Next stop, the dollar store. Photographer: David Paul Morris/Bloomberg
Next stop, the dollar store. Photographer: David Paul Morris/Bloomberg

What’s the matter with Target?

Since last year’s data breach, when hackers acquired tens of millions of credit and debit card numbers from the its cash register systems, Target Corp. seems to be stumbling from bad to worse. In the last six months, two of its top executives have been let go, including the chief executive officer. Now the company is announcing yet another quarter of lackluster earnings.

Part of that is obviously the lingering fallout from its data loss. It has spent well over $100 million dealing with the breach, and it is spending another $100 million to roll out more secure chip-and-pin credit cards. Meanwhile, the company has to woo back customers who are frightened of the rather cavalier approach it apparently took to systems security.

But as tempting as it is to attribute Target's woes to a transitory scandal, many of its problems seem deeper. Like a lot of companies that cater to a less affluent demographic, Target finds itself increasingly forced into an “ultra-value” strategy (see the McDonald's struggle to move its customers off the dollar menu and onto a higher price point). It has to offer deeper-than-expected price cuts in order to keep merchandise flowing out of stores, and that’s cutting into profit margins.

Target did really well for a long time with a strategy you might dub “the Rich Man’s Wal-Mart.” It sells staples, but the draw of the stores is cheap-chic clothes and stylish housewares in the lower-middle-quality range. Few of the items it carries are top-of-the-line, but its basics have more style than Wal-Mart or Bed Bath & Beyond and a lower price point than Williams-Sonoma or Pottery Barn. This attracted lower-middle-class aspirational shoppers and upper-middle-class kids in their 20s who couldn’t afford their parents’ lifestyles (yet) but wanted some of their style.

Unfortunately, that strategy is no longer the market-dominating force it once was. Both the Rich Man’s Wal-Mart and the real thing are struggling in the face of multiple competitive threats. Amazon.com Inc. is siphoning off its commodity electronics business; other retailers have pushed even further into the “cheap chic” space. And lower- and even middle-income consumers are increasingly looking to dollar stores for even cheaper bargains, which is why there’s currently a bidding war for Family Dollar Stores Inc.

With all this competition, it’s tough not to wonder if the department-store model (the category into which both Target and Wal-Mart fall) even makes sense. I’m not saying it doesn’t -- when I travel, it’s sure convenient to be able to pick up a toothbrush and a sundress in one place. But as competition from the Internet and the ultra-bargain places grows, more and more of these stores' departments seem likely to turn into the red. The big department stores might end up running those areas as loss leaders to drive traffic to the profitable departments -- but that means thinner margins, always in danger of turning negative if too many departments convert to “loss leader” status.

But it’s a little early to call doom and gloom just yet, not with all those Target sundresses hanging in my closet. Target still has a lot going for it, especially in the home decor area. But in other areas, it will either need to up its game (I’m looking at you, kitchen electronics) or give up and try to beat Dollar General at its own game.

To contact the writer of this article: Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article: Brooke Sample at bsample1@bloomberg.net.