October 24, 2012
Target Sells Credit Cards, Cuts Debt, Focuses on Retailing
It was always a matter of time. Target, which has said for a couple of years that it wanted to sell its credit card business, did just that. The retailer announced yesterday that it had reached a deal to sell its portfolio to Toronto-Dominion Bank, AKA TD Bank.
The deal is seen as a win-win. Target gets cash based on its receivables ($5.9 billion) to help it reduce debt as it expands into Canada. TD, the sixth largest bank in North America, according to Reuters, expands it portfolio.
According to a Star Tribune report, David Strasser, an analyst with Janney Capital Management, estimates Target can cut as much as $250 million in its interest expenses by using proceeds from the sale to pay down debt.
Target has seen rapid adoption of its REDcard since the company began offering a five percent discount on all purchases from its stores and website with its use. Consumers who use the card when shopping at Target.com also receive free shipping.
"We have a great product," Terry Scully, Target’s president of financial and retail services, told the Star Tribune. "There’s no question the portfolio is performing well. But we are a retailer. [The credit card business] exists to support retail sales."
The deal will maintain the REDcard program as-is and enable Target to continue earning "a substantial portion of the profits" from its credit card portfolio.
BrainTrust
Recent Discussions
Discussion Questions
What is your reaction to Target’s decision to sell its credit card business? Will other retailers follow suit?
Poll
Target is a retailer and a very good one at that…so this is a postive move and not unlike a few other great companies have done in the past. It is back to retailing for Target, a good move.
A good call: The move strengthens Target’s balance sheet, and presumably still allows the REDcard marketing to drive overall sales. It also signifies Target’s interest in growing new concepts (C9, CityTarget) as well as further into Canada.
Target has found solid retail footing. It wants to expand into Canada and be Canada’s top retailer. The cash from the sale of its credit card business will help accelerate its Canadian strategy.
This is a rather unique Target play so I don’t see a lot of other retailers following suit.
Some would say it’s about time. Target was one of the last big retailers operating its own bank, serving as its own issuer. The integration of marketing and credit coupled with CRM and Loyalty gave Target a competitive advantage. It is easy to point to the short-term gain of using the proceeds to pay down debt, but the affinity to the card, its ability to drive traffic and lift key metrics cannot be emphasized enough in today’s competitive space.
TD Bank may indeed market the card just as effectively as Target Financial Services did for these many years, but this places an entirely new operating structure on the enterprise with change management becoming an essential component in the mix. I am certain the numbers added up and from a short term financial perspective it was the right move for Target. Some would say they should have sold to a CITI (as Sears did) or a GE Consumer Finance (as JCPenney did) many years ago when a private label portfolio was much more attractive.
Having worked with the folks at Target on their credit business, the power of the card is tremendous. Time now for TD Bank to step up and do it just as well, if not better.
There is a lot to be said about focusing on your “Core Business”.
It’s surprising that while they mention impact to debt and reduction in interest expenses, they mention nothing with respect to cash flow. This alone may be the largest gain for Target.
Will others follow suit? If they don’t, they likely should.
Target is not only expanding into Canada, they are re-making their stores throughout the chain. Their focus belongs there and not managing a credit card business.
It is a good move and one that indicates they understand where their collective heads belong.
It may be great financially, but the needs and motivations of a bank and those of a retailer are very different.
Under a single organization you can overcome these, but it is much harder between two companies.
For instance, a customer who increases their shopping because of the card but doesn’t make the credit arm any profit (and may even make a loss) can be seen as a high value and Loyal customer overall. This would be a good behavior to drive.
With credit under a separate business, the bank might not like this! This kind of dynamic can cause contention over time and might result in not only the customer losing out, but Target too.
Clearly there are other complex dynamics in play, but addressing this challenge should be a priority consideration.
The coalition of retailers contemplating operating a mobile payment system should take note. Even after launching a successful, single retailer focused and wholly owned traditional payment system, Target concluded they were better off not being in the payments processing business.
It’s a wise decision on Target’s part to sell the credit card business. They can now focus on the retail business and leave the credit card business to financial institutions. This deal extends the same benefits to the Target credit card holders (discounts, free shipping, etc.) as before, and this will encourage customer loyalty to continue. Other retailers that have their own credit card businesses could learn from Target’s decision.
This was a good decision. Target needs to focus on its core competency — retail. Target would do better to keep its vision and focus targeted on the retail issues which will allow it to continue to be a retail leader, now and in the future.
Does this mean we won’t be asked if we want to “save 10% today by applying…” at the cash wrap? THAT would be a nod to focusing on the shopper experience that builds the core business. Target made another smart move by letting bankers do the banking.
A couple years ago Target discontinued their Target Visa Card — went to their REDcard — good only at Target, but gave users a 5% discount up front. With net profits probably not even 5%, I wondered how long that could last and what the customer reaction might be if they had to end the discount program. Maybe this will be the way out that will minimize negative customer reaction.
The name for this is core competency. Many companies outsource function all the time. It not only frees up capital, but usually results in lower operating cost and less continual investment. The real trick is to have the outsourcer look and interface with customers the same way as before. This should have no impact on Target, as many retailers have done this in the past.
An expected, and excellent move. This removes the distraction from the core retail business and ensures that top leaders will make retail- and customer-based decisions vs. financial/banking-based decisions. Bravo!
Financially, this makes sense. Most proprietary cards are now managed by 3rd Party banks. Target’s relationship with the bank will prove the value of the deal over time. This adds an entirely new dynamic to MARCOM. What was an internal resource is now an external partnership.
Target CRM is retail best practice and competitive advantage. Something to protect. Gutsy decision.
Or as we say, “retail ain’t for sissies.”
I love getting rid of debt. Way to go Target!
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Target is a retailer and a very good one at that…so this is a postive move and not unlike a few other great companies have done in the past. It is back to retailing for Target, a good move.
A good call: The move strengthens Target’s balance sheet, and presumably still allows the REDcard marketing to drive overall sales. It also signifies Target’s interest in growing new concepts (C9, CityTarget) as well as further into Canada.
Target has found solid retail footing. It wants to expand into Canada and be Canada’s top retailer. The cash from the sale of its credit card business will help accelerate its Canadian strategy.
This is a rather unique Target play so I don’t see a lot of other retailers following suit.
Some would say it’s about time. Target was one of the last big retailers operating its own bank, serving as its own issuer. The integration of marketing and credit coupled with CRM and Loyalty gave Target a competitive advantage. It is easy to point to the short-term gain of using the proceeds to pay down debt, but the affinity to the card, its ability to drive traffic and lift key metrics cannot be emphasized enough in today’s competitive space.
TD Bank may indeed market the card just as effectively as Target Financial Services did for these many years, but this places an entirely new operating structure on the enterprise with change management becoming an essential component in the mix. I am certain the numbers added up and from a short term financial perspective it was the right move for Target. Some would say they should have sold to a CITI (as Sears did) or a GE Consumer Finance (as JCPenney did) many years ago when a private label portfolio was much more attractive.
Having worked with the folks at Target on their credit business, the power of the card is tremendous. Time now for TD Bank to step up and do it just as well, if not better.
There is a lot to be said about focusing on your “Core Business”.
It’s surprising that while they mention impact to debt and reduction in interest expenses, they mention nothing with respect to cash flow. This alone may be the largest gain for Target.
Will others follow suit? If they don’t, they likely should.
Target is not only expanding into Canada, they are re-making their stores throughout the chain. Their focus belongs there and not managing a credit card business.
It is a good move and one that indicates they understand where their collective heads belong.
It may be great financially, but the needs and motivations of a bank and those of a retailer are very different.
Under a single organization you can overcome these, but it is much harder between two companies.
For instance, a customer who increases their shopping because of the card but doesn’t make the credit arm any profit (and may even make a loss) can be seen as a high value and Loyal customer overall. This would be a good behavior to drive.
With credit under a separate business, the bank might not like this! This kind of dynamic can cause contention over time and might result in not only the customer losing out, but Target too.
Clearly there are other complex dynamics in play, but addressing this challenge should be a priority consideration.
The coalition of retailers contemplating operating a mobile payment system should take note. Even after launching a successful, single retailer focused and wholly owned traditional payment system, Target concluded they were better off not being in the payments processing business.
It’s a wise decision on Target’s part to sell the credit card business. They can now focus on the retail business and leave the credit card business to financial institutions. This deal extends the same benefits to the Target credit card holders (discounts, free shipping, etc.) as before, and this will encourage customer loyalty to continue. Other retailers that have their own credit card businesses could learn from Target’s decision.
This was a good decision. Target needs to focus on its core competency — retail. Target would do better to keep its vision and focus targeted on the retail issues which will allow it to continue to be a retail leader, now and in the future.
Does this mean we won’t be asked if we want to “save 10% today by applying…” at the cash wrap? THAT would be a nod to focusing on the shopper experience that builds the core business. Target made another smart move by letting bankers do the banking.
A couple years ago Target discontinued their Target Visa Card — went to their REDcard — good only at Target, but gave users a 5% discount up front. With net profits probably not even 5%, I wondered how long that could last and what the customer reaction might be if they had to end the discount program. Maybe this will be the way out that will minimize negative customer reaction.
The name for this is core competency. Many companies outsource function all the time. It not only frees up capital, but usually results in lower operating cost and less continual investment. The real trick is to have the outsourcer look and interface with customers the same way as before. This should have no impact on Target, as many retailers have done this in the past.
An expected, and excellent move. This removes the distraction from the core retail business and ensures that top leaders will make retail- and customer-based decisions vs. financial/banking-based decisions. Bravo!
Financially, this makes sense. Most proprietary cards are now managed by 3rd Party banks. Target’s relationship with the bank will prove the value of the deal over time. This adds an entirely new dynamic to MARCOM. What was an internal resource is now an external partnership.
Target CRM is retail best practice and competitive advantage. Something to protect. Gutsy decision.
Or as we say, “retail ain’t for sissies.”
I love getting rid of debt. Way to go Target!