Target Pricing Spineometer: 4 of 5 Vertebrae
Target, a grocer and general merchandiser, had a mixed Q3 2023. Revenue fell 4.2% to $25 billion, but earnings before interest and taxes rose 30% to $1.3 billion over the same period last year.
A review of Target’s 15 November earnings call and financial report provided insight regarding the importance of pricing on performance.
Price is clearly on the minds of executives at Target. Repeatedly, executives mentioned hitting certain price points stating an item was “priced under $5” or “priced under $20”. Christina Hennington, Chief Growth Officer at Target, emphasized, “The price points are very appealing.”
But price is not just a number. The “appealing” price for everyone is free. So, where does price fit in the strategy of running Target? Would a researcher be able to identify “magic price points” at Target as well as a generalizable and predictable logic for when they should or should not be used?
Brian C. Cornell, CEO of Target, identified the issue of price elasticity stating, “Dollar sales are being driven by higher prices with consumers buying fewer units per trip.” Yet this was not an issue he highlighted.
Rather, the macroeconomic environment was something he and his team spoke about, and they did so in terms of responding to it rather than seizing the opportunities it creates. Brian Cornell lamented the 25% inflation of food at home compared to 2020. Christina Hennington added comments regarding the negative impacts of student loan repayments and interest rates on purchasing. Something, however, is amiss. These economic headwinds are met with a tailwind in the form of real (after inflation) GDP per capita growth since 2020.
Nonetheless, we continue our exploration.
Management was clear, the focus was on operational excellence. Brian Cornell spoke about efficiency, inventory management, store remodeling, supply chain management, product launches, and freight costs. Christina Hennington spoke about brand and product launches and tie-ups regarding Figmint, Fenty Beauty, Kendra Scott jewelry, and FAO Schwarz. John Mulligan, COO of Target, spoke of operational efficiency and teamwork.
Given this information and the operations of Target, we can identify some expectations regarding the pricing capability that would benefit Target.
- Industry benchmarks would suggest between 200 and 1,000 professionals, out of a total of 440,000 employed, would focus on pricing at Target.
- Their focus would vary between promotions and list pricing.
- Given that Target serves primarily North America, Target would primarily need professionals near their Minneapolis headquarters.
- And, given that North America is far from a monolithic market, Target would benefit from having individuals well-versed in specific regional markets.
- Given that Target operates both online and off, and the online market is going through rapid changes, Target would benefit from having a strong digital pricing team.
- And yes, macroeconomic changes will impact Target’s performance. The key question is how to make hay in a windstorm rather than lament the breath of fresh air. To seize the opportunities across macroeconomic cycles, perhaps Target would benefit from having a small team of economists.
Research into the investment by Target in pricing yielded encouraging results. After reviewing 100 job titles in pricing, we came to suspect that Target has a team size relatively aligned with industry standards. Titles ranged from lead and analyst to manager and director. Roles focused on data science, analytics, competitive intelligence, promotions, and strategy. Knowledge domains were largely aligned with categories such as apparel, kitchen, or discretionary. Some identified clearances as their specialty, while others identified loyalty.
Given the importance and capability of pricing at Target as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of January 2024.
Target Pricing Spineometer: 4 out of 5 Vertebrae.
TGT (Target Corporation) rose from 110 the day prior to their earnings call to 131 one week later. FY 2022 revenue of $109 billion with a 3.5% operating margin and P/E ratio near 18.
For FY 2022, a 1% improvement in price would yield a 28 % improvement in operating profits holding all else constant at Target.