What Are Target’s Next Markets For Expansion?

Target (NYSE:TGT) is one of the biggest retailers in the U.S. with over 1,700 stores and $70 billion in annual revenues. Due to its large presence in the country, the company has limited growth opportunities and remains susceptible to the weak economic environment. It recently began its operations in Canada where the initial customer response has been positive. Target did not have any international presence until now. So, what could be the next ‘Target’ market for the retail giant?

The most viable options appear to be big Latin American markets such as Mexico and Brazil. Although there are no concrete plans yet, Target had stated in 2010 that its international expansion will most likely start with Canada, Mexico and other Latin American countries. ^[1] In this analysis, we’ll try to analyze why Target should expand to Mexico, Brazil and Peru.

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Target Can Expand In Mexico With Small Format CityTarget Stores

Mexico has maintained its economic growth and has kept inflation rates under control. The retail sales in the region have grown at a robust pace and the market growth exceeded the GDP growth last year. ^[2]

Financing and consumer credits have emerged as important retailing tools in Mexico. Several retailers are evolving into financing bodies by providing the options of deferred payments at a cash price. ^[2] “Meses sin intereses” or monthly payments with no interest has become a common practice in the market. Additionally, retailers are looking to expand throughout the country while specifically targeting the regions with heavy footfall. ^[2] This has bolstered the popularity of smaller format and quick-stop stores, and Target can easily adapt to this trend with its CityTarget format. Along with store expansion, department stores and other grocery retailers are expanding their product portfolios as well. ^[2] This to meet the customer demand and outperform local retailers who offer limited products. Since Target already offers a wide range of products, it is likely to benefit from this trend.

Although the retail sales have grown strongly in the region in the last few years, they declined unexpectedly during the initial period of 2013. ^{[3] [4]} Weak consumer confidence due to the slowest economic growth since 2009 appears to be the reason. Nevertheless, policy makers are likely to cut the interest rates in order to stabilize the economic growth. ^[4] The region’s inflation rate could also come down to 2%-4% during the second half of the year, from 4.65% in April 2013. ^[4] This should help the consumer confidence to a certain extent and support the growth in retail sales.

The U.S. retail giant Wal-Mart (NYSE:WMT) has performed exceptionally well in Mexico with its everyday low price strategy. Therefore, Target will have to rely on its price match strategy to appeal to the region’s value-conscious buyers.

Brazil Is Attracting A Lot Of Foreign Retailers

Along with its fellow BRIC nations, Brazil has become a key location for foreign retailers to invest. ^[5] Wal-Mart entered Brazil in 1990s and still continues to grow at a healthy pace. The French grocery giant Carrefour, which started in Brazil in 1975, was among the early movers in the region. Last year, French retailer Casino began the acquisition of Brazil’s biggest supermarket operator Companhia Brasileira de Distribuição SA to further strengthen its position. ^[5] Currently, these three retailers account for one-third of the region’s total grocery sales, indicating that foreign companies are taking Brazil seriously. ^[5]

Despite the slow economic growth in the country, the retail market has remained stable. The upcoming 2014 football world and 2016 Olympic games are likely to impact the retail sales positively. As a result, most retailers are investing in store expansion and increasing their selling space. ^[6] Growing popularity of online retailing is also likely to play a crucial role in driving the industry growth. Over the past few years, e-commerce channel has seen strong growth in Brazil. Many retailers are now looking to bolster their online sales and provide better customer service in order to acquire a loyal customer base. ^[6] Also, a number of companies are increasingly investing in their supply chain to improve distribution & delivery methods. As more retailers try to improve their services, online retailing will continue to grow and help the region’s retail industry. Furthermore, it will allow big retailers such as Wal-Mart to fight-off competition from local store-based retailers.

Brazil’s retail industry is witnessing some consolidation due to mergers and acquisitions. ^[6] Going forward, this is likely to slow down as attractive merger options diminish. Target needs to enter the region in the near future, or else it may not find many good companies to collaborate with.

Peru

The fact that Peru is not as developed as other Latin American markets, holds some appeal for foreign retailers. Retail sales in Peru are expected to grow at more than 20% annually and it remains relatively untapped by chain retailers. ^[7] The region’s retail industry is still dominated by Chilean companies and chain retailers hold just 15% share. ^[8] In comparison, this figure is as high as 60% in places such as Brazil and Chile. ^[7] Also, the number of malls in Peru are likely to double by 2015, indicating an improvement in the shoppers’ lifestyle. ^[7] These aspects imply that there is good growth potential for retailers such as Wal-Mart and Target.

Our price estimate for Target stands at $85, implying a premium of about 20% to the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Target Focused On Strategic Growth, Target, Jan 21 2010 [↩]
2. Retailing in Mexico, Euromonitor International, Feb 2013 [↩] [↩] [↩] [↩]
3. Mexico Retail Sales YOY, Trading Economics [↩]
4. Mexican Retail Sales Unexpectedly Fall ror Second Month in a Row, Bloomberg, May 22 2013 [↩] [↩] [↩]
5. Analysis: Why have so few retailers entered Brazil, Retail Week, Aug 30 2012 [↩] [↩] [↩]
6. Retailing in Brazil, Euromonitor International, Apr 2013 [↩] [↩] [↩]
7. Peru’s booming retail sector catches Wal-Mart’s eye-source, Reuters, Apr 26 2013 [↩] [↩] [↩]
8. Exclusive: Walmart to start working on opening in Peru-source, Reuters, Jul 1 2013 [↩]