Target’s CEO didn’t leave because of a cybersecurity breach


Target has a more serious problem than hackers installing malware in its payment system: its business model. (AP Photo/Steven Senne, File)

When Target's CEO Gregg Steinhafel resigned on Friday, it seemed as if he'd become just another victim of the massive cybersecurity breach that put 100 million credit card numbers at risk. Maybe a change at the top will help the retailer regain its customers' trust, the logic goes, after it was so deeply violated.

A longer-term look at Target's fortunes, however, reveals more serious problems than hackers installing malware in its payment system: The business model isn't working anymore, and it's going to take a serious overhaul to bring up to speed, when competitors are already far ahead.

The instability isn't glaringly obvious. Target hasn't been thought of as a "troubled retailer," like JCPenney, Barnes and Noble, or Best Buy. It's made a lot of smart decisions in recent years, like opening small-format stores in urban areas, and designing sleek marketing campaigns that broadcast an image sophisticated enough to satisfy a demographic that might otherwise shop at the Gap. It's even ridden a wave of success with exclusive lines from designers like Michael Graves and Missoni, which generated healthy sales for items ranging from clothing to kitchenware.

"The key idea was that consumers want a better shopping environment, but they're not going to pay more for the same products that Wal-Mart carries, just because the store's a little nicer," says Kirthi Kalyanam, director of the e-commerce initiative at Santa Clara University's Leavey School of Business. "That combo of really good design at discount store prices combined with a nice shopping environment and convenience in the store, those three levers made the business model work."

It worked because shoppers were going to Target anyway -- they had to swing by to buy paper towels, and figured they might as well pick up some nice-looking home furnishings as well. But then, a couple of things happened.

One: The recession took its toll on most retailers, but hit Target particularly hard. Consumers tightened their budgets for exactly the kind of nice-to-have items that are Target's specialty. Those who needed a set of plates, for instance, opted for the cheapest and simplest kind, rather than a slightly higher-priced  option at Target -- or postponed the purchase altogether.

And two: Buying habits changed. The buzzword now is "omnichannel," meaning that consumers want to buy things wherever is most convenient for them, whether it's collecting in a store something they might have ordered online, or ordering home delivery from a store, or ordering something shipped to a locker at a 7-Eleven. That's a huge technological and logistical challenge for any retailer, but particularly one like Target, which had relied on consumers picking up slightly higher-end items while shopping for basics. Now, consumers are more likely to pick and choose those nicer items online--away from the store.

"The Wal-Mart customer today, when they want special apparel, they're buying it from Zulily," Kalyanam says, after naming One Kings Lane and Wayfarer as other affordable but stylish online retailers. "The cheap-chic product isn't working any more." No surprise, then, that online sales are a negligible percentage of Target's revenue.


Amazon beats everyone, but Wal-Mart is inching ahead at Target. (YCharts)

Wal-Mart, meanwhile, has charged aggressively into the omnichannel world. It's had an office in Silicon Valley for a decade cranking out new ways for people to buy its stuff, and more reasons for shoppers to come to its stores. For instance, it's begun offering a suite of financial services -- most recently, a money transfer service, for which the unbanked used to have to visit a Western Union. It knows it's in a desperate battle with Amazon for its share of the consumer's wallet, and has been as experimental as any super-sized retailer -- even when things don't work out. As for Amazon, it's encroaching on the brick and mortar retailers' physical turf, with inventions like a massive Brooklyn studio for designers.

"A lot of the headlines in those two stores has been figuring out the omnichannel strategy," says Barbara Kahn, a professor of marketing at the University of Pennsylvania's Wharton School of Business. "But Target's been in the news for all kinds of things that are not conducive to that."

You'll notice another similarity between those two gigantic players: They don't actually make products themselves. While Target has prided itself on innovation in its product mix, Amazon and Wal-Mart just sell other companies' products, and innovate instead on their business models. Even Macy's, a traditional department store, has excelled in using its Web site to drive traffic to its stores, and using its stores as warehouses to deliver online purchases faster. On the other end of the spectrum, successful brands like the Gap and J. Crew focus almost exclusively on their own designs, without having to worry about providing a comprehensive shopping experience.

"Target's model is more complicated," Kalyanam explains.

Of course, there were other missteps, like an expensive misadventure in Canada, and a Web site crash at the launch of a new clothing line. But even if the new CEO doesn't make those kinds of mistakes, she or he will have to deal with the question of what value Target really adds in a world where consumers can find most of what it offers more cheaply and easily somewhere else.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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