It’s been all doom and gloom here for discount department stores in Australia. Last week saw Big W announce the closure of 30 stores (about 16% of their store network). Even market darling Kmart hasn’t been immune, with sales underperforming last Christmas.

But interestingly if we look overseas, last month Target America posted its best results since 2005.

We’ve written previously about the brand’s somewhat “short sighted” strategy, however it looks like their most recent (and very ambitious) $7 billion plan might actually be working. The discount department store has mostly managed to avoid the slump in sales and traffic similar retailers are seeing in the US. YTD shares in the retailer are up 19%.

So what are they doing right?

Going small scale

Target have put the brakes on traditional large format store openings. Rather, Target are pushing hard into smaller locations – particular urban cities and college towns. Their strategy is to open in locations where full-sized stores traditionally wouldn’t have fit and in the process reach a new customer base.

Although real estate is often priced higher in cities and around university campuses, small stores are the most productive and cash cows for Target. Target’s Herald Square store in Manhattan earns more sales per square foot than any other Target store in America.

The small format stores on average are about 40,000 square-feet, or about one-third the size of Target’s traditional store size. In addition to basic groceries, grab-and-go food, clothes, electronics and household supplies; the offer within the store is localised. For instance, stores near campuses carry school supplies and dorm room essentials for students. In New York, Target focuses more on luggage and travel accessories. The company currently now has close to 100 small format stores and plans to open an additional 30 new ones a year for the next few years.

Getting online and logistics right

There’s no doubt Amazon continues to dominate online, however Target have a few advantages up their sleeve. Mainly, Target has a 1,800 network of stores it can use as delivery hub networks.

There’s two main benefits with this. Firstly, using existing stores to fulfil orders gives Target an advantage when it comes to shipping heavy and bulky items. Target can focus on the products that are typically seen as loss leaders for the likes of Amazon, for example furniture and bulk products (like toilet paper or water). And shipping from stores allows Target to better utilise current assets and the employees it already has, instead of investing heavily in big distribution centres.

Target now offers in-store pickup, along with a curb-side / drive up option that serves as a differentiator from it’s competitors. This allows customers to order online and pick up in the Target parking lot, without having to worry about finding a parking spot and leaving the cars.

Secondly, if the customer chooses to order online and pick up their order using Target’s curbside pickup option, fulfilling that order costs 90% less compared to shipping from a warehouse. Whilst Amazon’s warehouse may be more efficient that Target’s, the store base Target has provides huge savings to the retailer

Staff beyond the checkout

Target have also been heavily invested in staff over the past year. As part of their turnaround strategy, Target see the staffing model moving beyond simply the checkout process. They now want to “surprise” customers by inserting experts into key categories within the store. Target have been investing in expertise in core departments in which the customer expectation is for an interaction with a knowledgeable employee.

“We’re investing a lot in hours, staffing training and development and creating experts within our stores. Because we know as we listen to our guests in certain categories, they want someone there who is an expert. When they shop Target for beauty, they want a beauty expert that they’re coming to” says CEO Brian Cornell.

So is bricks and mortar really dead?

Target have used a combination of both innovation and focusing on getting the core basics right. In addition to their push into smaller store formats, online and  staff training; Target have also invested and re-modeled 400 of their existing stores. The stores have been outfitted with new technology, fixtures, design – totally changing how they look, feel and function. Plans call for an additional 600 stores to updated by the end of the next year. They’ve also invested heavily in their own private label products to improve overall margins across the business.

Discount department stores aren’t what they used to be and the DDS model has changed. If stores want to be around in the future, they need to adapt or die. Whilst the market here in Australia reacted positively to Woolworths recent announcement of Big W store closures and share buy-back (Woolworths share price hit an 8 month high on Monday), is it enough to save the Big W brand?

With consumer spending flatlining and an already crowded retail market, it’s obvious that there is still more room to go if Big W wish to survive into the future.

Author Trent Rigby

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