Target Faces Challenges Amid Changing Consumer Preferences and Market Competition

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Chloe Guss, a longtime shopper at Target for nearly two decades, has expressed reservations about the quality of some of the retailer’s products, hinting at potential trouble for the business. The 38-year-old New Yorker primarily uses Target via her Instacart app for groceries and essentials like diapers and formula for her children. However, for clothing and furniture, she seeks better quality items elsewhere.

Target, humorously pronounced “Tar-zhay” by fans and critics alike, has built a reputation for offering trendy, affordable designer home goods, cookware, and clothing. Despite its “cheap chic” appeal, the Minneapolis-based retailer is expanding its private label brands to keep its customers loyal. With over 45 private labels, including Good & Gather and Favorite Day, Target generates more than $30 billion in sales annually.

However, data from market research firm GlobalData reveals that Target’s total U.S. retail market share has shrunk in several key categories that account for over 60% of its revenue. These categories include food, household goods, clothing, electronics, homewares, and furniture. The only category where Target has gained market share is beauty products. Additionally, PriceSpider’s data indicates that both purchase rates and average spending per shopper have declined.

Target declined to comment directly on these trends, but CEO Brian Cornell mentioned in May that the company is focused on sales growth, which they expect to commence in the current quarter. Despite this optimism, Target reported weaker comparable sales for the quarter ending May 4, marking its fourth consecutive quarterly decline. The company attributed this to macroeconomic factors such as delayed purchases and increased spending on activities outside the home.

Investors are concerned about Target losing market share to competitors like Costco, Walmart, and Amazon. Over the past year, Target’s stock has increased by just 1.6%, compared to significant jumps of 27% for Walmart, 28% for Costco, and 21% for Amazon. In terms of forward earnings, Target trades at 16.36 times, compared to Walmart’s 27.31 and Costco’s 49.75.

Target and Costco primarily attract Millennial and Gen X urban white women with annual household incomes ranging from $40,000 to $125,000, according to market research firm Numerator. Competitors such as Gap and Dick’s Sporting Goods cater to similar demographics. Notably, Costco’s Kirkland Signature brand has grown in popularity, with significantly more households choosing it in early 2024. Costco has reported market share gains in big-ticket items like electronics and furniture.

Gap and Dick’s Sporting Goods have also increased their market share with trendier merchandise and boosted sales of footwear, athletic apparel, and sporting equipment. In contrast, Target’s clothing sales fell slightly in the fiscal first quarter compared to the same period last year but rose from the prior quarter.

Target’s Good & Gather food and Up & Up household essentials brands, which compete with Costco’s Kirkland Signature, have lost household penetration share in the first calendar quarter, according to Numerator’s data.

To counter these challenges, Target launched its ‘dealworthy’ brand in January, featuring nearly 400 items priced under $10, including iPhone chargers and toiletries. This summer, Target is cutting prices on 5,000 frequently bought grocery items and adding 125 more food items to its Good & Gather and Favorite Day brands. Members of the Target Circle free rewards program also receive exclusive deals on electronics.

GlobalData Managing Director Neil Saunders commented, “This is a good start at remedying the growing issue of value, but we wonder whether it will be enough to stem the tide of customer erosion.”

From January through March, Target.com saw the weakest average orders in categories like electronics, toys, and cleaning products, according to PriceSpider. Average order values for items like kitchen appliances and TVs dropped nearly a third, while essentials like detergents and toilet paper fell by 25%. In comparison, spending declines at Walmart.com and Amazon.com were less pronounced.

Overall, Target’s purchase rate dropped 16%, and its average order value fell 28%, while Amazon’s purchase rate grew nearly 8%, and Walmart’s remained stable during the first quarter compared to the previous year

Target’s stores contributed about 80% of its $105.8 billion in sales last year, with the rest primarily from online channels. In contrast, Amazon’s retail business is predominantly online, and Walmart generated $100 billion in e-commerce sales in 2023.

Burt Flickinger, managing director of retail consultancy SRG Insights, pointed to a broad consumer spending slowdown as partly responsible for Target’s troubles. The U.S. Census Bureau reported lower sales of electronics, appliances, home furnishings, and garden products over the past four months.

Despite these challenges, some shareholders remain optimistic about Target’s recovery through its private-label expansion and price cuts. Charles Sizemore of Sizemore Capital Management, which owns 5,000 Target shares, stated, “That is exactly what they should be doing in this environment.”

Target faces significant challenges as it navigates changing consumer preferences and increased competition. The company’s efforts to expand its private label brands and offer more value through price cuts and rewards programs are steps in the right direction. However, it remains to be seen whether these measures will be sufficient to regain market share and improve financial performance.