Target needs tougher talk on paying less

NEW YORK (Reuters) - For the past few years Target Corp (TGT.N) has focused on the first half of its "Expect More. Pay Less" tagline to lure consumers with the promise of name-brand clothes and home decorations at discount prices.

Now the discount retailer is trying to increase its focus on the "Pay Less" side of the equation as U.S. consumers rein in spending, and profits fall.

A recent coupon book mailer emblazoned with the words "Flip. Clip. Save" offers discounts on consumer staples like laundry detergent, toilet paper, bottled water and pet food.

A TV ad also emphasizes low prices. It shows a tower of toilet paper with the phrase "More soft" that transitions into a package of Scott toilet paper and the words "Less cents." Another scene shows glasses of water and "More splash" that changes to Dasani water and the phrase "Less cash."

But with the U.S. consumer spending slowdown showing no signs of abating, Target needs to ratchet up its low-price theme to convince shoppers it has mastered low prices on necessities, like food and toothpaste, the same way it mastered cheap but chic fashion and home design.

"When economic times get hard and the business model is under strain, you need to find a way to refine your advertising to actually make it work harder, and I don't think they have yet," said Zain Raj, chief executive of loyalty marketing firm Euro RSCG Discovery.

HITTING THE BULL'S-EYE

Target has been credited in the past decade with helping to reinvigorate the discount store concept.

Rather than compete with larger rival Wal-Mart Stores Inc (WMT.N) solely on price, it set out to lure more affluent shoppers with its brightly lit stores, clever ads featuring its red bull's-eye, and innovative products -- like pet couture by designer Isaac Mizrahi.

Its loyal customers began referring to the retailer in faux French as "Tar-zhay," and competitors mimicked the retailer, teaming up with designers for their own product lines.

Its sales growth began outpacing that of Wal-Mart as shoppers loaded up on its trendy clothes, handbags and home decor.

But the efforts also cemented the notion in shoppers' minds that while Target is a discount retailer, its prices may not be as low as its competitors.

According to BIGresearch's July Consumer Intentions & Actions survey, the 1,050 female shoppers who said they buy clothes only on sale listed Wal-Mart and Kohl's Corp (KSS.N) as the two retailers where they shop most frequently. Target ranked fourth, behind J.C. Penney Co Inc (JCP.N).

That is now an issue as Target's middle-income shoppers, squeezed by higher food and fuel prices, the crumbling housing market and rising mortgage payments, have also become bargain hunters.

Rather then splurge on higher-profit goods like cashmere sweaters or metallic handbags, they are leaning toward basics, like laundry detergent and household cleaners.

FEELING THE PAIN

The change in shopping patterns has hurt Target's results. Profit in its past three fiscal quarters has declined. Its June sales at stores open at least a year rose 0.4 percent, compared with a gain of 3.3 percent the year before. (For a comparison between Target and Wal-Mart, click on table ID:nN24506306).

In the latest sign that its consumers are strained, data on its credit card operations this week "revealed that delinquency trends within Target's credit card portfolio continued to weaken on a sequential basis and remain notably worse than last year," wrote William Blair analyst Mark Miller.

Target spokeswoman Jeannine Befidi said given the current climate, it has increased its focus on "frequency driving" items like pharmacy and food, and is trying to ensure that shoppers do not confuse its trendiness for higher prices.

But she added: "We don't feel that it makes sense to change what we consider to be a proven, successful long-term strategy."

Wal-Mart stumbled two years ago when it tried to imitate Target by shaking up its merchandise selection, and adding more upscale goods, like skinny jeans and high-thread count sheets. Target has said that while it has adjusted the merchandise in its stores, it does not anticipate making significant changes.

Befidi said Target wants to find the "appropriate balance" between emphasizing "Expect More" and "Pay Less."

"We want the same level of excitement, that same quest for that new, different, interesting item that Target carries, but with the added sense that value is a bigger issue ... and we need to make that a priority as well on our end," said Befidi.

"CHANGE WITH THE TIMES"

Joseph Feldman, a retail analyst at Telsey Advisory Group, said that while Target's prices very often match Wal-Mart on identical items, that message is not reaching shoppers.

"You have to change with the times," he said. "They're arguably not doing enough creative marketing and merchandising to convince the customers that prices are the same at Wal-Mart."

Shelli Baltman, head of customer experience innovation at consulting firm What If, said that in tough times retailers need to give customers a reason to come into their store.

She said Wal-Mart's summer "staycation" promotion, in which it cut prices on hot dogs and patio furniture to help shoppers celebrate summer at home, conveyed an "empathetic customer point of view."

"Wal-Mart's done a really good job of letting customers know that they understand what it's like to tighten their belt," she said.

Target should let "their customers know that we understand your suffering, and we are going to help you," said Baltman.

Raj said Target's core business strategy -- low prices on brand-name products -- is timeless, but its marketing is not.

"Wal-Mart is giving you tangible reasons to come back, but Target is just flashing cool words about 'cost less' or 'pay less,'" he said. "(Target) can still have beautiful-looking advertising ... but the beautiful-looking advertising can have a more substantial message."

(Editing by Brian Moss)