Target offers 5% discount to spur sales

Will the move pay off? Or will the retailer just be stuck with more bad debt and smaller margins?

By InvestorPlace Jun 23, 2010 9:48AM

Earlier in the year, Target (TGT) broke ties with Visa (V) over its store-branded credit cards (see related Top Stocks post here). Rather than let the credit card giant take a cut, the big-box retailer decided it would process the payments itself.


Now that Target has taken the reins of its credit card business, it's looking to pump up sales with a huge promotion -- 5% discounts on any purchase within the store that's charged to your Target credit card!


The move seems too good to be true for cash-strapped consumers. But is that actually good for the retailer, considering that bad debt and credit card delinquencies have been a problem recently for Target?


First the upside: An eight-month test at Kansas City area Target stores indeed boosted same-store sales, and the company expects the program to drive a 1% to 2% nationwide increase. That makes sense, since shoppers who swipe their Target cards will get very competitive pricing with that 5% discount.


Also good news is that without Visa as the middle man, all those credit transactions could give TGT stock a boost, since the company will be doing the processing in-house -- and keeping the profits in-house, too.


The icing on the cake is that the rewards program will help Target maintain a position as a low-priced retailer, ground that the big-box store has often ceded to Wal-Mart (WMT) in a mission to keep its image as stylish (see: Wal-Mart opens smaller stores in Chicago)  and affordable over just plain cheap.

 

But the downside is very real. First off, Target has already seen problems with bad debt during the recession and spurring even broader use of credit cards could make that problem even worse. It's good to cut out Visa as the middle man if there’s a lot of cash to be made, but the partnership with Visa also mitigated risk that now Target will shoulder on its own.

 

      Related Article: Target vs. Wal-Mart – which stock is best?


Second, if the 1% to 2% increase doesn't materialize as TGT stock execs claim it will, then the company is essentially squeezing its margins for no good reason. When you lower prices you have to make up for it in volume, and a small test area in Kansas City may not reflect true consumer trends across the board.


Whatever happens, at least consumers are going to win out this fall with the discount promotion.


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