Leveraging loyalty is TGT trump card

A 300-basis-point same-store-sales lift could be in the cards for Target if it is able to replicate the success the company is believed to have achieved in the test market of Kansas City. That’s according to William Blair & Co. analyst Mark Miller who believes the retailer’s 5% loyalty card program set to role out chain wide in mid-October promises to be a retail game-changer that will impact sales results well beyond the company’s guidance of a 1% in the fourth quarter and 1% to 2% in 2011. He disclosed his expectations for the new loyalty program in a research note following a meeting with Target CFO Doug Scovanner.

According to Miller, “We estimate comp-store sales lift in the Kansas City test market has exceeded 300 basis points. We understand that credit penetration has increased from 5% to 9% of sales, shopping frequency has risen by 50% when customers get the card, and about half of the incremental sales from the loyalty card program are on the Target debit card.”

Target last year began experimenting with the loyalty program, which provides shoppers a 5% savings, and the fact it has opted to pursue a national rollout without further testing is one indicator of Target’s eagerness to capitalize on the desirable effects of the initiative. Early results suggest the program has Target’s best shoppers spending even more, but potential benefits also await as Target persuades its less loyal customers to shop more frequently and spend more money.

“It will be intriguing to see whether Target is able to connect with a higher percentage of its customer base with the loyalty program over time, and also whether it might be able to draw new customers into the store,” according to Miller.

It could depend on how Target opts to communicate the benefits to customers. Today, its prices are about 3% higher than Walmart’s, but the company’s prices would be lower than Walmart’s for those who participate in the Target loyalty program, according to Miller.