Keeping a retail niche in the bullseye

Gregg Steinhafel, chairman and CEO of Target Corp., talks about the company's strategy for weathering the recession and expanding its place in the retail market.

EXECUTIVE SNAPSHOT

Who: Target Chairman and CEO Gregg Steinhafel.

Education: Steinhafel earned a bachelor's degree in business administration from Carroll College and an MBA from Northwestern University's Kellogg School of Management.

Personal: He and his wife, Denise, live in Orono, Minn., and have two children.

What you may not know: Steinhafel likes to snowboard.


Kai Ryssdal: Gregg Steinhafel, good to have you with us.

Gregg Steinhafel: Glad to be here.

Ryssdal: How's business?

Steinhafel: Not bad. We've seen the economy stabilize. From our perspective, it seems to be bumping along the bottom. There are some encouraging signs but we'll see what happens.

Ryssdal: Bumping along the bottom is not to me an encouraging phrase.

Steinhafel: Well I think stability in this kind of environment is important and just the fact that the environment is stable is encouraging.

Ryssdal: What are you going to look for amongst your clients and your customers to know that it's turning around?

Steinhafel: We'll know that it is turning around once the discretionary categories perform better in the marketplace. Our food business, our Health and Beauty, and all the need base businesses have performed very well in this environment but apparel and home in particular and other discretionary items are really where the fall-off in sales has been. So when the recovery happens, we'll see those businesses in particular strengthen.

Ryssdal: And you've actually had a lot of your stock, a lot of your product lines in those discretionary categories . . . clothing and things like that. Is this recession making you rethink that balance?

Steinhafel: It's not making us rethink the balance as much as it is helping us understand that we've got to have traffic-drawing capabilities in any economic environment. So one of our priorities are to strengthen our food offering in our non-Super Target general merchandise formats and we've been working on that for some time. We've been adding food on an on-going basis and we know that's the right strategy going forward and we are going to continue to strengthen our food commitment in new stores and remodels in the future.

Ryssdal: I wanted to ask you about the food thing because I'm a Target shopper. You know, I go there whenever I need things that I think I can get at Target. But when I go in there, I'm looking for socks and maybe toys for the kids, and maybe car polish or something like that. I'm not looking for a gallon of milk and some Ore-Ida fries. Why food at a store like Target?

Steinhafel: Well to be honest with you, Kai, you're not the average demographic that shops in our store. We're highly female oriented and those busy moms . . .

Ryssdal: But I'm a sensitive shopper, I mean . . .

Steinhafel: If you were the grocery shopper in the family, you would be looking at our food assortment. And I will just tell you that in time, as we broaden the offering and we make it more compelling for you, you won't be able to walk by our food offering without taking a good look.

Ryssdal: How are you going to broaden it? Are you going to have fresh produce?

Steinhafel: We are. We are going to deepen our commitment in all the areas of food. Currently we have a fairly reasonable assortment of dry dairy frozen, but we don't offer any perishables in our store so we are going to do both. We're going to deepen our assortment in the dry dairy and frozen categories, and in new stores going forward, we are going to add perishable products like bagged lettuce, and salad dressing, and tomatoes, and onions, and potatoes, and bananas.

Ryssdal: Doesn't that complicate your logistic stream and how you manage all of these things?

Steinhafel: It really doesn't because we have 245 Super Targets today that are essentially a Target with a full grocery complement. So what we're really doing is we are extending the best of the best from a Super Target into a general merchandise store. And moms have told us that they love it whenever we have added more food in the store, our sales have gone up tremendously. So we know that she is time-pressed and she wants to do all of her shopping in one trip. And by broadening our food assortment, we are enabling her to do so and not make that second stop to get her fill-in groceries at the neighborhood supermarket.

Ryssdal: All right, so let me see if I have this straight. You are working towards price-conscious consumers. You are trying to make it so that customers can get everything they conceivably need at your stores. You are offering food. How are you different from Wal-Mart then?

Steinhafel: Well we have a differentiated strategy from Wal-Mart because the demographics in our store are different. Our demographics are slightly more affluent than the Wal-Mart guest, slightly more female, they have kids at home, they are slightly better educated and so we have a different consumer that is coming into our store. And what we are able to provide is similar to a Wal-Mart, we have all the basic need categories covered. But then we create a different environment on the discretionary side where we are appealing to a consumer that wants better quality, more fashion, the kinds of items and products you would find in a specialty store environment but we're able to bring them into Target at Target prices.

Ryssdal: But it's that discretionary category that hasn't really been doing so well for you.

Steinhafel: It's true but still the prices on our discretionary categories are still a half or a third less of what you would find in department stores or specialty stores. So we're delivering incredible value on slightly more upscale products than what you'd find in a Wal-Mart. Wal-Mart's a great retailer, they're very competitive, but they have a tendency to commoditize and sell more basic products. And we're able to give a little bit more of a design and style and fashion forward look and great value at the same time.

Ryssdal: You've been concentrating pretty hard on the pay-less side of this company's logo: the "Expect more, pay less" branding that you see out there. How do you keep going with that pay-less strategy at a time when consumers are incredibly cost conscious, and really differentiate yourself from Wal-Mart though?

Steinhafel: Well our strategy is expect more, pay less. It's really about the balance. So we continue to focus on both the differentiated side of the business and the pay less side. Clearly this is the most challenging consumer environment in the last 50 years, so consumers are just more stressed as it relates to their economic situation and so they're focused more on buying things that they need and not what they want. So in this environment we have to be reflective of the fact that that's where they have the capability to spend. So we've got to adjust our strategy to make sure that we are appropriately taking advantage of what they have to spend and so we're focused more on the pay less but that doesn't mean we are abandoning the expect more side of the equation.

Ryssdal: How do you focus on the pay less? I mean, what actually do you do in the stores to make consumers realize "Oh, this is the pay-less place"?

Steinhafel: Well, it really starts with the contents. So it's our adjustment of good, better, best. It's the end-cap presentation . . .

Ryssdal: End-cap on the aisles there . . .

Steinhafel: End-cap on the aisles. It's having a single price point emphasis on those kinds of items. It's in all of the marketing messages that we convey to our guests, whether it's broadcast, circular, radio. It can have both a decidedly upscale feel but a stronger price message so we're focused both on the content and on the messaging.

Ryssdal: This is an enormous company. I mean, you have 350,000 people who work here. Can you be agile enough to do all of what you want to do to get through this recession before the recession is actually over and people are starting to feel better?

Steinhafel: We are a big company, but we have a resilient strategy and we have an unbelievable team who are passionate about what they do. And you know, we have to be good at our game every day, every guest, every transaction, and our team has risen to the occasion.

Ryssdal: Were you fast enough on the up-take to recognize how quickly this economy was slowing 18 months, two years ago?

Steinhafel: I don't think anybody anticipated the depth of the recession. So we've been through these kind of economic environments in the past and when we are in these kind of environments, we have a tendency to do or to not perform as well as when we are in a robust economy. But I don't think anybody could've predicted that it would be this deep and lasted as long as we now think it's going to last.

Ryssdal: How do you get back the customers that have either gone to Wal-Mart for cheaper goods or just stopped spending? How do you convince them that it's OK to get back in the water now?

Steinhafel: Well, we have to be on our game every day and that's the fun part of retail is that is we've got 25 million consumers coming into our stores every week. And if we deliver great value and a fabulous experience, they're going to keep coming back. If we don't deliver on that proposition, they're going to shop somewhere else. In this environment, we really haven't lost customers to Wal-Mart. What's happening is we've lost that discretionary trip. That special "I'm just going to go to Target to see what's new," because they don't want to be tempted to come into our store and spend money that they don't have.

Ryssdal: Is that part of the whole food thing, to get people into the stores and maybe they buy an extra pair of jeans while they are there?

Steinhafel: It really is. We think that bringing people more frequently into the store will develop a stronger bond and loyalty and we believe strongly that we are offering fabulous products, great value. And if we can get more consumers to visit us more often and we can become a more regular part of their shopping experience, they'll become loyalists for us.

Ryssdal: Where did this company come from? I mean, it seems to me that eight, 10, 12 years ago it just kind of came out of nowhere. And then everybody was talking about going to Target and we have to do this and that . . . and obviously it was a concerted effort. How did you do it and where does it go from here?

Steinhafel: It's a great story. It started back in the early 1900's from the Dayton family. We went public in the late 60s. We were formerly Dayton-Hudson Corporation, now we are Target. We've been in business for 47 years. It has a rich tradition of being guest-focused, having great corporate governance practices, and really putting the consumer and the teams and the communities all together in an integrated strategy.

Ryssdal: You've had to slow down your growth plans a little bit since the economy has slowed. You were talking about 100 new stores a year, and $100 billion in sales. How are you going to bounce back from having to retrench like that and having to reconsider your strategic objectives?

Steinhafel: Well, all retailers have had to slow their growth down. I mean, it takes a while to slow the pipeline of new stores down and it's going to take a little while for them to ramp them back up when the economy gets better. But when the environment gets better, we can and we will look for the right kind of sights and we will get back on a growth pattern. In all likelihood it will not be 100 new stores a year. That will take some time to work our way back up to that, but when the fundamentals of the economy changes and strengthens, we're going to be back building new stores.

Ryssdal: Is there going to come a point where the United States is Target saturated and you have to look elsewhere?

Steinhafel: Well, not in the near future. We currently have 1700 stores and we believe there is potential to have approximately 3000 in the formats that we have today and so we believe that will enable us to grow for at least a decade or possibly two decades. And there are a lot of urban areas where there are a lot of Target loyalists that we are not going to be able to put 150,000 square foot stores and we'll have to figure out a different way to reach them in the future.

Ryssdal: But don't you look at markets like Asia and Latin America and say, "You know, we could really make some money there."

Steinhafel: Well, we look at how to grow and how to deliver shareholder returns and so we've got to balance both of those. But ultimately it's about generating the right kind of returns for our shareholders so we look both domestically, we look at the contiguous North American border countries, we've looked at Europe, we've looked at Asia. We are not a company that is going to perform well in a developing nation because you need higher discretionary incomes because we are a differentiated strategy. We are not the low-cost provider, so when there is an adequate middle class that exists somewhere, it might be appropriate for us to look at that.

Ryssdal: Give me the laymen's definition of differentiated strategy. I mean, it's a marketing term that you obviously have as a second language. What does it really mean?

Steinhafel: Differentiation means having unique products and services and experiences that your competitors don't have. So for example, our own brands, the designers that we have, how we approach seasonal events. We create products and services and an experience that is unique and different to other retailers in the market place. We know that if you have a K-Mart and a Target and a Wal-Mart all on Main and Main, all offering the same products, the low cost provider is going to win. So we've got to have products and services that are unique to us and we do. In our stores we have brands like Champion that Wal-Mart doesn't have. We have brands like Converse that Wal-Mart doesn't have. We have brands like Calphalon. So we've got a lot of unique products in our stores that our primary competitors don't have. That's what makes us different.

Ryssdal: If you have all those brands and if you are successfully differentiating yourself, how come you are still number two to Wal-Mart?

Steinhafel: Well they're a tremendous company. They are the world's second largest company and they have a very successful formula. And we don't aspire to be as large as Wal-Mart; we know that's not going to happen. We want to be the best retail company we possibly can be. So we're focused on our demographics in servicing our guests the best way we possibly can. We know that if we can do that then we're going to be very successful as well. It's not a zero sum game. It's not as if Wal-Mart wins and everybody else loses. There's a lot of great retail companies and we believe that if we can effectively compete with Wal-Mart and stay true to our strategy, we will be highly successful over the next couple of decades.

Ryssdal: Let me get to the shareholders for a second. You have your hands full with shareholders these days . . .

Steinhafel: We do.

Ryssdal: There's a hedge-fund manager named William Ackman. He runs a hedge-fund company and he's taken a big position in this company; about 7, 8 percent. And he's got a slate that he wants to put up for nomination to the board of directors at your annual meeting here in a couple of weeks. You're not interested in having him do that. You say, "To put his people on the board would be risky." He says, "I just want to maximize my shareholder value. I own 8 percent of this company."

Steinhafel: He has, actually, he has 3.5 percent of actual ownership, and he has a derivative position for the balance. So that's the starting point. We share his objective of long-term shareholder value creation. We just see it differently in terms of how to accomplish that. If you look at Target's track record, our plan for the future, and the level of engagement that we've had with Mr. Ackman, we believe that we have a better plan than he does. And ours is built shopper by shopper and we believe that his agenda is risky and speculative and doesn't generate shareholder value.

Ryssdal: How do you handle a challenge like this to your board of directors and fundamentally to the way you are running the company? I mean, this guy's got some ideas and they're not necessarily yours.

Steinhafel: It's incumbent upon us to listen to all of our shareholders and we've been very engaged with Bill. We've had our very constructive and positive dialogue from the first time that he took a position with us in July of 2007. We don't happen to agree with his real estate idea and that really was the point at which the relationship soured. We have a fantastic board of directors: they're highly engaged, they're independent, they're world class, they have deep and relevant experience in retail and we do not believe that his slate will add any value. As a matter of fact, it is a zero-sum game and our candidates are far stronger than his candidates. And to replace our candidates with his would be, I think, not only inappropriate but it would lose shareholder value, not improve shareholder value.

Ryssdal: Speaking of differentiation, how do you differentiate his ambitions as a shareholder verses the general movement, given the recession and all that's happened on Wall Street, with shareholders being treated more, shall we say, informed a little better and kept a little better in the loop and so that they know really what's going on in the company?

Steinhafel: We have a very aggressive shareholder outreach program. We talk to all of our shareholders including Bill Ackman. We're going to continue to talk to Bill Ackman. Their point of view is important. They formulate and they challenge us; they present good ideas and so it's incumbent of us to make sure that we are engaged with our shareholders and we try and do that on an ongoing basis.

Ryssdal: How are you going to know this recession is over?

Steinhafel: Well I think the recession will be over when we start to see strength in our traffics, strength in same store sales, and our discretionary categories rebounding to at least less negative or slightly positive compared to where it's been in the past.

Ryssdal: Is your feeling on the economy that things are getting bad less quickly?

Steinhafel: There are some early signs of improvement. We see that our sales trends are slightly better than what they've been in the past. Our early stage delinquencies in our credit card operation have improved. And we believe that when we get through the third quarter and start to cycle some of the really challenging environments that we were up against last year, we're going to start to see improvement.

Ryssdal: Speaking of later in the year, you are probably somewhere in this building there are people working on Christmas of 2009, right? How are you getting ready for that? As we all know retailers have a huge stake in the fortunes of the consumer at Christmastime.

Steinhafel: Well we're taking what we believe to be a reasonably prudent position. I mean, we are going to go out and we are going to try and capture as much market share as we possibly can, but we're going to do so profitably. So we go through business by business trying to project where that business is going to be nine months out, we make our commitments, we develop a plan, and then we try and execute that in the market place better than anybody else. And if we do that and we are on our game, we believe that we will take share and do so profitably.

Ryssdal: Do you as the CEO running this company; and you've had the job for about a year now plus or minus, do you reach down into the organizational structure and say, "Hey listen, come see me. I need to talk to you about this thing or that thing." Or do you let your managers do your thing and then deal with it that way?

Steinhafel: Well, the benefit of being here nearly 30 years is I know the organization inside and out and upside and down, and I believe in going right to the source. So I've got a deep pipeline of information and I can go very deep. I think it's important that leaders do that, that you don't become isolated. You have to go to the source; you have to spend a lot of time in your stores and a lot of time in your competitors' stores.

Ryssdal: So when you walk into a Target store, let's say the one down the block over here, what hits you and what are you looking for?

Steinhafel: I look at our stores through the eyes of our guests. I come in and I want to see how does the store feel? Is it clean? Are the brand standards right? I quickly look at the check lane, is there anybody waiting in line? And I walk the store to see, is this a compelling environment? Am I excited to be here? Are there fun things on the end caps? Do I believe that there is a great value and an engaged team that comes up and greets me and says, "Can I help you find something?" So I look for what I would expect our guests would want to have in a Target store experience and that's how I walk a store.

Ryssdal: Even if we are just running in for a pair of socks and some car wax?

Steinhafel: I love shopping Target stores. I love shopping competitors. I walk stores all the time. I'm always looking to see how our stores are performing.

Ryssdal: What is it about retail that clearly captivates you? I mean, you could be in investment banking; you could be doing a thousand things.

Steinhafel: Retail is an incredible business because of the pace, because of the consumer contact, the fact that it always changes. There's so many exciting aspects to it and we offer a lot of variety in the portfolio of goods and services that we offer. So there's always businesses that are trending up, trending down and it's an exciting way to try and be as relevant as you possibly can and solve as many problems for the consumer as you possibly can, better than anybody else.

Ryssdal: Does it drive you nuts that you are at the whim of an incredibly fickle group of people, the American consumer?

Steinhafel: Not really, because if you deliver day in and day out, they're going to become loyalists to you. I mean there are some individuals that are price loyal and they don't really shop the store because of the bond they have with the store; they are bonded to the lowest price. But there are a lot of consumers that really appreciate their Target experience.

Ryssdal: What's next for you?

Steinhafel: What's next for me? I lead the greatest retail company in not only America but the world. I am so excited to come to work every day. I'm part of a company that has a great heritage, that has a winning strategy, that's a powerful brand and I have the good fortune to work with an incredible team. So I'm excited. You know this is more than I could ever have imagined.

Ryssdal: What happens to this company if you don't time and negotiate the handling of this recession the right way? Is there a big downside risk coming out of this recession for you?

Steinhafel: Well, there's a downside of not being a good competitive retailer in any environment, not just in the current environment. We have to be good every day, and that's another thing that I like about this business is you do get a daily score card and a weekly score card. So you know how you're doing by store, by item every single day. And so it's invigorating and you know when you get it right and you know when you are not getting it right and so you've got to be really disciplined and good at what you do or else there's a lot of shopping alternatives for the consumer to go to.

Ryssdal: A couple of years ago, nobody would've thought of Target and fashion really in the same breath and yet here you are now being characterized as affordable and fashionable, stylish with some "cachet." How hard a transition was that? I mean, what was the thought process in the boardroom?

Steinhafel: The thought process goes back to early 1990 when we recognized that if we didn't develop a different strategy and change courses, we would compete with the low-cost provider. And I think you know from what's happened in the marketplace that you cannot go up against Wal-Mart and out-Wal-Mart, Wal-Mart. So by design we created our strategy and we've been focused on it for nearly two decades. So we've been very committed to being a differentiated retailer and it takes a long time to develop that kind of brand, that kind of "Target" and all of the attributes that comes with it. Even though you aspire to be something different, you've got to really work hard at delivering that day in and day out and ultimately, you'll get rewarded for that but it takes a long time.

Ryssdal: Does it raise your hackles when people call it 'Target' [pronounces it Tar ZHAY] or are you OK with that?

Steinhafel: We love it, we love it.

Ryssdal: Is retail hard work?

Steinhafel: It's hard work but it's fun work. There's the team here in Minneapolis and all throughout the world that's part of our Target team are really passionate. They love retail, they love the company, they love what we stand for so I think a lot of people say, "Yeah, it's hard work, but what isn't? And we have fun doing it." They love the culture; they love the fact that we are focused on guests, team members, shareholders, community. I think they like the performance orientation, they like the values that we stand for and there's so much to love about this company, I think that the average team member really, really feels compelled to do their best every day.

Ryssdal: By the same token, it is in that category of big box retailers which comes with all the attending criticism of poor treatment of labor, bad utilization of space and it's not a very "green" company, and it's a consumer society, and we don't need all this stuff. I mean, it's not all positive.

Steinhafel: We are highly engaged in our communities. Our philanthropic efforts, our team member volunteer efforts are superb. We go into communities with stores that fit in their communities, we try and deliver great value, we deliver a team member experience and we pay good wages and benefits. We're a great employer and most communities love to have us there.

Ryssdal: How does the average consumer know that you're a discretionary retailer, I mean what does that mean to them?

Steinhafel: Well, we don't really market the word discretionary to them. We want to provide the right kind of goods and services and experience in our store. So we put a store and we invite people to come in and we want to win them over based on what we are selling within our store. And so we put together the right combination of products and presentation and physical attributes and the visual elements and our brand standards and high service levels and it's the combination of all of those things that combine for an incredible experience that people become passionate about over time.

Ryssdal: Is there a bottom limit on that pay less side of the equation? I mean, you can only cut the prices so far until you really start getting down to your profitable bones here. How do you know when you are there?

Steinhafel: Well we're not interested in competing strictly on price. We're not interested in starting a price war with Wal-Mart. We have to be competitive in the marketplace. I mean, that's a standard expectation of everybody who comes into our stores. So we want to be competitive, we are competitive, and then in addition to that, we know that if we can provide more upscale products at great values in a unique store that's well lit, bright with cheery team members that are highly engaged we believe that over the long term that's a winning formula.

Ryssdal: Let me get back to your demographics that we talked about at the top a little bit. You say you are very heavily skewed toward women who are shopping for the family; they like their groceries and their fashion in the same place. How do you grow that though, do you look for more women to get into the stores or do you try to get teens and younger people and the dads as well?

Steinhafel: Well, you have to do both. We're focused on not only converting the existing shopper who we call "guests" into our stores but we're always looking to attract new segments. So we look at those segments that are in our core demographics and ones that are more attuned to making shifts in their purchasing behavior. So when you go off to college or you get married or you have children, those are times in your life where your shopping habits change and we want to be destinations at those key times in your life stage.

Ryssdal: Why not just call shoppers, shoppers -- instead of guests?

Steinhafel: Because it's part of Target and it's part of trying to provide an aspirational experience and we use that because we want to have our entire team member base thinking about providing a slightly more elevated experience to individuals. We don't view customers as a transaction; we want to view them differently.

Ryssdal: Interesting choice of words: aspirational. Do you worry at all that there may come a point where this company is too aspirational where you're trying to be just a little bit too high fallutin'?

Steinhafel: We are in a business where you have to take risks and you can at times get ahead of yourself and become too aspirational, and there are times when you are not moving fast enough. And that's, again, part of the fun part of the business where you got to find that sweet spot where you're trend right, you're fashion forward, you have the right kind of content. But you are not too far in front of the market because, if you are, people aren't going to understand what you are trying to sell. On the other hand, if you are post peak, then you are just selling commodities. So we've got to find that right center of the bell curve and be the best at that.

Ryssdal: It's crazy making, I mean you have to consistently re-jigger to a moving target provided by customers who eight times out of 10 probably don't know what they really want, right? You shrug, but c'mon, dealing with the American consumer, I think, must be an amazingly frustrating enterprise.

Steinhafel: American consumers are highly brand loyal. They use the Internet for research. We are in a self-service environment so there are a lot of consumers, or guests that come into our stores that they really do know what they want. They might not know exactly the difference between one particular style and another style, but that's what we do. We are the super editors for our guests. And so we give them the best of the best and we do all the work on their behalf so they come in and we're giving them the best choices, category by category. And over time they trust us to be their editors to make their life simple and easy.

Ryssdal: I will just say for all the journalists out there that may be listening, editors don't always know what's going on. There is a fine line. it seems to me, between you telling us what we want and giving us what we let you know we want, right?

Steinhafel: You can look at it a number of different ways. Wal-Mart has a much broader assortment than Target does. They have tens of thousands of more choices. We believe that's confusing. On the other hand, you have Costco and Sam's Club -- very, very tightly edited; they have 4,000. Both of those strategies are successful. So choice works because Wal-Mart is successful, tightly editing assortment works as well. So it is not an either/or. You can do both. You can offer choice and editing at the same time and win in the marketplace.

Ryssdal: Is that a phrase you guys actually use -- editing?

Steinhafel: Yes we do. We do.

Ryssdal: Gregg Steinhafel, chairman and CEO of Target. Thanks so much.

Steinhafel: Thank you.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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