Target Slashes Prices, but It’s Profits That Will Be Cut | The Motley Fool

 

Target (NYSE:TGT) has few options other than to engage in a broad price-cutting strategy. Long under pressure from Wal-Mart and Amazon.com to remain competitive, the mass-merchandising retailer has often responded with select promotional deals to keep customers coming back.

And though chains such as Kroger, Supervalu, and even Costco felt the heat from deep-discounting grocers Aldi and Lidl as they expanded their U.S. presence, Target was finally forced to make a more decisive move after Amazon bought Whole Foods Market and immediately began cutting prices at the organic-foods grocer.

Do sales matter?
The switch to an everyday-low-price strategy is an attempt to give customers assurance that when they shop Target, they’re getting a good price without having to hunt for bargains. It looks to be a smart strategy that keeps the company competitive, while Wal-Mart spends billions on “price investments” and Amazon aggressively positions Whole Foods as a more affordable shopping destination. In the first week that Amazon lowered Whole Foods prices, it sold a half-billion dollars’ worth of private-label 365 by Whole Foods goods online. However, there’s no guarantee it’ll be a slam dunk. As J.C. Penney discovered, customers can sometimes shun low prices for the treasure hunt thrill of a big sale.

But Target’s investments in pricing — even before the company-wide cuts — are pinching profits. In the second quarter, the retailer said operating margin declined year over year to 6.8% from 7.7%, while gross margin narrowed to 30.5% from 30.9%, in part because of the efforts to improve pricing and promotions.

Now that it lowered the bar across its entire store, investors can expect rates to be squeezed even further.

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Target Slashes Prices, but It’s Profits That Will Be Cut — The Motley Fool.