Project “Glimmer” April 282010

A marketing plan designed to take the cosmetics department within the Target Corporation to the next level and effectively compete in the cosmetics market. An experience unlike any other and essentially designed for the educated, on-the-go woman.

Retail Management: Spring ‘10

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

Executive Summary

The Target Corporation aims to be the leader in quality affordable products: they are currently second to Wal-Mart. Target does a fantastic job at differentiating themselves from their competition – discount superstores – by being as fashion forward as possible; they have teamed up with high end designers from around the world to create and offer discount versions of the current high-fashion trends on the market. Their cosmetics department should be no different. Recently the company has been feeling a down trend in this area of their store and are looking to upgrade and revamp the cosmetics department – keeping it hip and happening. The company also faces major losses in their cosmetics department as patrons have found and mastered ways to get around their security and steal items. One bay area store saw losses of approximately $15,000 in L’Oreal products alone. Our team has formulated a few objectives that we would like to see the Target cosmetics department reach; from there we have designed strategies that should allow our objectives to be met.

Our main objective is to reduce theft in the cosmetics department drastically. To do this we intend to implement a distribution strategy where first and foremost the Target cosmetics consumer will be shopping essentially within a special store within the larger Target store. By keeping the cosmetics department closed off there will only be one way in and one way out. We also wish to employ a fulltime cosmetics staff member that will not only be skilled and knowledgeable in cosmetics, but will also be able to keep an eye on the merchandise. Furthermore the shelves will be lowered to approximately 4.5/5 feet, which will increase the visibility within the cosmetics department. The more costly products will be locked up in glass cases and can be viewed with the help of the cosmetics aide.

Our teams’ second object is to create a better experience for the cosmetics consumer. We want them to feel comfortable and excited to be shopping there. In order for Target to achieve this goal the cosmetics department will be sectioned off into three categories – savvy, wise, and indulgent – that will allow easy access for the consumers and each section will be highlighted in a different hue. We recommend access to more testers especially with the foundation products. These testers will be located next the cosmetics aide to prevent left; overall more testers should increase customer satisfaction.

In our goal to enhance the cosmetics shopping experience we would like to include three small touch screen displays, where consumers can match up their skin tones to the perfect foundation and eye-shadows that enhance eye color and so on. There will be reviews not only by consumers but by staff members as well. In order to gain competitive advantages brands will have the option to buy advertising space on the touch screens.

Cosmetics were created to make the consumer feel special about themselves and in keeping up with that angle we want to create a world where the consumers feel above the rest: that this whole experience was specially designed for her. We will call this department “Glimmer.”

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

Market Description

From the Target Case Specifics:

Our guests are young, well-educated, moderate-to-better income families who live active lifestyles. The median age of our guests is 42, the youngest of major discount retailers. They have a median annual income of $60,000, 51 percent have completed college and 33 percent have children at home. Also, we have one of the strongest brands in the marketplace. Our Bullseye is recognized by 97 percent of American consumers, even nudging out Apple and the Nike swoosh.

The following is a more quantitative breakdown of Target’s market:

1. College Studentsa. Size: 15,900,0001

b. Affecting Factors to Purchase: Cost of products, social responsibility, environmental sustainability, trendy image, convenience

2. Baby Boomersa. Size: 78,200,0002

b. Affecting Factors to Purchase: Convenience, cost of products, children, need to save money, selection

3. Teenagersa. Size: 15,897,0003

b. Affecting Factors to Purchase: Cost of products, convenience, trendy image, fashion4. Young Achievers

a. Size: 11,551,9144

b. Affecting Factors to Purchase: Convenience, trendy image, sustainability, social responsibility, cost of products

5. Young Accumulatorsa. Size: 9,385,7375

b. Affecting Factors to Purchase: Convenience, trendy image, cost of products, children6. Middle Class Families

a. Size: 1,240,0006 familiesb. Affecting Factors to Purchase: Convenience, cost, children

7. Middle-Upper Class Familiesa. Size: 2,419,0006 familiesb. Affecting Factors to Purchase: Convenience, sustainability, social responsibility,

children, trendy image

1 http://www.census.gov/Press-Release/www/releases/archives/facts_for_features_special_editions/002263.html2 http://www.census.gov/Press-Release/www/releases/archives/facts_for_features_special_editions/006105.html3 http://www.census.gov/population/www/socdemo/school/cps2008.html4http://www.claritas.com/MyBestSegments/Content/Segments/groupDetails.jsp? id1=APBW&webid=&id4=@R&social=yes5http://www.claritas.com/MyBestSegments/Content/Segments/groupDetails.jsp? id1=APBW&webid=&id4=@U&social=yes6 http://www.census.gov/hhes/www/cpstables/032009/faminc/new01_001.htm

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

Review of Competition

From the Target Case Specifics:

Wal-Mart: Adding more fashion to its home mix; testing new merchandise presentation strategies in order to convey good-better-best strategy

JCPenney: Building on private and exclusive brand offerings (i.e. Colin Cowie, CM Hotel Luxury); expressing interest in pursuing more urban market based strategies

Kohl’s: Expanding apparel private label brands into home offerings; seeking to establish a more distinct good-better-best strategy

Additional analysis follows of other competitors and expanded analysis of Wal-Mart.

1. Wal-Mart – Target’s major competitor. Very similar business model of large scale discount retailing. Everyday low price strategy. Positions itself as a low price leader with a vast selection of products. Caters to practically every shopping need of the budget minded consumer. Very ubiquitous in location.

2. Costco – Warehouse club. Wholesale pricing strategy utilizing membership fees and bulk packages, catering to small business customers. Positions itself as a minimal décor, low overhead operation appealing to business customers and large families looking for low priced brand name goods in bulk.

3. Safeway – Supermarket. Grocery store with a slightly upscale flavor. Carries fresh meat and produce, along with consumer packaged goods at higher prices than discount retailers. Sales still rule this retailer, providing value to budget minded shoppers. Positions itself as a lifestyle grocery chain for families looking for smart, fresh, and healthy choices. Located in local neighborhood shopping centers.

4. Ulta –More than 346 stores in 38 states. One stop shopping beauty superstore with a value emphasis. Assisted self service by trained employees. Provide s cosmetics, fragrance, hair-care, skincare, bath and body products and salon styling tools, as well as salon hair-care products. High product breadth, with over 21,000 products offered. Full-service salon also available in every store. Modern store environment and décor. Has a points based customer loyalty program. Large stores, typically 10,000 square feet.7

5. Sephora –International with over 560 stores. Assisted self service format. Sells skincare, color, fragrance, makeup, bath & body, and hair-care products. High end luxury shopping for cosmetics. Emphasis on service by highly trained knowledgeable employees. Very generous sampling policy. Offers many high end and boutique brands. Important private label brand has value pricing and innovative cosmetics, such as makeup for legs.. Many specialized areas within the store with services for nail, hair, brow, and more. Has a points based customer loyalty program.8

6. MAC- Sold in over 50 countries. Leading cosmetics company. Service based format with traditional makeup counters staffed by trained makeup artists, located in department stores. Multiple social responsibility and charitable programs, for example cruelty free makeup. Sells only MAC branded makeup products. Brand promotion is done through celebrity endorsements.

7 http://www.ulta.com/ulta/common/about.jsp and http://finance.yahoo.com/q/pr?s=ulta8 http://www.referenceforbusiness.com/history2/73/Sephora-Holdings-S-A.html#ixzz0mYShs2cw

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

and word of mouth marketing. Has a special recycling program for used makeup to be exchanged for a product.9

SWOT Analysis

Target ( Whole Store)Strengths

“One-stop shopping convenience” with pharmacy, food, and regular goods10

Low prices Inventory management – “Our newly launched

store and merchandise segmentation strategy allowed us to customize our assortment, timing and presentation based on the sales volume of individual stores and local preferences.”10

Trendy, young image Innovative products, for example reclosable cereal

containers10

Environmental and social responsibility Store cleanliness Store atmosphere Target mobile-shopping app

Weaknesses Some goods seen as cheap, lower quality Non-exclusivity of many brands Not as low priced as Wal-Mart Not a global company11

Greater emphasis on price than service

Opportunities International expansion More inventory management improvements Localized product assortments to appeal to local

markets Emerging environmentally sustainable markets Better corporate image than Wal-Mart expands

opportunities for building stores in more locations Exclusive and higher quality, higher end product

lines Even more guest services to expand one-stop

shopping convenience Mobile markets

Threats Competitive pricing pressure from Wal-Mart Image as a large corporation Difficult economic conditions Possible alienation of aging customers and need to

appeal to older demographics Increasing expenses cost of sales, credit card, and

depreciation/amortization expenses10

Substantial increases in net debt7

Negative comparable-store sales growth from fewer transactions at higher selling prices per unit7

Target Cosmetics (Pre-Plan)

9 http://www.sokissandmakeup.com/the-history-behind-mac-cosmetics-inc/ 10 “Target 2008 Annual Report” http://investors.target.com/phoenix.zhtml?c=65828&p=irol-reportsAnnual11http://www.associatedcontent.com/article/69980/target_corporation_company_analysis.html?cat=3

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

Strengths• One-stop shopping with low prices• Convenience • Exclusive designer cosmetics

Weaknesses• Some goods seen as low quality • Non-exclusivity of many brands • Prices not as low as competitors • No service • Boring shopping experience• Premium brands • Unfocused promotions

Opportunities• Better customer experiences • Inventory management

improvements• Localized product assortments to

appeal to local markets• Exclusive and higher quality

product lines• More guest services

Threats• Competitive pricing pressure

from Wal-Mart• Image as a large corporation • Higher service of specialized

cosmetics stores• Higher costs

Target Cosmetics (Post-Plan)

Strengths• One-stop shopping with low prices• Innovative, trendy, and young• Local products• Interactivity and customer

engagement• Socially responsible company• Convenience, easy shopping • Personalized service• True shopping experience• Discourages shrinkage• Increased loyalty

Weaknesses• Some goods seen as cheap/low

quality • Non-exclusivity of mass market

brands • Prices not as low as competitors • Increased costs • Still not as good shopping

experience as specialty cosmetics stores

• Less service than specialty stores

Opportunities• Even better customer experiences • Inventory management

improvements• Virtual mirror, try on cosmetics

virtually through new technology• Exclusive and higher quality product

lines• More guest services• More concentrated marketing• Greater product depth

Threats• Competitive pricing pressure

from competitors• Image as a large corporation • Higher service of specialized

cosmetics stores• Higher costs could threaten

profits• Too dramatic a change can

alienate customers

The Target Corporation is essentially a discounter superstore; however Target differentiates itself from its competitors as being a fashion forward discounter. They have teamed up with designers to offer cheap

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

and chic merchandise. Their cosmetics department is positioned for a young woman from college to late thirties. It is also positioned for an educated woman who is looking for a quality product at reasonable prices. This also positions Target for an on-the-go woman who is not looking for extreme fashion trends but basic in-style, affordable good quality cosmetics to keep her looking sharp. This woman needs her day to day items such as shampoo/conditioners and other hair products; lotions; cosmetics and other products that she uses daily. Her reasons and needs are functional.

Our overall strategy is to enhance the shopping experience at Target stores by offering a store within a store experience12 and enhancing the connection with the consumer. We will unify this new cosmetics area under the name “Target Glimmer.” To do that we plan the following:

Product Strategy

Target should continue being fashionable yet value oriented, while leveraging exclusive brands. Target is selling affordable yet fashionable makeup. They update their products daily and highlight new products and features regularly. They sell 14 different brands of cosmetics including London’s Boots brand – sold exclusively through Target. It is necessary for Target to remain fashion forward without overextending themselves. Target’s consumers are not looking for the newest extreme trend; they are looking for quality products at affordable prices. Target should continue to position itself as being the chic discount department superstore that offers a clean, affordable, cool shopping experience while leveraging exclusive brands like Boot’s, giving it a premium cachet within Target’s affordable image. Target should also point out its comparable cosmetics performance in relation to boutique (MAC, Sephora) brands, wherever certain products or brands meet the quality of the boutique brands.

Target should also connect with the local community, by sourcing locally produced cosmetics and companies, and attempt to arrange relationships with them. This will give Target “lead products”13 that will lead local consumers to Target specifically to buy those products. This will help foster an image of Target supporting the local economy, increasing the strength of the brand. Target will also gain new, distinctive products that will help differentiate their cosmetics department.

Pricing Strategy

Target’s cosmetic department is priced for college students and higher who are looking for quality product at affordable prices. Their products are overall more expensive then what you may find at a Wal-Mart., yet less than boutique brands. Target should maintain their pricing strategy as it suits their overall image. Target is not a department store but they are also not a dollar store: the company aims to be a cut above typical discount stores to suit the needs of the educated, upper –lower to middle class income markets. With this pricing strategy they are able to attract a large array of customers that will draw in above–average returns for their stores – as noted with the Serramonte Target.

Distribution Strategy

Remodel the cosmetics section to be a well-lit enclosed area with glass shelves you can see over. Lower the middle aisles to 4.5ft., and extend the outermost aisles to the back wall in order

12 See “Selling the experience: customers want retailers to appeal to their ideas of luxury with interactive experiences and electric atmospheres.” in Global Cosmetic Industry, 175 (9): 68, September 2007. ISSN: 0012-652713http://www.cba.uh.edu/jhess/documents/LeadProductsasNewStoreChoiceFactor-JMSubmission.pdf

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

to enclose a special area just for cosmetic products. There will also be short counter height shelves in the front of the area. This allows our consumer to feel as though they are separated from the main store. This will also prevent loss because it will not be as easy steal and leave quickly. Also, the aisles will be lower and visibility will be greater; there will be one way in and one way out. Because of the enclosed nature of the new cosmetics section, customers will feel more comfortable and have a more discreet shopping experience.

o All the shelves should be made of clear glass, for a more stylish look and to increase visibility/decrease shrinkage.

o Include mirrors angled downwards above the outer shelves to increase visibility/reduce theft. Also include pull-out mirrors within the aisles themselves for customer use.

o Ensure the lighting is bright, both to highlight the section and ensure proper makeup appearance.

The cosmetics area will be divided into three color-coordinated sections for different price range shoppers to promote easy shopping. Each aisle within the cosmetics area will have its own special name that will go by brand, then cosmetic type (mascara, lipstick), and each aisle will be based on price; three rows of displays. For example aisle names can be: savvy (inexpensive) shoppers, wise (mid-range) shoppers, chic (premium) shoppers – for the few products that cost a bit more. Customers will become familiar with the aisle names and get excited to shop in their personal aisle. Each of these sections will have a subtle color theme on the using the color of the shelves and the floor. Inexpensive will be yellow, mid-range will be green, and premium will be lavender.

o Premium will be located in the middle, right where the customer walks in. This will force them to see the expensive cosmetics before anything and highlight them. Cheap will be on the left shelves and mid-range will be on the right. The front short shelves will contain accessories/brushes on the right and nail polish on the left.

Target should have more product sample testers that are easy to find, especially on face makeup—foundation, face powders – these testers can be kept near the employee working in the section. This will increase awareness, increase purchase satisfaction, let customers judge effectiveness, and induce trial. It will also help promote exclusive Target brands like Boot’s. These testers should be very visible, obvious, and consistently highlighted so that they are easy to find.

Expensive products will have only one display product with the rest locked in a case. If a consumer wants the product they will have to ask the Target cosmetics specialist, during off peak times there will be a large, obvious call button that will call a regular target employee to cosmetics. Since this is during off peak times, the response time should be very quick. This will prevent the loss of expensive items as the items will be kept locked in a case.

Have an Asset Protection officer patrol the cosmetics area every 15-30 minutes. This strategy has zero cost and is simple to implement, but will help deter theft due to the increased presence and visibility of security in the area.

Promotion Strategy

To enhance the experience, three small touch screens for customers will display new releases, guides on what is the best product for our consumer’s specific needs, and favorable comparisons to boutique brands. These can also show tips on makeup application and featured articles about makeup sold at Target. There will be two located in the front, near expensive products, and one on the back wall.

o Cosmetics companies can pay to have their products shown on the screens, raising revenue as well as entertaining and informing customers of new products and their use.

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

The screens can tell them locations of specific products as well as informing customers about special promotions occurring. It will also increase browsing time.

A Target employee that is trained and familiar in cosmetics should be located near the entrance of the cosmetic department and near the premium section. This person will be able to answer any questions, promote products, and make recommendations, while keeping an eye on questionable consumers to prevent shrinkage. Overall this will give customers a more personal experience as well as make an educated decision on what they are purchasing, leading to a happier consumer that will be likely to return more frequently. This will also discourage shoplifters.

o This employee would work during peak times, when there are more customers and a higher chance of theft.

Utilize a problem-solution marketing approach towards product promotion. One possible implementation is having a large sign in a highly visible location. This would be the “problem of the week” space where Target would put a problem the consumer has, then lists a product or brand as a solution to that problem. For example, it could say “Some Name - Dear Target, my mascara is running! What should I do? Hey Some Name, you want to use good quality mascara. Try our waterproof mascara brand x or product y. This could also help facilitate up selling or cross-selling, if the recommendation is for a complementary product that the customer is not buying.

Conduct “recycling specials”--bring in old used makeup containers for recycling at Target and receive a discount off new purchases. This reinforces Target repeat purchasing behavior. It also increases the responsible image of Target as a hip, young retailer that cares about the environment. It effectively appeals to value-conscious customers by giving a discount, yet it is a more unique promotion than a coupon.

Conduct targeted marketing promotions for special events by leveraging the registered user base of target.com. Other good ideas would be birthday specials for free or heavily discounted makeup, grand re-opening event for remodeled cosmetics section with samples, premiums, and sign-ups for promotions. Customers could even take advantage of the birthday specials just by showing a driver’s license and writing down their name and e-mail. This would be promoted through signage and by the cosmetics employee.

Utilize customer/employee review signage which has reviews and recommendations from real people, highlighting the usability and comparability of cosmetics carried at Target to other brands. This personalizes the shopping experience, fosters a connection to Target, and facilitates a social shopping experience. This also highlights specific products, raising awareness for effectiveness of certain cosmetics. This strategy also has a lot of appeal to young generations of customers, who have grown up with interactive/social-networking applications that allow content creation by a network of their peers.

Have a weekly (or bi-weekly/monthly) changing large sign that features makeup that is actually sold at Target, but applied on real people. It could be labeled “model of the week” with a tagline like “real people wearing real cosmetics” with a smaller byline “sold at Target.” The customer gets to see the makeup in use, the products are identified and promoted, and the customers get more involved in the cosmetics section, since it features them as models. This will help increase loyalty and satisfaction. Customers will see the cosmetics in actual use. Research has shown that customers trust people who are like them, and that this trend is only increasing with the prevalence of social networking.14

14 22% of people surveyed in the Edelman Trust Barometer saw ‘someone like me’ as their most trusted source in 2003. In 2004 that number jumped to 51%. In March 2009, the Nielsen Online Global Survey found that more people are communicating via social networks than email. http://www.focus.com/briefs/other/traditional-crm-v-social-crm-there-difference/

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

Highlight Target Glimmer opening through multiple channels. Highlight cosmetics revamp and services through the Target Style blog, website, newspaper inserts, and in-store signage. Use/promote samples, exclusive brands, and birthday specials, recycling specials, screens, remodeled areas to build awareness, traffic, and loyalty.

Promote brushes and makeup bags to induce customers to visit Target Glimmer. Even if the customer buys their makeup at other stores, they can still buy brushes at Target. Brushes and makeup bags can be used with any makeup products so they will be attracted to the new cosmetics section. They will then be exposed to the new products, specials, services, and featured items—raising awareness.

Action Plan & Schedule

June 2010- Development of Market SituationWe created a market description, reviewed the competition and created a SWOT Analysis

July 2010 – Development of Marketing Objectives and StrategyDefined positioning statement and marketing mix (product, price, promotion and distribution)

August 2010 – Remodel of Cosmetics’ Section1. Clear out cosmetics area2. Hire 3 knowledgeable cosmetics people to answer customer questions and concerns

a. Train person on all brands and products with emphasis on more expensive itemsb. Only one person will work at a time, but this person will be there at all peak hours

3. Replace shelving with eye level, glass shelving units and extend end shelves4. Insert two touch screens into end rows; and 5. Restock shelves with products according to value, price, and type.

October 2010- Soft Opening of the cosmetics section

The area will open with minimal promotions. The only promotions at this time will be within the store. The reason for a soft opening is to prepare/train staff so they know how to deal with customers and the work efficiently and effectively within the cosmetics department. They will collect information and photos for customer reviews and recommendations.

November 2010 - Grand Opening of “Glimmer” the Cosmetics Section at Target

This is when we will actually begin implementing our sales promotions and customers will be able to experience “Glimmer” the cosmetics store within Target. We will advertise the grand opening of the new cosmetics section widely, and especially on the Target Style blog. Once the cosmetics area is open, customers will have the ability to shop by price or color. They will also be able to ask questions and get answers from an expert. They will be able to find out about promotions and products by interacting with the touch screens and through in-store signage. The first month will be important for creating buzz and excitement, therefore coupons, testers, samples and free product giveaways will be implemented. Lastly, we will uphold Targets signature use of signage that will inform customers about the new area of the store: Glimmer. Our number one goal of the cosmetics remodel is to prevent theft and create a destination for young cosmetics users where they feel comfortable and excited about shopping for makeup.

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

Budget

Here is a breakdown of the major costs:

The remodel:

Glass shelving $ 20,000.00 Touchscreens $ 1,200.00 Signage and Printing $ 1,000.00 Merchandising displays $ 1,000.00 Paint $ 1,000.00 Labor $ 10,000.00 Total $ 34,200.00

Wages:

Another major cost would be hiring and training the cosmetics employee. Assuming the employee works 6 hours a day, 7 days a week, at $9 an hour this would be a yearly salary of $19,710.

Promotions:

The cost of promotions would have minimal set-up costs since they leverage existing assets. Acquisition of customer reviews/recommendations and photos of customers would be minimal since this could be done by employees and through the Target website. The only costs would be a printing allowance for new signage, estimated at $600.

Adding the salary costs of $19,710, promotion costs of $600, and nonrecurring remodel costs of $34,200, the first year implementation would have a $54, 510 total cost.

Revenues

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

The following is a sensitivity analysis of possible annual revenue increases resulting from our proposal. This is based on the information we received during the Target store tour that cosmetics sales were approximately $160,000 for a period of 6 weeks.

Sales Increase Total Revenues Increase in Dollars0% $ 1,386,666.67 05% $ 1,456,000.00 $ 69,333.33

10% $ 1,525,333.33 $ 138,666.67 15% $ 1,594,666.67 $ 208,000.00 20% $ 1,664,000.00 $ 277,333.33 30% $ 1,802,666.67 $ 416,000.00 40% $ 1,941,333.33 $ 554,666.67 50% $ 2,080,000.00 $ 693,333.33 60% $ 2,218,666.67 $ 832,000.00 70% $ 2,357,333.33 $ 970,666.67 80% $ 2,496,000.00 $ 1,109,333.33

However, Target should keep in mind that our proposal includes multiple measures to reduce shrinkage, effectively an increase in revenues. Thus, our proposal has additional increases not reflected in increased sales. The following is a sensitivity analysis of shrinkage decrease cost savings.

5% $ 1,099.28 10% $ 2,198.56 15% $ 3,297.84 20% $ 4,397.12 30% $ 6,595.68 40% $ 8,794.24 50% $ 10,992.80

Shrinkage Decrease (Percent)

Shrinkage Decrease (Dollars)

Assuming shrinkage losses of 1.5115% of sales gives a dollar figure of $20,938 in losses. If sales increase by a low estimate of 5%, then shrinkage increases to $21,985. If our proposal decreases shrinkage by a conservative 5%, this would be a savings of $1,099. Thus a conservative total increase in revenues, would be $69,333 + $1,099 - $54,510 = $15,922 net gain within the first year.

NPV and MIRR Analysis

We also calculated the Net Present Value and the Modified Internal Rate of Return for our project, using the conservative assumptions of sales growth in the previous section.

Briefly explained, these two analytical techniques are used to decide whether a capital improvement project will add value to a company and how much.

15 Figure taken from the 2008 National Retail Security Survey. Available at http://soccrim.clas.ufl.edu/criminology/srp/srp.html

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.16

The MIRR is basically a rate of return on an investment that is a measure of profitability.

Assumptions: A period of 5 years was used in these calculations. A WACC (Weighted Average Cost of Capital) of 8% was calculated from publicly available information.17 A gross margin of 30.5% was taken from the 2009 Target Annual Report. The sales increase and shrinkages reduction is assumed to be both 5%, as previously noted.

WACC 8%Gross Margin 30.50%

Cash Flows Increase in Sales $ 69,333.00 Remodel Cost $ (34,200.00) Recurring Costs

Year 1 $ 16,051.30 Wages $ (19,710.00)Year 2 $ 16,051.30 Promotions $ (600.00)Year 2 $ 16,051.30 Total Recurring Costs $ (20,310.00)Year 4 $ 16,051.30 Net Positive Sales $ 49,023.00 Year 5 $ 16,051.30 Cost of Goods Sold $ (34,070.99)

NPV $ 29,888.17 Shrinkage Reduction $ 1,099.28

Interpreting these results, since the NPV is positive this project would add value to Target as a company. Specifically, this 5 year period of cash inflows would add $29,888 of value to this particular store after costs. The annualized compounded rate of return on this investment would be 22%.

16 http://www.investopedia.com/terms/n/npv.asp17 http://www.wikiwealth.com/research:tgt

Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen

Appendices

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Marketing Plan Sunny Mui, Rachel Brinkenhoff, Esther Berg, Pany Chen