Target's new warehouse approach spells trouble

Tinkering with its strategy during a recession could be a big mistake.

By Jamie Dlugosch Jan 5, 2010 4:59PM

It is no secret that the best-performing stocks tend to be those of innovators. Companies that lead are often big winners for investors. Those that follow tend to be the losers.


So what do we make of Target's recent decision to shift some products to a warehouse model?


The company has been a big winner because of innovative, trendy products sold at low prices. For years, it resisted the temptation to compete directly with larger rival Wal-Mart. Doing so by stressing lower prices over products might very well have hurt it.


Instead, the company carved a separate identity and became a winner in the discount retail space.

Stockholders were rewarded with some of the best performance in the market.


The deep recession is putting Target to the test. Wal-Mart has surged as cash-strapped consumers focus on bottom-line prices. Trendy goods haven't mattered as much as pricing. Target's appeal dropped in the eyes of the market.

But while it is true that a pure discount strategy has worked in the short run, that doesn't necessarily mean that things have changed permanently. In fact, with the economy recovering, the pressure on pricing appears to be waning.


Changing strategies because of a short term event could be a mistake. At a minimum, such a change does not typically work.


Take a look at Wal-Mart’s experience in its competition with Target. As much as it tried to get trendy, Target kept its grip on a slightly more upscale market. Wal-Mart stayed focused on low pricing, which is why it was perfectly positioned when the economy went south.


In the same fashion, Target needs to be Target. It's hard to fault a little experimentation, but instead of wasting time and energy on a warehouse model, the company could be gearing up for the economic recovery.


Go out and do the things that brought you to the top. It really makes no sense to me to be something that you are not. Stay innovative and you and your shareholders will be rewarded.


Go toe to toe with Wal-Mart and you will likely lose the battle. (Here is a great way to trade this interesting development)


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