What’s Leading Edge With Today’s Leading Mass Volume Retailers?

What’s Leading Edge With Today’s Leading Mass Volume Retailers?
American Logistics Association Exchange Roundtable What’s Leading Edge With Today’s Leading Mass Volume Retailers? March 8, 2005 Dallas, TX 8912 East Pinnacle Peak Road • Scottsdale, AZ Phone (480) • Fax (480) • •

Based on most recent research, the top 3 retailers shoppers rank as literally “indispensable” to their daily lives are Wal-Mart, Target and Costco: Meyers Research: “Retailers Consumers Could Not Live Without” (Aug, 2004) Base: Among those who shop the store Wal-Mart 31% Costco 17% Target 13% BJ's 11% Kroger 9% Albertson's Safeway 8% Sam's Club 7% CVS 5% 7-Eleven 3% Dollar General Walgreens Rite Aid 2% Kmart Source: Meyers Research, Aug, 2004

Specific Retailers Consumers Find Most Fun To Shop
Not coincidentally, Wal-Mart, Target and Costco are also the same retailers that consumers find the “most fun to shop”: Specific Retailers Consumers Find Most Fun To Shop Base: Among those who shop the store Target 30% Costco Wal-Mart 28% SAM’s Club 20% BJ’s 11% Dollar General 6% Albertson’s 4% Kmart 3% Walgreens CVS 2% Kroger Family Dollar 1% Safeway Rite Aid Source: Meyers Research, Aug, 2004

Today: What is it about Wal-Mart and Target that makes them so successful, not only with shoppers, but from a business standpoint in general? What lessons can Exchanges take away from this, given their objectives and the constrictions under which they operate? Q&A

The Leaders – Snapshot of Current Vital Statistics:
Wal-Mart Target Sales (U.S. $B) $232.9 $47.1 # Stores (U.S.) 3,711 1,313 Gross Margin 23.9% 32.8% Operating Expenses 18.4% 22.4% Proj. CAGR, ‘04 - ‘07 9.9% 8.9% Positioning “Always Low Prices” “Expect More/ Pay Less” HH Penetration 86% 62% Sales/Sq. Foot 439 289 Inventory Turns 7.7 6.3 Days Sales In Net Inventory 21 12 Merchandising Strategy EDLP Hi/Lo Source: Company 10Ks & 10Qs; Hoyt & Company, LLC,

While Wal-Mart and Target are very different retailers, both share the same objectives as all other retailers– specifically: Grow profitable sales by aligning and focusing all marketing, merchandising, buying and logistics functions on one or more of the following objectives: Exchanges Increase customer count (new customers) X Increase trip frequencies (current customers) Yes Increase transaction size (current customers) Yes Increase productivity (Human and Financial) Yes Reduce costs (COG’s and Operations) Yes As you will see, the paths that Wal-Mart and Target have chosen to achieve these objectives represent today’s industry Best Practices.

The 800 lb. Gorilla In Every Retailer’s Living Room!
$284B – Largest company in the world – greater than the GDPs of Austria, Colombia, Czechoslovakia, Denmark, Greece, Norway, Portugal, Sweden, Switzerland, Ukraine and Vietnam $20K in profit per minute! 13% WW CAGR – projected to do $1 trillion by 2014 $233B U..S. sales – CAGR of 9.9% to 2007 3,711 U.S. stores: 1,706 Super Centers 1,370 Discount 549 SAM’s Clubs 86 Neighborhood Markets 500+ new stores/remodels planned for 2005 Objective is to become the largest retailer in every market in which it operates (now #1 in only two countries out of 10)

So what are the key growth drivers that enable Wal-Mart to sustain the momentum of this juggernaut?
Let’s look at these from the standpoint of what’s relevant to Exchanges in terms of: Marketing and Merchandising Buying Logistics

The key elements of the Wal-Mart marketing mix – elegant and sophisticated – way beyond just “Always Low Prices”: 1. EDLP made possible by EDLC – Global buying and relentless pressure on COGs and operating costs 2. Use of consumables (food and non-edible CPG items) to drive traffic and transaction size 3. “OPP/good/better/best” merchandising ladder (private labels –> national brands) Localization – Demographic assortments 5. Ancillary businesses – hearing aids, optics, stores within stores, etc. 6. Consumer-centric versus supplier-centric business model – all allowances are driven into price and not used to subsidize operating profits

The key elements of the Wal-Mart marketing mix (cont’d)
7. Shop-ability – wide aisles, mucho signage, well lit, easy to navigate 8. Speed to market – new items and promotions – 24/ hour turnaround 9. Community involvement – parking lot extravaganzas, fishing contests, high school marching bands, etc. 10. Retail-tainment – in-store TV sets, trendy promotions (Shrek 2 and Britney Spears) 11. EDLP reinforcement – roll backs, action alley, special buys and multiple clearance items 12. Clicks and bricks synergy – what you can’t get in-store, you can get online 13. Store managers have broad discretion – can tailor assortments, authorize local displays and recommend new distribution of local items

Wal-Mart strategy to drive trips/provide one-stop shopping convenience – sell need (read “food”) items! Wal-Mart’s March To The Top of the U.S. Food Chain: (Food & Drug Sales Only) 2010 $195B 35% Bigger than Kroger, Albertsons, Safeway and Ahold combined 2007 $162B +17.0%/Year Compounded Vs. 4.0% For Supermarkets! 2004 $112B Bigger than Kroger & Albertsons Combined 2003 $95B 2002 $82B Surpasses Kroger as the nation’s #1 food retailer 2001 $63B Source: Retail Forward, Food Industry Outlook, February, 2004; ACNielsen, 2002 and 2003

The Wal-Mart Merchandising Ladder
BEST = Typically National Brands BETTER GOOD Most of our brands tend to be positioned between upscale good and moderate premium. The merchandise ladder at WM is changing shape in a way that’s I interesting. premium – trying to be bigger OPP - becoming bigger less good and better Add dynamic merch. Slides here. Q; is pl always the opening price point. A: For WM, not apparel yes. OPP = Opening Price Point in the category (typically, Private Labels) Source: MVI 10/28/2004

Wal-Mart Buying – What lies behind the glitz
Wal-Mart buyer responsibilities: Development of innovative merchandising solutions Understand customer needs and trends and set the pace of new product development & brand strategy Management of a diverse supplier base – from major brands to own label Achievement of business plan targets Development and delivery of the category’s trading strategy

Wal-Mart Buying – How Buyers are Measured
Wal-Mart Buyer – Key Performance Measures Sales Units Dollars Profit dollars Margin % Turns Markdowns (e.g., maintained margin) In-stock Comparable store sales growth (in certain categories) Less tangible measures: Respect for the individual Service to customers Strive for excellence

Wal-Mart Buyer –> Supplier Expectations
To achieve their objectives, Wal-Mart buyers proactively utilize suppliers to help run their business: Wal-Mart Buyer –> Supplier Expectations Annual plan -- rolling 12 months by month and quarter New items Tab ideas Modular suggestions MCAPS -- community store merchandising Weekly monitoring: Item P&Ls vs. plan Sales, initial margin, markdowns, contribution margin Problem stores/districts, as well as items Competitive situations Co-managed Inventory Replenishment New item/promotional Economic order quantities Source: MVI, Selling Wal-Mart 10/28/2004

Wal-Mart Vendor Scorecard Extensive measurements for Wal-Mart and Suppliers
Sales Measurements Overall % Increase Comps Avg. Sales/Store Sales at Full Price vs. Markdown Markdown Measurements Markups and Markdowns (Dollars, Units and %) Prior and current retail price Margin Measurements Initial margin Average retail price Average cost Gross profit at item level Gross profit/item/store Margin mix Inventory Measurements Replenishable store inventory Non-replenishable store inventory Warehouse inventory Lost sales from OOS Excess inventory DC outs Total owned inventory Return Measurements Customer defective returns Store Claims Source: Hoyt & Company Records

Wal-Mart Turns vs. Kmart + Target: 1998 - 2003
Wal-Mart Logistics – How does Wal-Mart stack up versus its leading competitors? Wal-Mart has the highest inventory turns… Wal-Mart Turns vs. Kmart + Target: Source: Company Reports; MVI, 10/

Wal-Mart Logistics – How does Wal-Mart stack up (cont’d)
…and the lowest # of days sales on hand: Wal-Mart vs. Leading Competitors: # Days Inventory On Hand: Source: Company Records; MVI, 10/28/2004

Wal-Mart – Key Inventory Management Drivers:
Replenishment & Logistics Co-managed/vendor managed inventory Two-Tier Distribution (Replenishment vs. Promotional) Collaborative Planning, Forecasting and Replenishment (CPFR) – works with suppliers to determine appropriate levels The Future: Radio Frequency IDs (RFID) Systems UCCnet Internet EDI Merchandising Systems Modular-based merchandising Modular Category Assortment Planning System (MCAPS) /Store of the Community

Why is Wal-Mart so good at logistics?
Because the buyer’s open-to-buy is based on inventory management and supply chain movement: Wal-Mart Buyer Open-To-Buy What the buyer is able to order here Depends on how much $ he/she has tied-up in these “buckets” New Item In The DC In Transit In Store Promotions – PLUS – Replenishment Seasonal On Order In Route + = why suppliers are so eager to work with Wal-Mart in helping to generate maximum sales off the lowest possible inventory base.

Net on Wal-Mart: EFFICIENCY!
Consistent, clear positioning – “Always Low Prices” – everyone knows precisely what Wal-Mart stands for Relentless focus on the fundamentals Cost suppression and cost reduction is a mantra Cooperation with suppliers to achieve mutual objectives Combination of food (consumables) and traditional discount creates a low price one-stop shopping mecca Lightning speed to shelf on new items/trendy promotions “Fun place to shop” – in-store TV, on trend promotions, parking lot extravaganzas and tie-ins with local community events Fierce competitor – will price comp anything, anywhere Store manager discretion means stores can be traited and tailored demographically

“Expect More/Pay Less”
$47.1B in ‘04 sales – a 15.1% increase vs. ‘03 (less Mervyn’s and Fields) 8.9% CAGR between now and 2007 – projected to do $61B versus today’s $47B 1,313 stores – 1,177 Targets Super Targets Comparisons to Wal-Mart are dangerous: Different business model Different consumer Different merchandising strategy No attempt to compete on same basis Is much more like an Exchange in assortment and operations: Careful balance of high end vs. commodity merchandise – PLs and exclusives are key Limited CPG food representation (changing quickly) Super centers are NOT the primary growth engine Distinct department store heritage and orientation

Target Challenges: Narrow customer base: 81% female
50% between 30 and 44 Low trip frequencies vs. Wal-Mart, Costco and even Dollar Stores! Supercenters behind the curve Too “Department Store-y” for a discounter: Clean, uncluttered store policy sometimes perceived as sterile and boring Too much emphasis on “want” vs. “need” merchandise – not enough everyday consumables to drive trips, create excitement or get shoppers started on the merchandise ladder Highly centralized operations – Store Manager’s role is compliance and execution – no local discretionary authority = 71% of Trips and 80% of Spending

Target Heavy Shopper Trip Frequencies – Just Not Enough!
Source: IRI Panel Data 52 weeks ended Dec 31, 2003

Being perceived as more “Department Store-y” than “one-stop discount/convenience” these days is not exactly on trend: The U.S. Department Store Death Spiral: Department Store Share of Non-Auto Retail Sales Source: Retail Forward, 2003

Target vs. Wal-Mart sales and comparable store growth – 2004
Despite these seemingly core negatives, Target has consistently out-paced Wal-Mart in both sales and comps ever since it jettisoned Mervyn’s and Marshall Fields in 2003 Target vs. Wal-Mart sales and comparable store growth – 2004 Source: Company 10Qs and monthly financial reports—MVI, Dec 09, 2004

So what is Target doing to achieve such exceptional results?
Target keys to success: Clear, concise, consistent positioning – “Expect More, Pay Less”: Not just words but the basis for all buying and merchandising decisions The framework for Target’s Merchandising Ladder A short, simple slogan that shoppers can remember and relate-to Non-price differentiation – Through captive brands, designer exclusives, partnerships with other retailers, trendy P.L. merchandise, celebrity endorsements and “Buzz Marketing” Emotional Connection with its customers – “My Target”

So what is Target doing to achieve such exceptional results, cont’d?
Heavy advertising – Over $1B in 2004 – to heighten awareness, sell promotions and build equity for the Target name Quick response segmented merchandising – To capitalize on the latest generational and lifestyle shifts – expanded pharmacies (seniors), Hispanic advertising and Merchandising, “One Spot” (dollar sections), always on-trend merchandise (soft goods, apparel and housewares) and seasonal promotions Rapidly adding everyday “need” consumables to drive trips and increase traffic – significantly expanded food sections in all stores. Recently added extensive wine section.

Target Positioning: “Expect More, Pay Less”
We’re on top of trends so you will find the latest and greatest at Target. Bright, clean stores and fast checkouts make shopping at Target easy and fun. Really low prices are the number one reason to shop at Target. Great quality at a low price makes Target merchandise a great value. STYLE SERVICE PRICE QUALITY Increase share of wallet Platform for differentiation Fashion/“Want” items Drive trips/build traffic Create low price impression Consumables/”Need” items

Target’s Positioning vs. Discount and Department Stores
Target’s “Expect More/Pay Less” Positioning has enabled Target to place itself squarely between commodity discounters and traditional department stores and avoid competing with either on their terms: Target’s Positioning vs. Discount and Department Stores Drive Value Focus Drive Trend Focus Discount Stores Low Margins (23%) Follow Trends Price Sensitive Price/Convenience Moderate margins (32%) Trend Seekers Quality/Value Sensitive Trend/Quality/Convenience Department Stores High Margins (50%) Early Adopters Quality Sensitive Fashion/Selection This positioning has become a major asset: Enables Target to attract a wealthier shopper than traditional discount stores. Improves sales per store, transaction size and gross margins (Target’s are highest in the channel at 32.8%).

Target Buying – Key Levers
Trend Planning – Crucial to “Expect More”: Trend merchandisers travel to seek-out latest colors, fashions and designs Research coordinated across departments All items, color schemes, etc. are tested ahead of the season Customization – Pressure on suppliers to co-brand or custom-pack merchandise to reinforce Target’s differentiation objectives Competitive Line Reviews – Basically auctions consisting of competitive bidding for line distribution or promotion support: Target even calls these “shoot outs” Series of elimination rounds Contracts can be up to one year Reverse Auctions – Online competition to provide lowest cost for commodity items or private label consumables Global Sourcing/Direct Imports – Target is doing as much as it can to buy direct from lowest cost producers willing to meet product specs

Target Buying – Supplier Mandates
Reduce cycle times—allow for “just in time inventory” Zero tolerance for orders delivered before/after scheduled time One Purchase Order per Truck—while trying to reduce overall # of POs Tiered in-stock level requirements – identify when Target begins to lose sales – maintain in-stocks above this level 97% “in stock” for top 2500 items 92-95% “in stock” for remainder of items Perfect match of invoice to receipt of product Increased flow-through distribution—automated receiving tech. should facilitate Will impose penalties/fines Check In-stocks are important. Notion of Presentation Minimums—minimum in-store presence. A couple of issue: In-store sell-through is captured in store, but given batch processing to InfoRetriever, may be disconnect with what Bus. Analyst sees. Pres. Mins are also tweaked by store cluster, so can be differences among stores. Part of trade-offs. Can take Pres Mins down to reduce inventory, but OOS result. Efficiency vs. effectiveness.

Target Supplier Report Card
Target’s scorecard is the most complete of the three largest Discounters: Buying Logistics Sell Through Administration Order fill rate Turns – warehouse (store?) Out of stocks – warehouse and store lost sales Forecast accuracy Percent orders with changes (customer) On-time delivery rate Order Damage rates Lost time Missed windows Backhaul earned Bar code violations Percent of plan – $s and unit sales New items Established items Markets New/old stores GMROI Share of space, advertising, merchandising Facings (slots) Ads Display Multiple locations Signage Perfect order rate Accurate invoice Deductions Pricing Advertising Other EDI Transmit rates Target has one of the most extensive vendor scorecards in the industry. Scorecard elements can be monitored and measured through POL. Scorecard covers all of the elements of in-bound logistics to store sell-through and administration. Work with buyer/BA to determine areas of focus, esp. in conjunction with THEIR compensation.

Target Supply Chain/Logistics Initiatives – 2005 and Beyond:
SKU Reduction – To facilitate focus on fewer, more important items and be “more important to fewer vendors” Automated Receiving Technology – Electronic labeling system that utilizes real-time information about where product is needed: Automatically labels each carton Significantly accelerates the flow of goods Eliminates time-consuming, labor intensive procedure Rollout starting December, 2004 DPIA – Direct Import, Pre-distro & Assortment Programs Converts indirect imports (no middlemen) to direct Have suppliers pack store-specific and store ready pallets, reducing DC workloads and storage space Have suppliers combine multiple items in cartons to reduce the number of cartons sent to DCs in stores Estimated savings of $71MM in 2005 RFID – Mandatory for pallets and cases by spring, 2007

Target From The Supplier’s Standpoint:
Multiple opportunities to tie-in with Target’s marketing and merchandising initiatives “Expect More/Pay Less” platform Target community giving/cause-related sponsorships Co-Marketing to build upon each other’s equity Current, intense emphasis on “Pay Less” Multiple vehicles – Target TV and print advertising, circulars and website, etc. Supplier Aids: Partners On Line (POL) – provides suppliers with same data that buyer has (like Wal-Mart’s Retail Link) InfoRetriever – Available to Category Captains and top vendors – provides a deeper level of information on a more current basis + 2 years of back data

Net on Target: EMOTIONAL CONNECTION!
Non-price differentiation – no attempt to compete with Wal-Mart on its own terms Willing to settle for a piece of the pie rather than going after the whole enchilada: Consumer target is not the universe but primarily women and young singles Clear, precise, consistent positioning that enables Target to fill the void between commodity discounters and traditional department stores Unique understanding of the needs, wants and aspirations of its target shopper: Designer clothes, soft goods and housewares at great prices Clean, uncluttered stores with contemporary colors and thematic consistency Ancillary services that cater to Target shoppers lifestyles, needs and shopping proclivities (pharmacies, Minute Clinics, photo, Starbucks and Pizza Hut, etc.)

Net on Target: EMOTIONAL CONNECTION (cont’d)
Product assortments that cannot be purchased anywhere else – designer exclusives and captive brands, etc. Strong, centralized control to ensure uniformity and thematic consistency throughout all store presentations and activities A conscious policy of transferring as many costs as possible to the supplier community while, at the same time, offering suppliers a strong upside through Target’s aggressive advertising, merchandising and product exclusivity policies Awareness of and willingness to react quickly to current issues – for example, Target’s current campaign to significantly increase its consumables representation to increase traffic and trip frequencies

Ten factors, as follows:
While Target and Wal-Mart have each chosen to walk different paths on route to their success, there are certain factors common to both of these retailers that make them leading edge vs. most others in the retail community. Ten factors, as follows: 1. Differentiation – Through constant juggling of the following elements: Price Formats Captive Brands Designer Exclusives Successful Private Label Programs National Brand Supplier Customization 2. Use of Consumables – To build traffic and increase trip frequencies. 3. Ancillary Departments – To increase convenience and share of wallet. 4. Fluid Merchandising (rapid ins and outs) – To create excitement, build trip frequency and reinforce differentiation objectives

Ten factors that separate the most successful from the rest, cont’d
5. “OPP/Good/Better/Best” Merchandise Ladders – To trade shoppers up in almost every category. 6. Speed to Market – Now more important than “Bigness” 7. Relentless Pressure on Costs and Productivity – Both in general and store-specific 8. Willingness to Experiment – New formats, ancillary businesses, stores within stores, partnerships, adjacencies, retail-tainment, etc. 9. Global Sourcing – Now direct from the lowest cost producer – no middle men. 10. Technological Innovation – RFID, etc. to reduce costs/increase speed

Moral of story: It’s not just price; it’s a combination of factors, carefully blended and balanced to satisfy a particular consumer need or aspiration. Each retailer has to search within its own strengths to find the right formula. There are no easy answers.

A Special Thanks to Sylvia Harris and Cathy Ely of Luke AFB for their time and hospitality . . .

We Appreciate The Time and Attention You Have Given Us Today
Specifically, we want to thank Frank Jepson and the American Logistics Association for inviting us and P&G for sponsoring us and trust that this has been both fun and helpful. 8912 East Pinnacle Peak Road • Scottsdale, AZ Phone (480) • Fax (480) • •

Some particulars that may be of interest . . .
Appendix Some particulars that may be of interest . . .

Target and Kmart U.S. Sales vs. Wal-Mart – Relatively Small
Wal-Mart vs. Target and Kmart Sales & Growth Projections: E $100 $200 $300 $400 1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E Wal-Mart Corporation Wal-Mart US Target Corporation Kmart $382.1B $309.4B $59.5B $19.4B Source: MVI 10/28/2004

Wal-Mart vs. Leading Competitor Household Penetration, Mid 2004
By mid 2004, Wal-Mart U.S. had achieved 86% household penetration – almost 25 points more than its next largest competitor – which translates to over 130MM shoppers per month Wal-Mart vs. Leading Competitor Household Penetration, Mid 2004 Source: IRI Panel Data (all shoppers - Total US)

Wal-Mart Domestic Expansion Plans For 2005 – Total U.S.
Not content with this, Wal-Mart plans an additional 500 new store openings plus remodels in 2005, driven primarily by new Supercenters: Wal-Mart Domestic Expansion Plans For 2005 – Total U.S. Supercenters Discount Stores SAM’s Clubs Neighborhood Markets Total New Stores Remodels/Relocations Grand Totals 160 500+ Source: Wall Street Journal, 10/5/2005; Supermarket News, 10/11/ /18/2004

Wal-Mart’s store expansion strategy is carefully calculated to capture new consumers at all levels of the income spectrum and to provide shoppers with easy accessibility: Wal-Mart Format Expansion Strategy: Capturing Consumers at All Income Levels Different formats: Target the same consumer for different trips Target new consumers Consumer by HH income Format A 75K+ walmart.com B 60-75K SAM’S C 45-60K N. Mkt Discount D 25-45K Supercenter E <25K Source: MVI 10/28/2004

Wal-Mart’s latest and greatest
Stores within stores: Kid’s Connection – Candy, soda, clothes, toys Personal Business Centers Dollar Stores – plastic bunnies, etc. Increased focus on soft goods: Coordinated lifestyles Heavy focus on Wal-Mart brands Integrated merchandising – e.g., not just towels but everything for the bathroom In-store TV support for “How to decorate your home” Apparel: Mary Kate and Ashley exclusives – in-store and online Levi Strauss – 2003 The Wal-Mart “George” line – men, women and children – big push! Carter’s line in infants Trend alert – partnership with Seventeen Magazine to offer teens “cool picks” in clothing and electronics

Target SuperTarget Growth vs
Target SuperTarget Growth vs. Wal-Mart Supercenters – Not exactly NASCAR competitive Source: MVI, Selling Target, 12/9/2004

Target Super Target Issues:
Traditional Targets are Hi/Lo; Super Targets are EDLP: Target dependent on supplier allowances to grow operating profits Every time Target converts a traditional discount format to a Super Target, it loses the benefit of the allowance (which is thereby driven into price and not op. profits) Building too many super centers too fast would severely impact Target’s financials Super Target trip frequencies do not support format productivity Super Target layouts do not allow easy transition to the consumables section and cross-over shopping

Expect More – Implementation is all about non-replicable differentiation
Department store-like destination departments: Apparel Housewares Shoes Captive Brands: Mossimo Danskin Philippe Starck Exclusive Partnerships – Fieldcrest, Boots (HBA and Cosmetics) and Amazon.com (powers the Target website) Private Labels: 50% of the store Reinforce Target’s brand equity – all have either “Wave” or “Bulls Eye” Key contributor to Target’s 32% gross margin Synergistic, complementary spin between stores and website: Bridal registry, “Target to a T – custom made clothes” Red hot shop – hot trendy items – new every week Greeting cards Infants and toddlers Seasonal items Waverly Garden Room Liz Lange Maternity Hello Kitty

Pay Less – Implementation is all about driving trips and traffic:
Price comping – Target pledges to match Wal-Mart on price item for item throughout stores Significant expansion of consumables and commodity items starting in Q3, 2003: Based on new P2004 format 50% greater space devoted to food, beverages and snacks “Consumables World” department placed in front of store 70 remodels in 2004 – all remodels and new stores starting in 2005 “Savings Spot” – In front of store, near registers, introduced 2004: Club-like pack sizes Paper, household cleaning supplies and pet foods “One-Spot” (Dollar departments) now expanding beyond test: Kitchen, storage containers, toys, baby products and stationery Exceptional value and “Treasure Hunt” items Managed by separate buying group Does not cannibalize other items

Target Ancillary Departments – Return Trip and Transaction Size Drivers:
Pharmacies: 71% of stores by YE 2003 Extended hours Pharmacy rewards program tied to use of Target Visa card “Minute Clinics”: 135 sq. ft., staffed by a nurse practitioner Treats about a dozen common health problems Menu-priced – most services $40 - $45, covered by insurance + co-pay Now testing in 8 stores (BM) with plans to expand in metro areas 95% of MC patients get prescriptions filled at Target Other Services: One hour photo labs Optical departments In-store restaurants – Starbucks, Pizza Hut, Taco Bell Lawn and Garden centers Portrait studios Bridal and baby gift registries

Target aggressively advertises its benefits through multiple vehicles and is, in fact, the largest advertiser of the Big 3 Vehicle Target Wal-Mart Kmart TV $288 $426 $86 Print $293 $40 $95 Outdoor $19 $14 $8 Unmeasured $483 $198 $223 $1,083 $678 $413 Index (100) (63) (38) Media Strategy: TV is strongly seasonal/holiday oriented Heavy print budget is targeted to women and young adults “Unmeasured” is circulars and ROP Source: LNA and MVI,

Target Buyer Compensation Structure
85% of buyer compensation: Sales Contribution Dollars Contribution % Inventory Turns In-Stock % (10%) and personal objectives (5%) round out compensation Senior Buyers are also eligible for a bonus plan that can represent up to 100% of their base compensation. Goals are set every 6 months, not annually. Including product flow costs… Target is very sophisticated in terms of buyer measurement. Lots of trade-offs—margin vs. velocity—so each buyer will work through trade-offs differently. Making money on buy vs. sell. Key is to understand each buyer’s thinking around the trade-offs. Margin vs. turns (big buy up front); inventory vs. OOS; gross vs. contribution margin --Product flow-through costs (contribution), ABC are also incorporated—so opp. To work with Target in this area. Contribution adjusted by flow through costs from DC to back door and probably vendor dollars. --Buyers who hit all bonus measures are considered “golden” Tiered contribution margins—high, medium, low—important to ask buyer what the charges are in order to move up tiers and affect contribution; may be small tweeks such as pallet weight; moving to a different level can change margin for buyers;

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What’s Leading Edge With Today’s Leading Mass Volume Retailers?

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