Could Target's New Strategy Overcomplicate the Business?

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It seems discount retailer Target (NYS: TGT) is having an identity crisis. Known for its penny-wise pricing on trendy merchandise, the retailer now plans to open upscale mini-shops within its stores, and it just might work. Let's take a closer look to see whether the new brand strategy will be a bull's-eye for the retailer.

Target's recent partnership with Apple (NAS: AAPL) is part of its plan to open smaller stores within Target locations. However, some analysts argue that the retailer is trying to go in too many directions at once. I disagree. True, Target expanded into groceries behind rival Wal-Mart (NYS: WMT) in a push to become a one-stop shop. Though, selling croutons and couture hasn't exactly hurt its image.

In a way, "The Shops" concept is an expansion of what Target has done all along, which is to offer customers a semi-luxury experience without the markup. While Apple's products won't carry the same markdown as other Target merchandise, shoppers using a Target REDcard will enjoy 5% off every item purchased -- even iPads, iPhones, and other Apple products. Target is one of the only retailers to offer an additional discount on nearly every item, and not only does it help customers save more but it also drives repeat business for the retailer.   

A savings of 5% on an iPad is more than what you'll get at Best Buy (NYS: BBY) . Apple's small-format shops are already inside 600 Best Buy stores. While the electronics superstore doesn't have a 5% discount program like Target, some of Best Buy's "Apple Shops," as they're called, do feature staffing by Apple specialists.

In addition to the Apple mini-shops, Target is launching five specialty stores, bringing a selection of boutique brands together under one roof in a way that no other big-box retailer has.  

Something for everyone
The Shops concept is a throwback to when Target would feature apparel from up-and-coming designers. Those partnerships later parlayed into limited edition lines made exclusively for Target by some of the world's most esteemed fashion designers. Who can forget the hysteria surrounding its Missoni collaboration? Target stores around the country sold out of the merchandise in minutes, and the rush of customers trying to snag Missoni products online crashed Target's website.

The madness continues on Feb. 5 when Target unveils exclusive pieces from designer Jason Wu. Of course, the products come with a Target price tag -- ranging from $19.99 to $59.99. Critics should accept the reality that Wu's limited collection will likely be just as big of a success as the Missoni launch.

A winning play
I think this strategy is a win for Target as it tries to differentiate its brand from discount retailers such as Wal-Mart. Wal-Mart pressured Target during the holidays to increase its promotions and markdowns in a competition to pull more customers through the doors. During the last few months of 2011, Wal-Mart came in ahead of Target by offering lower online prices on toys.

However, Target should get a leg up on Wal-Mart if its new strategy plays out how I envision. Target is known for seamless store-level execution, which should help it with the launch of 25 Apple stores and five boutique shops inside select Target locations.

The partnership with Apple could be a big win not only for Target but Apple as well. The tech titan is known for its stylish storefronts. By introducing a miniature version of its store layouts within a larger retail store like Target, Apple is able to get its products in front of more consumers -- consumers who normally wouldn't visit an Apple Store.

On the investment side of things, Target's stock looks fairly cheap at just 11.64 price-to-earnings. That compares with Wal-Mart's P/E of 13.40. If I were Wal-Mart, I'd be pretty nervous right now. Target is creating a shopping experience that you can't find anywhere else, and in the process it is strengthening its brand. Looking forward, we can expect great things from this retailer. Tell me in the comments below whether you think Target's new strategy will prevail or fail.

At the time this article was published Foolish contributor Tamara Rutter owns shares of Apple and Target. The Motley Fool owns shares of Apple and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores and Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. 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.

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