A few years ago Target CEO Bob Ulrich, marketing EVP Michael Francis and property development EVP John Griffith were having dinner at the luxurious Nevada home of a retired Target executive who did rather well for himself as a result of his successful career at the company. Walking out on the balcony together, and overlooking the lights of Las Vegas, Griffith put his hand on Ulrich’s shoulder and said, “You know, this has got to make you feel really good.”
“What are you talking about?” Griffith remembers Ulrich saying.
“To know that because of the job that you have done as a CEO, someone could come into this organization, get stock options, reinvest in his 401k, go from a small retail operator to become a regional senior vice president, and realize the fruits of his labor in this kind of home. That’s got to make you feel good.”
“Absolutely not,” Griffith says Ulrich replied, “It’s not about me. It’s about this team. This is the greatest team that this company’s ever seen.”
However scripted it sounds, observers confirm that the story is authentic Ulrich. Having started out as a merchandising trainee after graduating from the University of Minnesota, Ulrich enjoyed a long and impressive career at Dayton Hudson, Target’s antecedent company, but avoids putting himself forward, preferring the chain’s performance to speak for itself. Ulrich appeared pleased when selected by his peers as CE’s 2007 Chief Executive of the Year, yet somehow not entirely comfortable with the honor. Imagine Masters winner Zach Johnson wearing the green jacket offered him only if everyone-from his coach to his caddy-could wear one too. The team Ulrich assembled with great care frequently references the collegial nature of the organization and its relentless merchandising discipline as the closest thing the company has to a “secret sauce.”
“You’ll hear the word team’ a lot around here,” grins Gregg Steinhafel, Target president and the executive observers say is a likely successor. “Bob is the kind of leader who challenges appropriately, but gives you the rope to do what you need to do to be successful.”
“He has a subtle way of training you and getting you to think creatively, observes Griffith. “Part of it is having clear expectations. Also, he has an uncanny ability to know when to encourage you when you’re down and when to challenge you aggressively when you’re up.”
“We are so relentlessly focused on differentiation and the need to innovate,” adds marketing EVP Michael Francis, “that it’s part of our DNA. That is what he’s been able to create in his time here as CEO.”
In the lethally competitive world of retail discounting, where no one can escape Wal-Mart, differentiation and consistency of execution are not just virtues but a necessity. Benefiting in part from its Dayton Hudson department store pedigree, Target focuses on upscale discount customers referred to as “guests” by Targeteers-a term borrowed from Disney-who like to be fashion forward and save money while doing it. A typical customer is a woman in her mid-forties with above-average education and household income. Fortyone percent have children. To woo her, the store cultivates its cheap-chic image with hip advertising and trendy merchandise that supplements the basics. The familiar red bull’s-eye icon has become ubiquitous, ranked in consumer surveys with higher recognition than Ralph Lauren’s polo pony and Nike’s swoosh.
Target pioneered the strategy of attracting internationally known designers to create products for its stores that is now imitated by several of its peers. Last year it launched Go International, a series of limited-edition apparel collections from hot up-and-coming designers. Patrick Robinson, the current flavor of the month, appears in Target’s 30-second TV spots. Dutch designer Tord Boontje and Paul & Joe from LA will also be featured. Target’s Proenza Schouler collection of women’s apparel was offered at the Collette boutique in Paris, an influential fashion destination in France. (In case you wondered, the French really do pronounce it “Tarzhay.”)
All of this puts team Target in an enviable position-for now. Today, the $59 billion chain with a $51 billion market cap employs 350,000 people, operates 1,502 stores and plans to add 100 new stores (net) a year in the U.S. to reach 2,000 units by 2012. Over the last 20 years the group has generated an average annual increase in earnings per share of 14 percent with a 16 percent annualized total return to shareholders, including dividend reinvestment.
An investment of $10,000 in Dayton Hudson stock in 1987 would have purchased 220 shares. Today, through share splits and reinvested dividends this would represent 3,537 shares of Target, worth about $210,000. For those who focus on P/E analysis, one could have paid up to 45 times 1987 earnings and still have outperformed the market by investing in Target stock.
Five years ago, there were seven retailers with market capitalizations above $20 billion that are still around today (see chart). With the exception of Safeway, all have had sharp increases in revenue and EPS over this period, yet have seen P/E multiple contraction. Only Target and Lowe’s have beaten the market by growing earnings fast enough to defeat the effect of multiple contraction.
In the quest for organic growth, Ulrich has pushed for innovation in areas where it isn’t often found. Food, considered a commodity by most, represents a huge change in Target’s strategy that didn’t exist 10 years ago when sporting goods, home improvement and automotive categories were more dominant. Similarly, Target is committing far more to pharmacy than it did a decade ago. Customers also show a growing appetite for the store’s own food brands, such as Archer Farms, Market Pantry, Sutton & Dodge and Choxie. From virtually nothing in 2001, the store’s private label food business is 15 percent of current sales and could be as much as 25 percent in four years.
“Target is one of the few mass merchants to survive the competitive juggernaut of Wal-Mart,” observes Mark Rowen in Prudential Equity’s coverage of the company. “Target remains a business we think can grow to $100 billion over five years,” asserts Morgan Stanley’s Gregory Melich, who also overweights the stock in its ratings. “The key remains shrinking the sales productivity gap with Wal-Mart.” Team Ulrich is already closing the gap with the goliath of Bentonville in some areas. As of March of this year, Target’s same-store sales increases topped Wal-Mart’s for 43 of the last 44 months in a row. In addition, Target’s gross margin was 33.6 percent in 2006, almost 10 percentage points higher than Wal-Mart’s.
Ulrich and company are not without their critics. For example, The Corporate Library, a governance and shareholder advocacy group, gives Target a D rating. Longtime board member, Ann Mulcahy, CEO of Xerox, takes a different view. “I have always looked at Bob as a model for how one should interact with the board and with shareholders,” she says. Mulcahy points to such issues as the pace of online retailing, international expansion and its discipline for the sustainable achievement of its domestic strategy as examples where the give and take between the board and management is sharp and at times contentious. “There’s a high level of transparency at Target that makes me comfortable as a director,” she adds.
Also, considering that the company is normally astute in understanding consumers, the media hammered it in 2005 for dropping specific mention of “Christmas” in favor of the anodyne “holiday greetings.” “This arose out of an attempt to span the period from Thanksgiving to Christmas into one inclusive holiday period,” says Ulrich. “We were not the only retailer to do it. Frankly, we screwed up, but we reacted within days with specific Christmas emphasis in our commercials and in-store signing.”
Interestingly, the Target team sweats the details but doesn’t worry about making mistakes. Ulrich even welcomes them since they provide a dash of adrenaline as it moves. What keeps him awake at night? “To do what we do you need bright, capable people,” he says. “It’s not rocket science, but people need to be motivated. It’s a more difficult strategy to execute if you’re not. I sometimes ask myself if we’re doing enough.”
Fond of wearing cowboy boots and keen to discuss the artists whose paintings and sculpture adorn Target’s Minneapolis headquarters, Bob Ulrich readily talks about the group’s prospects, but is less fond of talking about himself as CEO, preferring to put his senior team forward. In a wide-ranging conversation with CE’s J.P. Donlon, he reveals where the retailing juggernaut is headed.
Given your considerable emphasis on leadership development and team building, is this Target’s “secret sauce”?
We put a lot of effort into intellectual capital and ongoing improvement. A lot of people talk about developing a team, but this is really why we are able to work the way we do. Someone once said that when a CEO fails as a leader, it’s usually due to putting someone in the wrong job, sticking with them for too long and getting deeper into trouble as a result.
One of the things we do is concentrate on building teams by ensuring that we develop people at all levels. For example, I normally interview people about four levels down, probably the top 500 to 600 jobs in the company.
I don’t fool myself that I have a great insight, but our process ensures that people deserving promotion are vetted with a heck of a lot more scrutiny, as opposed to rewarding them because they’ve been here a long time. We try to ensure that a person can be effective at the level he or she is in.
We ask ourselves, “How do we recognize those people who represent the top 10, 15, 20 percent and make sure that we celebrate their success?” Most people, even at the hourly level, do not want to have to work a lot harder at their jobs because someone else isn’t pulling his or her weight. People do better if they’re surrounded by other talented people who are contributing and learning. We survey team members and ask whether we are doing a good enough job of taking people out who are not really making a positive contribution. Even among the hourly people in our stores, close to half will say that maybe we’re a little better, but we’re still not really doing it. This shows us that people really appreciate working with talented, high-contributing people. People don’t want to be held back.
How have you modified your basic go-to-market strategy?
I became CEO of the total company in 1994, but I actually became CEO of Target Stores in 1987. Even back then, we certainly did not want to compete on price with a Wal-Mart.
We think there are a lot of people out there who may be a little bit tight in terms of money, but who still want quality and design. The more we pushed design, the more people responded, and we adapted our marketing accordingly. John Pellegrene, who preceded [marketing EVP] Michael Francis, was one of the people who did a spectacular job of making our marketing more aspirational and clever.
With our “expect more, pay less” slogan, we price ourselves close to the competition on identical merchandise. But that’s not where we’re going to win overall. We want our guest to have a choice of something a little better in quality, a little more forward in fashion. That’s where we win.
We push innovation and design very strongly-sometimes we even go a little too far. But that’s fine. We learn. We pull back and rebalance. That’s the key-don’t overreact! Don’t retrench. That’s the worst reaction.
To what degree does Target’s competitiveness rely on the brute strength of its supply chain operations?
We’re pretty much second to none in terms of our logistics and technology. That doesn’t mean we ever stop. We benchmark every industry in the world all the time. We are extremely efficient, although we lagged Wal-Mart for a period. We were a little slow in terms of getting our manufacturers, like Procter & Gamble and Johnson & Johnson, to help us manage categories by SKU for different demographic groups across the country. They have huge expertise and can tell you, for example, that one particular hair color sells more in one area and a particular shampoo sells more in another. For a while, Wal-Mart did a better job of that, but we’ve caught up.
How do you work with Target’s board of directors?
Our board, which has several CEOs, has always had a strong voice with diverse perspectives. We encourage them to challenge and push us. Some time ago, for example, our board pointed out that since some of our competitors were slow to enter major metro markets, we should do so and claim the more desirable sites before our competitors did. We did- and have a stronger competitive position in these areas.
In addition, the board has also actively urged us to bring more potential future leaders to their attention, which we do through formal presentations and informal social gatherings, where board members can meet people they normally don’t ordinarily see.
Where are you taking Target? Give us a glimpse of the future.
Andy Grove famously said that only the paranoid survive. Let’s face it, when organizations get large, they tend to get bureaucratic or complacent. We aim to maintain our speed, avoid bureaucracy and move fast. That’s our strength. Over time, we’ve been getting bigger and becoming more fashion-forward with improved quality. If anything, we’ve become the department store of the future. We expect to add 100 net new stores annually in the U.S., doubling our store base from approximately 1,500 today to very close to 3,000 over the next 15 years.
But flexibility is key. Despite our size, we can adapt to trends, unlike a specialty store that’s under a cyclical threat. For example, the music entertainment industry is down. Kids are downloading and sharing songs. Fine. Then we build toys or flat-panel televisions. The strength of Target is the guest base, the great service, the tradition, the pride of our team members and the way we give to the communities. Overall, it’s our flexibility. As long as we don’t get complacent, as long as we’re exploring, benchmarking and looking for new ideas, we’ll be around for a heck of a long time to come.
What about international growth?
International will come eventually. It’s very sexy, but a lot of people have not done well. They’ll do okay in one country, but not in another. Target has a strategic advantage by being focused on the world’s largest market-the domestic U.S.-not being distracted by other areas.
Sourcing around the globe?
Absolutely. We understand people have to be global for their manufacturing business. But in retail, no. We’re just competing with the local people in many cases. There aren’t that many synergies of scale necessarily. In countries such as China and India, there are no first mover advantages. Because we aim for a more affluent demographic, in five to 10 years those countries will be more ready for Target than they are today.
Given the ups and downs of economic projections lately, what’s your take on this year’s “Christmas” season and how consumers might spend in 2008?
First, I am not an economist. But business looks reasonably okay to me. Obviously, it isn’t as buoyant as last year. Barring a major incident, we should end with a solid year. Our comparable store sales continue to improve along the same track it has run over the last several years so we’re optimistic.