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Target Commercial Model Reset Is Complete, Says Wesfarmers

Target is now a “smaller and simpler business with a significantly reduced fixed cost base,” according to Wesfarmers, who held a Strategy Briefing Day this morning.

At the start of the year, there were 258 Target stores nationwide. Today, that figure has dropped to 142, with many of the smaller-format stores shut down or rebranded as Kmarts.

Target have dropped the smaller-format stores altogether, with a single large-format set up, and a significant reduction in cost base. The supply chain has been rationalised, also, dropping from three distribution centres to two.

With reduced floor space comes reduced rent. Target’s lease liability has dropped from $1.1 billion in June 2020 to $800 million, as of April 2021. The pre-tax, one-off non-operating costs relating to all the Target store closures and conversions has been cheaper than expected too, dropping from a previous estimated cost of $90 to $110m to an expected $60-$70m.

There has also been a 30 per cent reduction in support office costs following the restructure.

The reset of Target’s commercial model is complete, according to Wesfarmers.

“[The] near-term priority is to stabilise, and achieve consistent and sustainable profitability”, the group explains, while future growth will be “supported by accelerating digital capability, and investing in data and digital capabilities to improve the customer experience and deliver personalised experiences.”

Kmart Group have also seen the acceleration of Catch, its online shopping hub.

The general online retailer now boasts over three million active customers in Australia, with over two million individual products available from over 1,900 marketplaces. Catch has opened a 62,000 sqm automated fulfilment centre in Melbourne to keep up with demand, although sales are expected to slow throughout 2021, as the world normalises.

Catch also plans to build a 30,000 square metre automated fulfilment centre in NSW which will open in 2022.

Not surprisingly, for an online retailer, the pandemic was good for Catch, with a gross transaction value of $1b throughout 2020. These GTV figures have been negative over the last few months, as business returns to usual.

It’s Click and Collect feature is available through over 400 Kmart, K Hub and Target stores, strengthening the tie between these online-only retailers, and brick-and-mortar stores – while its Amazon Prime-style members club Club Catch offers free shipping and members-only discounts.

On the environmental side, Kmart Group has committed to using 100 per cent renewable energy by FY25 across all its businesses. Target is on track to use 100 per cent sustainably sourced cotton for its own-brand clothing, bedding, and towels by July 2021.

Kmart Group will also ban single-use shopping bags by July 2021, as well as removing 10 priority own-brand products from shelves – a move it claims will remove over
500m single-use plastic items per annum from the environment.

“Kmart Group remains well-positioned to deliver sustainable growth over the long term”, according to Wesfarmers. It plans to do so by leveraging scale and product development capabilities, completing the store conversion program and delivering digital initiatives.

Although the Wesfarmers group didn’t release any financials, Citigroup claims the market was expecting sales in the Kmart Group to rise 8 per cent.

 

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