Wednesday, September 14, 2016

The end of Target's school charity program: demographic change or just bad management?

Addendum: I wrote this unaware of the fact that Target sold its credit card business a few years ago. That was insane too I think. But I gave up looking at Target about the same time I gave up looking at most retail. When I decided that I was perennially hopeless at analysing retail. The credit card story is however utterly real. Selling cards was just another piece of idiocy. The core work in this post was done in 2001... 15 years ago.

Target and Wal Mart once had very similar businesses - both discounters targeting similar demographics - both rolling across America.

When Wal Mart was in one town Target would just open in the next town. They were similar businesses but they did not compete.

Eventually America was saturated - you could not open a Wal Mart or a Target (or a K-Mart for that matter) without competing with an existing big-box discounter.

And then - and only then - did it become clear to anyone that cared to look that Wal Mart had lower operating costs and that to try and compete with them was a losers game.


K-Mart tried to compete with Wal Mart. It went to Chapter 11 (and will probably file bankruptcy again someday).

Target decided the way to co-exist with Wal Mart was to differentiate. So they did. They made the aisles wider and installed better lighting. That cost money but the stores were more pleasant.

Where Target held similar stock to Wal Mart they priced matched. But Target tried not to hold similar stock - it went up market.

The "target market" was middle-income but strained - classically a middle-income family with children, a wife who works less than she did and expenses that had gone up somewhat. They offered stuff for those people at a quality point above Wal Mart but still with a "discounter" ethos.

The average household income of a family that shopped at Target but not at Wal Mart was about 1.7 times the average household income of a family that shopped at Wal Mart but not at Target.

Target became "Targ├ęt" - a sort of aspirational up-market discounter.


I remember going to Target as a young professional about the time we had our first child. Children's stuff was displayed prominently and it was at a quality point that I was happy to buy. Target's shopping experience matched my demographic whereas I found (and still find) Wal Mart perplexing - extremely cheap but not particularly relevant to me.


I got interested in this because I was interested in Target's credit card.

The card was amazingly profitable - but to explain why I need to explain what makes a profitable credit card.

The average American has several credit cards in his or her wallet. There is one that is used every day at the "front of wallet". There is one at the back of the wallet used in an emergency.

The one at the front of wallet gets all the spend, a fair bit of rolling balance and is an essential part of the customer's life. It is usually very profitable.

The one at the back of the wallet doesn't get used much and is likely to be used if and only if the customer is financially stressed.

The one at the back of the wallet gets none of the daily revenue - but takes just as much credit risk. Statistically that card is likely a loser.

So credit card issuers want to get to the front of the wallet.

You also want the customer to roll a balance (ideally $2000-$5000) and to pay interest on that balance. Higher balances are often (not always) associated with genuinely financially stressed people and so may be less profitable (due to higher defaults).

Finally you want the people to feel really bad if they default. So you want people with a middle class aspiration and a deep fear of bankruptcy. In an ideal world it will be someone like a junior accountant with a young family. The junior accountant would be petrified of a record of bankruptcy - but they may meet the financially-stressed-with-young-kids demographic that Target was aiming for.

Credit cards have lots of tricks to move themselves to the "front of wallet" position. By far the most important trick is airline miles. Many an upper-income person shops preferentially on the card that gives them the best airline miles deal.

But for my financially stressed family airline miles are of only marginal benefits. Holidays are camping trips in the car (and Target will sell the family camping gear).

Whatever: Target needs another pitch to get to the front of the wallet.

And that pitch was a charity program. Target would give an education institution institution of your choice a donation equal to 1% of your spend. That institution was usually your children's school. [The old terms of the card can be found here.]

Combining credit cards with giving to your kid's school reduces the guilt of shopping on credit (or even rolling big balances). It moves the card to the front of wallet.


All very well - so Target now has accurately got to the desired position - the front-of-wallet position on a really nice demographic group.

But the card was profitable beyond even that. This card had more rolling money and lower default than any equivalent card I had ever seen. Obviously you want people to roll $4000 but the people who can't pay off their credit card are risky credits - so rolling balances and higher default rates are correlated.

But Target managed to achieve much better default rates than expected given their high rolling balances.

I puzzled over this for a while. I even asked some customers.

Strangely some customers believed something patently not true. At least some of them believed that if they defaulted on the card their children's school would find out.

The penny dropped. This was an absurdly profitable business. It gave money to charity (which is good) but it was brilliantly manipulative at the same time.

My respect for Target management (then very high) grew higher still.

This analysis was done in 2001 and my child was under 2 years old.


The occasion I had to think about Target's credit card was when Bill Ackman was trying to get Target to sell or spin out their credit card business. This was in 2009 and Mr Ackman was Target's biggest shareholder.

Target would not do it. They would not sell their credit card business.

Bill Ackman cried.

Actual tears.

And Target didn't explain why they wouldn't do what Bill said.

And I thought to myself of course they won't explain that. The whole program is too manipulative. But to sell it is to lose lots of value. This was a hugely good credit card business but it had to be associated with Target's demographic.

To explain the trick however would take some of the magic away.

So I kept my theory to myself.


And now I discover - much to my surprise - that Target has terminated their education charity program. Sure they gave a billion dollars.

And sure there are better charitable targets than the schools of middle-income kids.

But it struck me that Target is ruining or has ruined a very good thing.

The shift in Target's charity goals is to wellness related stuff (fairly loosely defined). Maybe that change is demographic.

But I suspect that it is just bad management. Maybe Target management imbibed some of that Ackman led Wall Street advice after all.

Thoughts anyone?



Dan Davies said...

The one thing you never want to hear your marketing people say...

"We just want to continue to innovate."

She almost literally says "it isn't broke but we wanted to fix it". Someone's building their own career here and decided that they weren't going to get to the top by competent administration of someone else's iconic program.

Rasiing_the_base said...

Have you checked if the default rates have changed? ie have people stopped believing their kids' schools will find out or stopped caring?

GlobalTrader said...

Respecting management that cheated in a proxy contest and now are under criminal investigation. classic hempton

Wilber said...

It's an interesting hypothesis, although it is not clear to me why customers would think their school would find out about their default. But if they do, do you think Target just lucked into this happy arrangement, which curbs default rates, or did they somehow subtly encourage this misconception? And if this is the case, why kill the goose that lays the golden eggs? At least they should sell it, as Ackman suggests, not just kill it.

John Hempton said...

Hey Global Trader - you proved yourself unable to read. The respect for management dated 2001.

Different time, different management.

exuberance said...

I was delighted to learn about the number of customers who use the card to get the 5% back and then walk over to the service desk and pay off the balance. The people at the Service Desk so have told/confirmed this seem delighted as well.

I wonder how much Target (and alternatives) do to get the schools to sell the program. Who knows, maybe Target dropped the ball on that side first.

a dog said...

Broad and unsubstantiated attempt at a thesis and response here: Isn't it possible that the entire US consumer-credit industry has been overextended for a while and is now starting to gradually wilt in from the edges (lending club)?

Casual Sophist said...

I'm sure you're aware of this, but they sold their receivables portfolio to TD Bank Group in 2012 along with the underwriting and and risk management rights (

I figured that the recent changes probably had something to do with the internal dynamics of that relationship rather than a specific strategic change? Though that's pure speculation on my part.

Anonymous said...

So your theory is that you know Target's credit card dynamics better than they do (based upon a couple of conversations) and therefore their decision to change the underlying driver of its success shows they don't understand it and will ultimately hurt it? Im willing to bet they know the motivations and drivers better than anyone and wouldn't intentionally do anything that would kill the golden goose.

Anonymous said...

I think the most likely scenario is that this is a sizeable profitability lever that is too good to leave unpulled. You see a lot of retailers, and non-retailers like airlines, devalue rewards points and I see this as a similar move. Target is already giving away 5% discount for Target card usage in-store, and I personally would view the charitable donation as a secondary value proposition anyways -- thinking this may be how they rationalize removing the benefit.

Anonymous said...

John, Didn't TGT sell their credit card business to TD Bank in 2013?

Anonymous said...

I find the demographic case pretty reasonable. The linked article quotes a Target source that only 10% of cardholders enrolled in the program.

That number is heading ever lower.

The next generation of Target customers just find having kids too inconvenient.


Anonymous said...

Another post devoted to Ackman bashing [using the lame pretext of examining Target's CC program]? You are like the guy that got dump by his girlfriend in 7th grade and is whining about it 30 years later. At some point don't you just, like, move on with your life? It's a seriously unhealthy obsession you've developed. Please get help soon.

Anonymous said...

Another post as a pretext for Ackman bashing? At some point it may prove useful for your general mental and physical well being to move on with your life. You were right about VRX and HLF - there, you get the credit publicly...and yes Ack was a big meanie to insult you to your clients. Satisfied?

Your Ackman obsession is all getting a wee bit boring at this point (hint - your blog used to be really entertaining - go back and read your early posts - now it's become insufferable, like the rantings of a bitter old man).

Anonymous said...

I must say I find Target a possibly compelling short. I really don't see its point of differentiation in the market. It lacks Wal-Marts low costs so cannot compete on price. It has a sizable food business but it isn't compelling compared to Wal-Mart/Costco/Kroger. It's electronics is an after thought. It's apparel business isn't that price competitive in a world where TJ Maxx and H&M are gaining share. It's home business is OK but not a huge driver. It's online business isn't compelling either. It is probably getting some customers who may have been going to Kmart as Kmarts continue to close, so maybe that helps Target next year.

They are at best OK in a number of product categories but compelling in few, and their only market is a strugglin upper lower middle class customer who wants to say 'times are tough but at least I'm not shopping at Wal Mart!".which isn't enough. Not going away but I see this a slowly leaking balloon.

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