This was published 10 years ago
Staff cuts just the start of a lengthy turnaround job at Target
Wesfarmers boss Richard Goyder is rolling the dice one more time on the runt of its retail litter, Target, to see if a cost-cutting program can revive it.
Dealing with Target is important for Wesfarmers, whose mantra on shareholder returns is legendary.
This underperforming brand is a bad look for Goyder - yet selling it to a competitor or subsuming it into another Wesfarmers retail brand such as Kmart must feel like failure or, at least, a missed opportunity.
Instead, Goyder has opted to churn the chief executive (the third time in three years). The new Target boss, Stuart Machin, has only been in the job a few months but made a big mark on Wednesday by cutting 260 jobs, mostly from the team at the Geelong headquarters.
Hard as this is for the staff affected, the reality is that over the past two years the Target headcount had risen 30 per cent, making it an obvious target for cuts.
At the same time profits and sales have been falling. Over the past three financial years Target's earnings before interest and tax have declined by 20 per cent and sales by 1.3 per cent, while the cost of doing business had risen an alarming 9 per cent. Every arrow was pointing in the wrong direction.
Under the previous management the strategy to arrest decline had been to add more staff in marketing, IT, human resources and support services, but that wasn't getting traction. Staff in head office alone had grown from 900 to 1250.
The most immediate concern for Machin is the excess inventory the stores are carrying. There is no overnight fix. Target will have to deeply discount this excess stock.
How did it lose track of its inventory position? Much is put down to what is termed shrinkage. This is all about stock unaccounted for in the supply chain - the product for which Target has been charged but it can't find - either missing, mismatched, booked incorrectly or even given away to charity.
It seems it bought more stock than needed and then managed to lose some along the way. It's an issue that poses questions about accounting and other processes.
Over the next six months the excess inventory will put pressure on Target's earnings.
It has been a costly exercise already, but its rectification, while painful, can be dealt with.
The longer-term challenge is structural. It's a question of whether this brand can find a market wedged between department store Myer and its own discount sibling Kmart.
To date, buyers and customers have not understood the mid-tier strategy, which has delivered too many products at the wrong price point or of the wrong quality.
Analysts have speculated that Target operates too many stores and that some might be better converted to Kmarts or even Coles.
But Machin seems to think the Target footprint is not the problem and speaks only of potential new formats.
It's as if Target has been lost in the Wesfarmers stable, which has concentrated its efforts on remaking its retail flagship, Coles.
No doubt these resources have been well spent but operating an underperforming Target forever is not an option either.
The Target revival has been billed as a five-year exercise but investors will want to see gains much sooner.