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)

 

Related Articles:

 

384Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120
120 rated 1
268
268 rated 2
439
439 rated 3
709
709 rated 4
641
641 rated 5
609
609 rated 6
640
640 rated 7
516
516 rated 8
272
272 rated 9
152
152 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION10
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.