Target’s CEO Steps Down Following The Massive Data Breach And Canadian Debacle

In an interesting turn of events, Target (NYSE:TGT) CEO, President and Chairman Gregg Steinhafel resigned from all his positions after extensive discussions with the board. The company stated that Steinhafel and board members have mutually decided that it was time for Target to continue under a new leadership. While the company usually promotes from within its ranks, this time it is also considering outside options. Meanwhile, Target’s CFO John Mulligan has been named interim CEO and president, and Roxanne S. Austin (a current board member) has been appointed as the interim non-executive chair of the board. ^[1]

It appears that the company’s board wasn’t completely satisfied with Gregg Steinhafel’s strategies, which were already under some scrutiny due to Target’s slipping sales and infirm e-commerce channel. The massive data breach in the U.S. last year and Target’s terrible start in Canada have further intensified Steinhafel’s problems. Some Target officials have acknowledged the fact that certain warning signs related to computer hacking were ignored a while before the breach came to light. According to Cowen Group’s (a financial services firm) note to investors, criminals were able to hack into Target’s database due to lack of security, which might have been a result of under-investment. In Canada, the root of Target’s problems is its underdeveloped supply chain system, which also reflects the lack of investments. ^[2] Since investment is a CEO decision, Gregg Steinhafel was in the firing line.

Steinhafel’s untimely exit is the second significant development for Target over the last few weeks in relation to the data breach. Towards the end of last month, the company appointed a new chief information officer (Bob DeRodes), who outlined details on additional security enhancements and announced that its entire REDcard portfolio will incorporate the new MasterCard chip-and-PIN technology. ^[3]

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Steinhafel’s Strategies Were Under Some Scrutiny

Target was once known for its value-for-money stylish and affordable merchandise, but it seems to have lost its essence due an aggressive push towards fresh foods. While this move made sense considering the success of Wal-Mart‘s (NYSE:WMT) grocery business, shifting focus from its core value proposition is proving costly for the retailer. According to Kantar Retail, only 32% U.S. shoppers visited Target stores and websites in March 2014, while 38% shoppers visited the retailer in the same month last year. Rising showrooming from Amazon‘s (NASDAQ:AMZN) customers was also partially responsible for this decline.

Although Target has deployed several strategies for the growth of its e-commerce channel over the past few years, it hasn’t turned into a big business for the company. Despite its vigorous efforts, e-commerce still accounts for an immaterial portion of the retailer’s sales, which has put a question mark on Steinhafel’s e-commerce strategies. Moreover, Target’s smaller format store expansion has been extremely slow despite the huge available market. The retailer started its smaller store expansion in 2012 and had just eight CityTarget stores at the end of 2013. In comparison, Wal-Mart has opened hundreds of small stores in the last couple of years. While some of Steinhafel’s strategies are questionable, others which seem valid have not produced the desired results. This has put Target’s CEO under a lot of pressure.

The Data Breach Is Troubling Target

Half way through the month of December, Target revealed a massive data breach in the U.S., in which personal information including credit/debit card details of close to 110 million individuals were stolen. Subsequently, the company stated that while its sales were going better than expected before the breach, they were meaningfully weaker after disclosure of the breach. ^[4] Customers bought less at Target as they felt that their credit card/debit card security had been compromised.

Target responded to the breach in a prompt manner to ensure that customer sentiment towards the company does not suffer. It apologized for the theft of information and assured zero liability for fraudulent charges. By mid February, financial institutions had replaced about 85% of cards affected by the data breach at Target free of cost. The company also increased fraud detection of REDcard holders and provided them with credit monitoring and identity theft protection. It started equipping  its stores with advanced chip-enabled technology for additional security. However, Target estimated that these technological changes will cost it more than $100 million in addition to $61 million incurred in breach related expenses in Q4 fiscal 2013. ^[2] This will put pressure on the company’s profitability in the near future.

Following the theft, Target hired Verizon Enterprise Solutions to investigate and plug the loopholes that caused this breach. Verizon has already prepared a report that details Target’s shortcomings on the matter of cyber-security, and it is being circulated among Target’s banking partners and credit card issuers, sources close to the matter said. While the report might not suggest that the CEO was directly responsible for the technological loophool, it will still cast a negative light on his recent tenue. While the company is working hard to prevent the recurrence of such events in the future, the resignation of the CEO indicates that all the necessary actions are being taken to ensure a quick recovery. In the aftermath of the breach, some customers have been reluctant to spend at Target, which is threatening for its sales. However, the ongoing investments in technological enhancements and tweaks in the top management structure might help Target gradually regain its customer and investor confidence.

Canadian Expansion Proved Costly

In 2011, Target bought 220 Zeller stores for $1.8 billion and spent about $10 million on each store to convert them into its symbolic red and white layout. However, the company’s start was disappointing as its 124 stores opened last year generated only $93 in revenue per square feet with gross margins low at 15%. Overall, the Canadian segment rendered $1.3 billion in revenues in 2013 and clocked up $941 million losses mainly due to high pre-opening expenses. According to Tiburon Research Group, Target is expected to incur a loss of $600 million in 2014.

Although the initial response was good, the company didn’t do too well in terms of customer satisfaction due to lack of a proper supply chain system. According to a survey conducted by Forum Research, only 27% of the customers polled were “very satisfied” with their experience at Target. Others felt that the products were too expensive and that the retailer was not able to meet customer demand since a lot of products were out of stock. ^[5] The company failed to properly manage its inventory, due to which it faced both inventory shortage and surplus issues.

Although international expansion was an inevitable move for Target, its approach was questionable. The company was very aggressive in opening stores without a sturdy supply chain to support its needs. The retailer offered expensive products for Canadian consumers who are highly value conscious and very fond of cross border shopping. Under a new leadership, Target will look to rectify its shortcomings in Canada. The retailer might want to shift its focus from aggressive store openings to developing a sustainable supply chain. Target has already slowed down its expansion as it plans to take its store count up to just 150 over the next four years. ^[6]

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1. Statement from Target’s Board of Directors, Target, May 5 2014 [↩]
2. Faltering Target Parts Ways With Chief, The New York Times, May 5 2014 [↩] [↩]
3. Target Appoints New Chief Information Officer, Outlines Updates on Security Enhancements, Target, Apr 29 2014 [↩]
4. Target Provides Update On Data Breach and Financial Performance, Target, Jan 10 2014 [↩]
5. Target profits dragged down by Canadian expansion, wary shoppers, CBC News, Aug 21 2013 [↩]
6. Target CEO Resigns After Security Breach, Canadian Fiasco, The Star, May 5 2014 [↩]