Lee Schafer
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The leaders of Target ought to at least consider ditching the use of the term price investment.

Their institutional shareholders know exactly what this retail industry jargon means, so it's not like anyone's really fooled. A good reason to stay away from this sort of gentle euphemism for unpleasant things is to keep grounded about the unpleasantness.

And at Target, cutting prices can't mean things are going really well.

For the novices, that's the basic translation of price investment, "cutting retail prices to keep customers coming." Retailers talk price investments all the time, as Target did last week in New York in laying out a fundamental change in thinking. The Minneapolis-based company's "investment" just this year would represent a big part of an expected $400 million hit to expected gross profits.

Cutting prices is one response to what Target CEO Brian Cornell last week called "an incredibly challenging environment," with a brutal two-front war underway with Wal-Mart Stores and Amazon.com, along with more limited campaigns to repel dollar stores, grocery discounters and e-commerce sites.

Target executives also talked about the effects of other retailers going into retreat. While it might sound helpful for competitors to shut down stores, it can't benefit Target's 2017 results when a Macy's going-out-of-business sale has a shirt marked down so much that it's cheaper than what's available at Target.

As shareholders digested the Target presentation, the stock price slipped, ending the day down 12 percent. That's no surprise, since estimates of future earnings per share got whacked. Yet investors also had to be digesting an unspoken message, an admission from Target that its last strategy hasn't been working.

There's no question the recent results haven't been stellar. One particular concern is customer traffic, the number of people walking out the front door with merchandise or using a website. For the fourth quarter it was a bit better but still had declined for the full fiscal year.

The Target operation is a very complex machine with many levers to throw, and management is choosing right now to throw quite a few of them. A transcript of the discussion outlining the new plan contained so many details on store remodeling, a new way of shipping products to stores and other ideas that it ran to two dozen single-spaced pages.

Yet based on the notes that analysts put out after the presentation, they were clearly reminded of a similar corporate presentation in New York that took place in October 2015. That's when Wal-Mart's chief financial officer, using the same kind of upbeat tone that characterized Target's presentation, stood on a stage and said "over the next three years we will invest several billion dollars into price."

Wal-Mart shares then had their worst trading day in 15 years.

It wasn't a great day for other retailers' shares either, as Target's stock price slipped nearly 4 percent. You didn't need a Harvard MBA to understand what would happen to profitability in the industry with Wal-Mart once again determined to hold the low-price position in the market.

"We estimate that 30 to 40 percent of the staples retail industry is now ramping price intensity in consumables to spark traffic and capture share," the research team of Wall Street firm Credit Suisse wrote in a bearish note last week. "[Wal-Mart] has been the most aggressive, but others like Target have responded. This unprecedented level of activity is only likely to spread further. … We think it's unlikely this strategy will drive incremental gross profit growth for almost anyone in this space."

In 2015 Wal-Mart might have had no real choice, as being cheaper than everybody else is a key part of its identity. But the strategy has been effective.

Since Wal-Mart announced its determination to cut prices, along with other non-price initiatives, it has done better than Target. Its fourth quarter was the ninth in a row with increased customer traffic in its U.S. stores. Even its consolidated gross profit margin has widened.

Last week in New York, Cornell explained that Target's plans are more nuanced than simply slashing prices.

The company has run too many promotions as it fought to recover from a 2013 data breach, he said, so trimming prices is one way to reeducate customers to expect low prices all the time. He also made the point that prices aren't coming down across the store, as lower prices are needed primarily on "core essential and food categories," the kind of things that have traditionally filled the top of the shopping list for a weekly Target run.

As for the rest the store, Target's strategy has never been to have the cheapest prices, just cheap enough to not let price be the reason the customer walked out empty-handed.

Target has only ever won when the perception of value appealed to the customer. That's more complicated than just a number printed on a price tag, of course, although the formula certainly includes the price, as well as having the item in the right size and color. Another big part of value is the quality of the buying experience. That could mean the ease of sorting Target coupons on a smartphone or even the lighting when walking through a store's parking lot.

This management team certainly understands that, which explains other parts of the new plan, like the launch over the next couple of years of more than a dozen exclusive brands. Nothing about a task that big sounds easy, yet even if some flop miserably it's the kind of initiative Target should be trying.

Instead of price investments, Cornell should have talked last week about Target making value investments. No one would have known right away what he was talking about, and as retailing jargon it sounds even sillier than price investments.

But at least investors wouldn't now be focusing on how Target is cutting prices to stay in the game.

lee.schafer@startribune.com 612-673-4302