Target: A Company That Hits the Bull’s-Eye

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few days ago I read a book called The Gone Fishin’ Portfolio.  After reading this book my subconscious mind began identifying stocks that have dominant business models and reasonable valuations – stocks that you could buy and hold.         

What Stock Was Top of Mind?

Target (NYSE: TGT) clearly stood out as a stock that you could buy and hold onto without losing any sleep at night and then sell if and when you need some cash.  After all, this company has a superior understanding of customer behavior, best-in-class branding, and a dominant retail footprint.  Plus it leverages big data very effectively.  And, of course, Target is arguably the best in the business at creating a fun shopping experience for its value-seeking shoppers.

A Superior Understanding of the Customer

Target differentiates itself from the competition in several different ways.  One of the most important ways Target does this is through the products that it puts on its shelves.  Target does two things extremely well: (1) it sets trends and (2) it identifies trends.  Target allows lesser-known yet still quality designers to design products.  Target also enables its buyers to identify trends, often times in other countries, before they get to the masses.   

Target’s products reflect how they want their customers to feel: Target’s products are fun, distinctive, sophisticated, smart, trendy, and entertaining.  Target understands and appeals to the value conscious customer through its diverse and ‘cheap chic’ product offerings.  Target also turns over merchandise frequently, which creates not only a sense of urgency to buy now, but also a desire to come back to see what’s new.    

Best in Class Branding

Target is one of the best companies at building a brand in the world.  From Target’s Bull’s Eye, to its Features, to its In-Store Signage, to its Retail Associates, to its Website, to its Customer Relationship Management system, everything is on equity.       

Target has a Customer Relationship Management system, for instance, which tracks all of the purchases that a customer makes in the store, on the internet and from a catalog.  So if a person calls customer service, that person will have access to this data as well as notes from all other contacts, which is one of many examples of how Target effectively uses technology to enable effective customer service and to build its brand. 

Target also uses this data to customize offerings and personalize the experience.  That is a huge point of difference between Target and its competition. 

The Target Experience

Why do people shop at Target?  People shop at Target because of how the store makes them feel.  When I walk into a Target, I feel empowered.  Because the shopping experience is enjoyable, I shop longer than I would elsewhere.  I make impulse purchases.  I leave with more items in my cart than were on my shopping list.

On one level, I like the clean store, fanciful merchandise, neat features and ads, fast and courteous customer service, and product offerings.  I also like feeling as though I never know what I am going to encounter.  Shopping at Target is sort of like “treasure hunting.”  But there are a lot of retailers that make someone feel that way, particularly in the Dollar Channel. 

What those other retailers do not do, however, is offer is what some people describe as the human touch – the ability to connect with the consumer.  Target connects with its consumers through its in store communication, its trendy products, its store design, and its employees.  Target’s employees serve as extensions of and ambassadors of its brand.  Target understands that its employees project how they feel onto the customer. 

Sure, you can save money by going to discount stores as long as you can endure the pain – annoying salespeople, labyrinth-like layouts, clutter, poor lighting, long checkout lines, and a terrible experience that makes you feel inferior – just not at Target.           

Effective Leveraging of Big Data

Target couldn’t build a brand that rivals Nike and Coke, or design store layouts that reflect a deep understanding of the shopper, or maintain a dominant retail footprint, or create such an enjoyable experience for its customers without data on the population that it serves.    

Target and Wal-Mart (NYSE: WMT) are clearly the two crown princes that have emerged in retail.  You have Wal-Mart, a behemoth of a company, which has used data to minimize costs and provide customers with prices that are generally at least 5% below the competition.  And then you have Target, a company that carefully considers the value of a lifetime customer, and uses data to enhance the customer experience. 

Moreover, in 2001, Target made the strategic decision to partner with rather than compete against  Target entered into a deal that allowed them to sell goods on under a fee-for-service arrangement.  After all, it would take years for Target to build an e-commerce infrastructure, which is not one of its core competencies.  Importantly, I am sure that Target enjoys the big data that comes with this relationship.

3 Reasons to Buy Target

1.  Superior Understanding of the Customer.  Saying that Target is ‘customer-centric’ is an understatement.  Target has enticing store layouts, buyers that are trained to spot the latest trends, and even allows shoppers to sign up for Target REDcards – or Visa Smart Cards.  Those credit cards allow Target to see where else that person shops, what they buy, and how much money they spend.  That provides Target with a huge competitive advantage. 

2.  ‘Cheap Chic.’  Target both identifies trends (before they hit the masses) and sets them.  The shopping experience empowers shoppers.  New products keep customers coming back.  They also trigger impulse purchases and make customers feel special.       

3.  Differentiation from Wal-Mart.  In contrast to Wal-Mart, whose data systems concentrate on squeezing every last penny out of the distribution chain, Target uses data systems to enhance the customer experience.  Target’s CRM system, for example, allows analysts to look through all the data they have on a customer (credit card, internet purchases, call center, etc.).  

My Foolish Take

Customers and shareholders alike elect brands on a daily basis with their wallets.  Target understands better than any other retailer that its survival depends on customers voting every day with their wallets.  As long as Target is selling at a P/E ratio of less than 14 and below the average of the S&P, Target gets my vote. 

RyanPeckyno has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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