Target Outline

Target
Partnering with Fashion Forward customers
to Improve Forecasting
Kenny Kellogg (David Hegarty, Scott Orn, Carolyn Starrett)
 Executive Summary

• Demand forecasting is a key success factor in apparel retailing

- Too little supply = lost selling opportunity
Identifying the - Too much supply = significant mark-downs and inventory costs
opportunity - Studies show 5% gross margin improvements are possible1
• Customer loyalty and involvement drive incremental sales

• Target has the potential to harvest both the opinions and designs of their
customers
- Online game rating the potential success of new clothing
- ‘Hot-or-Not’ meets ‘Lucky Magazine’
Harnessing the - Online clothing design tool for user generated clothing
potential - ‘YouTube’ meets ‘Project Runway’
• Successful predictions of ‘hot fashions’ earn ‘Fashionista Points’ and bragging
rights
- Target foresees the new hot fashions identified by the ‘Fashionistas’

• Improved forecasting could increase Targets’ gross margins by up to 5%

- Translates into an $404M increase by 2012
Capturing the • Increased customer engagement translates into increased loyalty
value - Translates into an $127M increase by 2012
• Based on an estimated implementation cost of $21M, the project could result in
a NPV of over $600M

(1) Profit Logic and Oracle estimates Team Kenny Kellogg, McKinsey Business Technology Challenge 2
 To continue its tradition of growth, Target will
need to use innovation to deliver more of
what customers want
 Target has achieved a 12%
CAGR over the last 5 years Target is successfully balancing
 In 2006, 22% of Target’s high- end fashion demands at a
revenue ($12.7B) came from low-end price point…
apparel and accessories
Zara
56% Gross Margin
 In this category, Wal-mart owns
the low end and has ~3x
Target’s revenue 39% Gross Margin
– Both companies are increasing
total square footage at roughly
the same rate (8% pa) Wal-mart
23% Gross Margin

 Zara, H&M, and other affordable,

fashion forward franchises are …However, they will need to
looming on the competitive front will need to look to innovation
– Zara grew sales 22% in 2006 and original business models to
(60% of sales come from outside stay ahead of the curve
Spain)

Source: www.target.com, www.walmart.com, www.inditex.com, team analysis

Team Kenny Kellogg, McKinsey Business Technology Challenge 3

 An interactive community could help Target
generate more of the apparel designs that
consumer really want
User rated designs User created designs
• Users rate ‘pre-released’ clothing designs • Users submit new designs via online flash
- Both Target and user-generated designs design tool
• Users who correctly predict top selling clothing • Designs are fed through user-rating system
designs receive ‘Fashionista Points’ • Highly rated designs are flagged for
• Fashionista points = production
- Bragging rights
- Converted to Target gift card

Example: Example:
threadless.com 1154lill.com

• Target benefits from: • Target benefits from:

- Improved demand prediction - User-generate content creation
- More accurate inventory forecasting
Team Kenny Kellogg, McKinsey Business Technology Challenge 4
 This interactive community builds on many
key trends in Target’s customers lives

• Hot or not • Public appetite for

• Google Image new, home-grown
Labeler Game talent

Online Rating Project

Runway

User-generation trends
• User generated
• Fashion magazine
Rating trends

Super Bowl ads

where readers
‘tag’ items Doritos
Lucky
Ad
Magazine
Campaign

• Online user-
• Bragging rights from deisgned handbags
Fantasy Sports
Peer ratings 1154 LILL
• Online Flash based
• Peer Ranking Studios design tool
on eBay or # of
friends on
MySpace
(See Appendix for more details) Team Kenny Kellogg, McKinsey Business Technology Challenge 5
 The t-shirt company Threadless.com is a great
example of community generated and rated
design
T-shirt designs created T-Shirts voted on Winners produced

• Combination of fame • Community tries to • Community wins with

and money solicts the unearth best new ideas newest and coolest
best ideas - In its self-interest to fashion
find coolest new t-shirt • Designers win with cash,
fame and opportunity
Team Kenny Kellogg, McKinsey Business Technology Challenge 6
 An interactive community provides significant
benefits to both Target and its members
Increasing # of participants Increasing length of participation
Benefits to • More designers = better number of good • ‘Fashionista’ reputations developed
consumer: designs - Similar to eBay reputations or number of friends
on MySpace
• More people = more opportuntiy for bragging
rights on Fashionista Score • Designers will put their designs where more
people are. Fashionistas will go where best
• Fame amongst larger group is more powerful
designs are
for designers
• Unearthing previously untapped group of
designers

Benefits to • Significant brand cache to Target • Greater identification of true ‘fashionsitas’

Target: - Grass roots support of young designers and trend setters
- ‘Google Page Rank’ model for evaluating votes
• Greater insight into fashion trends and
- ‘Fashionistas’ vote weights higher
demand levels by
- Segments • Increased customer loyalty
- Geography • Process transferrable to other merchant
categories
• Positive brand for Target umbrella brand

Team Kenny Kellogg, McKinsey Business Technology Challenge 7 7

 An interactive community positively impacts
many of Target’s key profit metrics

Factors Components Expected Logic

Value
Operational − Collect and leverage customer 5% improvement Profit Logic and
1 insight in gross margin Oracle
Impact
− Leverage data for better inventory over 5 years projections
management and fewer markdowns
2

Customer − Typical internet adoption curve 10% of current Web 2.0

3 Penetration − Network effects of online Target forecasts
communities customers
Increased − More time spent on portal 10% increase in Reasonable
share of wallet − Increasing customer loyalty and purchases estimate
4 purchase occasions
− New (more appealing) styles
Demand − New styles 5% uplift Reasonable
5 − Additional media attention and viral through new lower bound
creation
marketing customers

Implemen- − Tool development, hosting, and $6M in upfront Bottoms up

maintenance development estimates
tation costs
− Manufacturing for custom design costs, $15 -21M
items
Source: Trendwatch, Oracle, team analysis ongoing
− Advertising and promotions
 By effectively harnessing the impact of the
community, there is potential to significantly
grow earnings

Assumptions: 1

2008-2012 CAGR
Net
2
3

Base
Incremental
Forecast
% Apparel sales
Impact:
$1,004M
4

Total apparel and a

NPV: $622M

Base gross margin (from 2

5

Projected gross ma
(1) Projected based on prior 5-year
CAGR

Incremental share of walle

(2) Based on 2006 results
(3) See logic on slide 8
(4) Share of revenue associated
with portal customers
 There are significant returns across even
conservative scenarios

 No Operational Impact:
$400.0
– No gross margin
$350.0 improvement

$300.0  No Demand Impact:

– No increase in top
$250.0 line
$200.0
 Conservative:
$150.0 – Max 1.8% GM
improvement
$100.0 – Max 6% revenue
gain
$50.0
 Aggressive
$-
– Max 6% GM
0 1 2 3 4 5 improvement
$(50.0)
– Max 12% revenue
gain
Base Forecast No Operational Impact No Demand Impact
Conservative Aggressive
 See appendix for
additional detail
 Four Phases of the Implementation Plan

Plan & Construct Promote & Populate Critical Mass Harvest

Q3 - Q4 2007 Q1 - Q4 2008 2009 - 2010 2011 & Beyond

Technology: Technology:
–Hosting Infrastructure –Add Features: My
–Page Rank algorithm Favorite Designers,
–Customize off the shelf Friend Lists, etc
design tool Marketing:
Marketing: –Promotional
–Market research to Partnerships with Project
validate interest Runway, iVillage, &
Oxygen Network
–Secure pilot test group
–Print & Multimedia
Manufacturing & Advertising
Supply Chain:
Manufacturing & Supply
–Establish custom Chain:
manufacturing
capabilities –Scale custom process
Design: Design:
–Cont. pro-submissions
–In-House contributions
Key Milestones Key Milestones
–500k unique users
–Test Group has high #
of rankings & minutes –10k apparel design
spent on system
submissions
–Execute on a few –50 apparel submissions
chosen designs reach market
11
Technology: Technology:
–Extend design tools to –Integrate into Portals &
all Target merchandise Social Networks
Marketing: Marketing:
–Add partners with focus –Continue spend to
on large social networks promote repeat use
and portals Manufacturing & Supply
Manufacturing & Supply Chain:
Chain: –Program’s extended
–Ability to customize reach means Target
Target-wide merchandise becomes custom
Key Milestones manufacturer for the
people
–Millions of unique users
–100k design submissions
Key Milestones
annually –Steady user and
–500 submissions & 1 submission growth
Blockbuster reach –Thousands of apparel
market annually submissions reach
market
–Annual contribution
margin of $10M-$50M –Contribution margin of
$200M-$500M annually
Risks and Mitigations
Risks
 Fast Follower - Exposing
designs & rankings to the
public allows competitors
like Wal-Mart to piggyback
on designs.
 Boredom – Will
merchandise maintain it’s
freshness in the stores
after consumers have
already viewed it online?
 Brand Conflict – Wal-
Mart’s “TheHub” initiative
failed miserably, why is
this different?
 Data Mess – With the
wide range of customer
segments contributing, will
the rankings be actionable?
Opportunity & Conversion
 Let Them Follow Us - Further solidifies
Target’s status as fashion forward relative to
competitors.
 The Blogosphere Lights Up - Customers will
be upset if Wal-Mart rips off their designs. The
bad press will pile up quickly.
 Pride vs. Boredom – While boredom is a
concern, the pride generated by playing a part
in design and approval should be more powerful.
 Always Designer Brands - Target’s emphasis
on designer brands makes it more fashion
forward and better suited to this than Wal-Mart’s
“Always Low Prices.”
 100% Authentic – Voters and Submitters are
real people, not actors filming company
approved videographies like Wal-Mart’s efforts
on TheHub.
 Sub-rankings - A segmentation effort will need
to be included,
12 with geographic or age related
 Appendix: Target should capture the trends
demonstrated in other websites
HotorNot.com Google Image Labeler Sellaband.com

 Users rate the pictures of  Google made attaching  A music ‘stock-exchange’

other users ‘Tags’ into a ‘game’  New bands post their
 Surprisingly addictive!  Consumer’s attached music
‘tags’ to earn competitive  Listeners invest in the
points bands they like
1154 LILL Studios eBay Ratings Lucky Magazine

 Use flash based software  The web’s original ‘user  Lucky is a fashion
to custom design rating system’ magazine
handbags  The oldest but still the  Each issue comes with a
 Handbag shipped directly best example set of sticky tabs to allow
to you you to highlight the