel King: I did not realize it started all the way back in 1962. I would have guessed, honestly, the 80s maybe, the early 90s. How does Target go from being a department store in Roseville, Minnesota in 1962 to being literally everywhere in the country?

Sarah Nassauer: Well, you know, over time, really that 80s period where it's in your brain, that is the expansion era of discount stores, right? This was one sort of experiment, right, in 1962, right? It was just an experiment, one store. And they found that it worked, right? And so they gradually opened more and more stores. Eventually, they added food into the mix. Originally, there was no food in a Target store. and, you know, now they're up close to 2,000 stores around the country. 2,000 stores around the country and to this day they're selling the food, they're selling some department store stuff.

Noel King: What else has Target added over the years?

Sarah Nassauer: Well, you know, they have added and also subtracted, you know, there's been a few iterations. You know, when the food concept first came to be at Target, they sold things like fresh sushi at one point. No, no, no. Yes, yes. So there's been lots of iterations of what food could mean at Target and also lots of iterations of what things like fashion could mean. But this idea that is very familiar to all of us, right? Like you go to the store and I kind of know I can buy toothpaste and also I'll look at maybe some clothes, but I need a gallon of milk. Like that kind of shopping experience, that's been around for decades now. And you will also buy a candle and you will also buy a throw pillow. You don't need either one, but you will definitely pick them up at Target on that same trip. That is the model. And what they like really hope that you do, right, is that you walk in there and you're trying to spend 20 bucks and you walk out and you've spent 100.

Noel King: And truthfully, I mean, Target is not just it's not just a store. I mean, like SNL has that character, the Target lady. It's like a piece of Americana at this point. For sure. For sure. I mean, everyone kind of has like a feeling about Target, right? That means it's like that's a big brand. That's a big part of culture when everyone has an opinion and idea about what it means to them.

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Noel King: This is my personality in a Target grocery haul. Same store, different day. Oh, my gosh, I'm back. Hey, hey, we have another question. They want to know, what is your favorite store? I love Target. Me too. Right. So given all of this, all of its successes in making me buy things I need and don't need, what's going on? Why is it not doing well?

Sarah Nassauer: Well, there a few things going on. One is so we still in a period where even though inflation has cooled a little bit for most people things feel really expensive. They're a lot more expensive than they were a few years ago. And so that things that you need to buy like food and childcare and rent. And people are still spending more on that stuff than they were a few years ago. And Target tends to have a little bit of a disadvantage in that environment because more of their sales are based on what they call discretionary items, which really just means things we want but might not need.

Noel King: Consumers tell us their budgets remain stretched and they're shopping carefully as they work to overcome the cumulative impact of multiple years of price inflation. So in this environment, you know, a traditional grocery store or a Walmart, which is the country's largest grocer, tends to do a little better because we need to spend more on groceries and a little less on throw pillows and candles. So that's part of it. However, you also see, especially in their last results, that they're starting to get, they're a little bit out of step with the market, which means that their sales are pretty flat, while other folks that are selling similar things, in some cases, their sales are growing a little more. And that means they're probably also making some operational missteps and losing market share.

Sarah Nassauer: Have you done the retail reporter thing where you run around the parking lot of the Target and you ask customers, like, why don't you like it as much as you used to? I've done that though I also do it in stores I try to get in the store where it's warm do you ever get kicked out um I don't know if I've ever gotten kicked out of a Target I have definitely gotten kicked out of malls I've gotten kicked out of many stores over many years I got kicked out of a Ralph's in Los Angeles once it was like it was like a violent ejection um but I had a microphone yeah that makes it harder I usually I'm just going in with my notebook and so I'm a little bit more subtle and also the thing is I always tell people who I am right And I always explain to the security guard or whoever, like, if people don't want to talk to me, they don't have to talk to me, you know.

Noel King: So what are customers actually saying about their – what is the nature of their discontent?

Sarah Nassauer: Well, a lot of them are saying sort of a combination of things. One is, hey, I've just noticed some products are out of stock, right? Like I go in, I know that there's this target thing that I like, like this certain brand of like mixed nuts or whatever it is. And they don't have it, and then that's really annoying. And then I have to make a second stop. People are talking about longer checkout lines, which is a perennial retail problem, right? And they feel they've gotten longer in some cases because Target has been making some changes with how they do self-checkout as an anti-theft measure. Some people don't like that more products are locked up as an anti-theft measure. And then some people sort of have more of a just general sense that the products aren't as exciting or interesting and tempting as they used to be. And that makes it a little less fun.

Noel King: Has anyone else noticed the absolute dumpster fire that Target is slowly becoming? Bro, this is crazy. They're locking up the toothpaste. I'm not even getting anything because everything I went in there for is completely out of stock. I feel like we're witnessing the downfall of what used to be a really nice grocery store into something that's more like a Walmart. The thing is, all of these are just common retail challenges, right? Like lots of stores, you know, face these things from time to time. People feel they're getting a little bit worse at Target. But also Target is a place that, again, you go because it's kind of fun, not necessarily just to buy cheap groceries. So people's standards for some of this stuff are a little bit different because it's supposed to be a fun place to shop, right? Target is a fun place to shop. Yeah, I want to have a good time.

Sarah Nassauer: So what is Target doing to try to combat this problem? We don't know for sure because they aren't defining their problems in this way. We heard them talk about on the last earnings call that their customer service scores over the last quarter are better than they were the same period last year, right? So they say things like checkout wait times, like customers' experience of those moments is improving. But they're not telling us exactly how they're improving or how bad their internal data shows that those things are. They're telling us that it's on a road to improvement. Net promoter scores for wait times at checkout lanes, satisfaction with team member interactions at both checkout and while shopping, ability to find products, and the cleanliness of our stores are all up year over year.

Noel King: One thing that they have talked about when questioned by analysts or investors about what they're going to do about the sales decline is they do try to emphasize that they have tried to lower prices this year. They said they have lowered prices on 5,000 everyday items earlier this year. We reduce prices on an additional 2,000 items to drive traffic and help celebrate the holidays. They realize that shoppers want cheaper stuff, right? They want lower prices. So they're focused on that. And then they're sort of matching that with what they call sort of distinctive product, right? They know that people come to them because they want something cool and interesting. So they're trying to redouble their efforts on that front as well.

Sarah Nassauer: And so the feeling about Target among people in your profession who know what they're doing is it's still there's still some mehness here. There's still some potential problems here. Is this a Target problem or is this a problem for every store that is like Target? Right now, it's a Target problem. Target is a place that does sort of attract this like, you know, people love to shop there, right? It has like this emotional attachment for a lot of people, especially I think moms that want to like get away from their kids and browse the aisles is a story I hear about often. You know, that's not gone. We're not in a place where we're like Target's going out of business and they're the next Sears. Like we are not there yet. Right. But we are in a place where you see their sales kind of getting out of step with broader trends. trends. And that's the thing, I think, that's why you saw the stock drop 20 percent after earnings. It's unexpected and it's a little out of step.

Noel King: The Wall Street Journal's Sarah Nassauer are coming up Walmart's brilliant strategy. It is stealing Target's higher income customers. It's going organic. It's coming for Whole Foods. It's rolling back DEI. Can one single store appeal to everyone? Walmart's going to try.

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Noel King: Okay, let's see here. Today. Today. Explained. Explained. We're back with The Wall Street Journal's Sarah Nassauer, who reports on retail. All right, let's talk about Walmart. So I have long been under the impression that Target is fancier than Walmart, possibly even fancy. But maybe I'm just a rube. Are Walmart and Target comparable stores?

Sarah Nassauer: The annoying answer is yes and no. They're comparable stores in that they're both a place where you can go and get lots, like a wide variety of things, right? Like the gallon of milk, the toothpaste, and the throw pillow. But Target has always had a slightly higher income core shopper, a different real estate footprint. And again, remember they have those department store roots. The whole model has always been about a little bit fancier product, a little bit trendier product, and attracting people into the store for that. Walmart has been a discounter, a low price player, the country's largest grocer, and people associate Walmart with a low price.

Noel King: Walmart super inflation buster sale blasts through the inflation barrier with big discount savings on hundreds of everyday items like Conair's lots of... And like Target, Walmart also reported earnings recently. What's going on there?

Sarah Nassauer: Walmart is doing really, really well. They're growing really fast. It should be noted, Walmart is a much larger company than Target. People compare them, but Walmart is massive compared to Target. So when they report positive sales growth of around 5% in the U.S. like they did last quarter, they're growing really fast, right, compared to Target. They're just grabbing a lot of business. And the thing that's happening at Walmart is also sort of in the post-pandemic era, they have really made a conscious effort to try to attract higher income folks. Because like, you know, everyone shops at Walmart in America in some capacity at some times, even if it's like you just go there once a year when you're on vacation in some place and you don't know where else to go, right? You'd still go to Walmart. And so it's hard for them to grow. So they've made an effort to go after higher income folks with their apparel selection, their food selection, and even like their marketing, the style of marketing.

Noel King: Walmart just launched a new private label brand called Better Goods. Better Good has a really interesting lineup of products, including plant-based cheeses. They're saying that, You know, they're going after the Whole Foods customer. I am a fashion and style content creator. And today I'm going to share all of my favorite fall finds, all from Walmart. So that's more of a direct threat to what Target does. Yeah, I always thought of Walmart as the place you go when you're broke and Target as the place you go when you're flush. Walmart wants to eat up Target's flush customer.

Sarah Nassauer: What counts as an upper income earner these days? Well, Walmart defines it as households earning $100,000 or more a year. Wow. Okay, so you're making six figures, but you're still shopping at the Walmart, maybe even for like clothing and food.

Noel King: What is Walmart doing to attract six-figure earners?

Sarah Nassauer: Well, the first thing they did to attract six-figure earners is just to be Walmart at a time when inflation is killing people's wallets, right? It was sort of this moment where I remember during the pandemic when we were all competing to get that big roll of toilet paper. Yes. And everyone was just rushing around like a chicken with their head cut off trying to get toilet paper. Well, like all the retailers benefited, right? Walmart, Target, everyone saw this huge surge in demand. We're buying throw pillows and like backyard grills and all this stuff, right? And people are flush with stimulus dollars. So there was just like a huge influx of business for a lot of retailers. Walmart, you know, coming out of that, inflation was such a huge role that lots of high-income households are going to Walmart just to get cheaper groceries. And so what Walmart is trying to do now is keep those folks even when they feel flush again, right? It's about just naturally who they are kind of draws people in down times and target struggles But Walmart wants to keep those people now and has done a few things to try to do that

Noel King: What would I find at Walmart today that maybe I haven't a couple years ago?

Sarah Nassauer: They worked hard to improve their fresh produce So just the quality of the fresh produce, more organic food, probably a little bit more distinctive brands like the sort of unique hot sauce that you might not think you could find there. They've tried to go a little bit higher end on their apparel. You know, the price points can be a little higher on those items than you're used to seeing at Walmart, but still a relatively good deal. They're trying to make those things like home goods and apparel look a little trendier. I don't think that, you know, they're quite the same. You know, Target is more universally trendy and stylish when they're trying to design goods. So they're not the same thing. But if you're going for cheap groceries, you might think, well, this is good enough.

Noel King: The other thing Walmart is doing is leaning into some of their e-commerce stuff, like buy online, pick up in a store parking lot. Those types of systems have gotten just smoother, and that is appealing to a lot of people as well.

Sarah Nassauer: Walmart still does have a traditional kind of customer, and that traditional customer does not make $100,000 or more a year. Is there any risk of losing your sort of legacy customer if you're like, let's go after the richer ones?

Noel King: Yes. Yes, definitely. And that's always the tricky play. And that has actually been a problem. Walmart has tried to do this, you know, like grab and keep the higher income shoppers for decades, right? There's been waves of that depending on who's in charge. And there's sort of an apocryphal tale in Walmart world where back in the day, they tried to go higher end and compete with Target on apparel and brought their apparel offices to New York and really they just sold a lot less stuff overall because they ate into the sales of like the socks and the undershirts. And, you know, for years there was sort of this like traumatic response, you know, when you talk to folks about that experience and that they knew they should stay in their lane.

Sarah Nassauer: So what we're seeing now is kind of a revival of that thought and a different era, right, of doing that same thing.

Noel King: After the election, Walmart made some very big news about its plans for DEI. What happened there?

Sarah Nassauer: So basically, the week before Thanksgiving, Walmart said that it was going to roll back some of its DEI initiatives along with, you know, some of its broader policies that conservative activists would call sort of woke policies in corporate America. The company says it's ditching its $100 million commitment for diversity, equity and inclusion programs over growing pressure from conservatives.

Noel King: So a few of the changes here, phasing out the term DEI, winding down the Center for Racial Equity, no longer giving priority treatment to suppliers based on race or gender diversity. It was an interesting moment for me because I've covered a few of these announcements from companies, but none as big as Walmart. So when Walmart does something like this, it sort of has a different kind of effect on corporate America and response from shoppers and workers and all of those things.

Sarah Nassauer: And from a company perspective, the concern is we're going to lose shoppers, right? We're going to lose shoppers or not be able to hire as many people if people perceive us this way. That said, this is part of a years-long sort of turn away from even the term DEI. D-E-I. Like last year, Walmart started to use the word belonging, right? That doesn't mean that the policies change necessarily, but the corporate titles and the report that you get every year now has the word belonging in it. So there's, you know, it's acute, but it's also sort of a drip, drip, drip that we've seen in recent years.

Noel King: All right. So the story of retail is one of ebb and flow. Sometimes you're up, sometimes you're down, sometimes you're fancy, sometimes the other guy is eating into your fancy clientele. Target is not in a great spot right now. Walmart is booming. What is the takeaway here?

Sarah Nassauer: Well, I think the takeaway is that Target has long been in a tricky spot when folks are feeling less flush, right? Just what they do. You're not going to splurge as much when you're feeling less flush. And so that's sort of a long-term challenge for the company in down times. What we're seeing now, I think, is another round of that where they have to decide, hey, can we be distinctive enough, right? Can our products be so cool that people will come to us? And that's just a very tricky thing to do.

Noel King: I think the takeaway is if your thing is selling cheap groceries like Walmart or an Aldi or someone else like that, it's easier to have kind of a steady eddy business, at least when it comes to demand. I think that Target is in a place where what people love about them is this fun thing, this like, I am just going to go to Target and browse the aisles and it's almost self-care. Yes, it's consumerism and I'm picking up milk, but I really enjoy it. That is a thing that I've heard about Target, you know, my whole life, really. I remember when there was the first Target that opened in Brooklyn where I used to live, and it was just mobbed. It was like people hadn't eaten in months or something, and they were swarming this Target when it was open. So there's this kind of like fervent emotional attachment part of Target that I find really interesting. But that means that right now when you see that Target is struggling to draw people in with its products if it's not cheap food, right? It means that it's hard. It's going to be hard for them to maintain that level of engagement with people in that way. And so they're just in a tricky spot right now. And time will tell whether or not, you know, they can sort of get back on track.

Sarah Nassauer: Sarah Nassauer of The Wall Street Journal.

Noel King: Today's episode was produced by Amanda Llewellyn, edited by Matthew Collette, fact-checked by Laura Bullard, engineered by Patrick Boyd and Rob Byers, and hosted by me, Noelle King. It's Today Explained. Thank you.