Target & Kmart to suffer as consumers opt for specialty stores over discounts

By Claire Reilly

Large mall-based retail chains such as Target and Kmart may face a difficult future as more consumers turn towards dedicated specialty stores for their shopping, according to a new report from Macquarie Equities Research.

A report on Wesfarmers’ financial performance – authored by Macquarie analysts Greg Dring, Rob Blythe and Charlotte Woods – found that “there are obviously issues within the discount department store (DDS) businesses which are not unique to Wesfarmers” and that “large format mall-based retail is underperforming.

“Customers seem to be choosing depth (and service) in the merchandise offer over widest range, which favours specialities,” the report read. “We think there is emerging consumer preference for the deeper merchandise offers of specialties and have become distrustful of large format retail.

“Kmart and Target are struggling to co-exist in the same group. The unexpected departure of Target managing director [Launa] Inman just adds to this view.

“There is too much space committed to this (DDS) format and Wesfarmers is likely to have to reduce its aggregate footprint overtime.”

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Both Target and Kmart performed poorly over the last quarter, reporting a 3.1 per cent and 2.2 per cent decline in sales respectively.

According to the Macquarie report, Target management “blamed tough trading conditions across the market” while Kmart management suggested that although price deflation stood at roughly 10 per cent over the period, “they saw 3 million more customers that drove 25 million more items sold and an increase in items per basket of 4.5 per cent.”

Regardless of the cause of the decline in sales figures, Macquarie posited that department stores and discount department stores have been “underperforming when comparing growth rates of REIT’s shopping centre portfolio growth rates” – referring to Real Estate Investment Trust groups that combine retail with property investment.

“There is significant overlap between Target and Kmart and perhaps Wesfarmers have too much space allocated to discount department stores.”

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