Target Moves First and Makes a Splash


As a rule of thumb, guarantees are fantastic, as they allow you to make decisions with more certainty than you would normally. And one of the biggest fears that we have as capitalists is that we've overpaid for an item or service. "The market should have fixed this by now," we say to our friends after spending $300 on some tech toy that we then see for $290 at a different store. "How is this still happening?"

Enter Target . Today, the retailer said that it was extending its holiday price-matching program indefinitely. No longer will customers feel the sting of looking up a new camera or DVD on only to find a cheaper version -- Target is matching Amazon's prices. It's also going to match Best Buy , Wal-Mart , and Toys R Us. While it seems like a bold move, it actually makes a lot of sense, and forces the hands of some competitors.

Price-matching 101
Target can afford to price-match for three big reasons. The first is that hardly anyone takes advantage of a price match, but people still like that they exist -- it's like the extended warranty of sales pitches. Over the holidays, when Target tested out the price match, it got little traction with customers. That's a bit of a double-edged sword, as customers need to know about the program to want to come in, but you don't want people breaking the floodgates to get cheaper items.

The second reason that Target is price-matching is for the footfall. For the past two quarters, Target has been pushing comparable sales up through an increase in its average ticket. That means that each person who buys something is spending a bit more in total purchases. In addition to the overall trend, Target is seeing extra-strong tickets from customers who are part of its REDcard group. A price-matching system gets more people through the doors, even if they're just there for the lower price. Because Target sells everything, the chance that a customer would come in just once and just for a price-matched item is slim, so even with the price-matching, sales should increase.

The secret weapon
But low take-up and higher footfall aren't the only reasons for Target to match prices. One of the best things the company has in its corner is its own branded items. The Target-owned Archer Farms brand has been gaining traction as its own brand, giving Target a leg up on the competition. The same is true for other areas of the store, where Target is hoping to show customers the big name-brand price, only to have them walk out with the lower-priced private-label brand. Generally, those brands have higher mark-ups, and generate more income for retailers.

Target has to be betting that customers coming in for a national brand might see that, even with the matched price that Wal-Mart is offering, the Archer Farms version is cheaper. Then, instead of taking a small hit on margin, Target gets a big win and potentially wins over another Archer Farms convert.

The bottom line for investors
Target is making what seems to be a bold move, but what is really just a great way to get more people in the store. At some point, every major retailer is going to have to price-match or customers will just make a profession out of showrooming. By being the first to adopt the price-match, Target gets all sorts of positive customer vibes, and should reap the rewards from that goodwill. The move to omnichannel sales -- where customers use smartphones to check online prices as they shop in-store -- isn't on its way, it's already here.

If other retailers can't see that customers aren't interested in their knowledgeable staff and lovely fluorescent lights, then they're going to suffer the same slow death that's creeping over Best Buy. With this move to price-matching, Target investors can sleep soundly knowing that the company has made the right call. While it's just one step in a long journey to the true omnichannel experience, this can only be good news.

Make the first move
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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of 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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