Target looks to battle pricing apps

Target Looks to Battle Pricing Apps

January 24, 2012

Target Corp. is exploring pricing changes to counter the practice of "showrooming," or using mobile pricing apps to check out and scan the price of products in stores only to purchase them at a less expensive price online. "What we aren't willing to do is let online-only retailers use our brick-and-mortar stores as a showroom for their products and undercut our prices without making investments, as we do, to proudly display your brands," according to a letter signed by Chairman, President and CEO Gregg Steinhafel and Executive Vice President of Merchandising Kathee Tesija and sent to some of its vendors regarding the changes.

The letter was first disclosed by Citi Investment Research's Deborah Weinswig, followed by a report in The Wall Street Journal. Target confirmed to the Associated Press that the letter was sent but declined to confirm any details. In the letter, Target reportedly asks vendors to help it create more exclusive items to create a greater point of differentiation and reduce product-on-product price competition that has become easier for shoppers to uncover through computers and smartphones.

According to the Journal, where exclusive products aren't possible, suppliers are being asked to help it match rivals' prices. In her report, Ms. Weinswig wrote that she thinks Target is "exercising leverage over its vendors to achieve the same pricing that smaller, online-only retailers receive. This strategy would help Target compete with retailers like Amazon on like-for-like products."

Finally, Target indicated to its vendors that it is exploring the possibility of creating a membership or subscription-based online pricing, which Ms. Weinswig believes might be similar to Amazon's "Subscribe and Save" program. The program gives regular buyers of certain products, such as diapers or coffee, special discounts. The move comes as online sales jumped 15 percent this holiday season, more than three times the 4.1 percent rate seen for retail overall.

The Journal quotes a few analysts believing Target's reported moves likely won't reverse the "showrooming" trend. They said online retailers have significantly lower labor costs, don't collect taxes in most states, and can use other revenue generators — such as cloud data storage and fees it charges others to sell on its website — to subsidize the lower margins it gets in retail.

"The traditional retailers are still doing business the old way while Amazon has reinvented the model," Sucharita Mulpuru, retail analyst at Forrester Research, told the Journal. "Wal-Mart and Target are willing to sell a few things at a loss. Amazon's whole business is a loss leader."