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During 1962 in Roseville, Minnesota the Dayton Company opened the first Target store for the purpose of providing customers with discounted prices. The main objective for this was to create an atmosphere that was different from the Dayton Company’s more upscale stores.
By using this concept, the Target store flourished ultimately leading to more stores opening across the United States. By 2000, the official name of all the Target stores become known as the Target Corporation In the Target Corporation case study, it compares Target’s business model and marketing strategies to other discounted retailers including Wal-Mart and Costco.
While at the same time, it analyzes Target’s capital budgeting process. Additionally, some of the other information given consist of Doug Scovanner being the CFO and having to analyze 5 different capital project requests (CPRs) to accept or reject in order to create the most value and growth for the Target Corporation and its shareholders. Some factors to consider with accepting each CPR are by evaluating the financial calculations, as well as customer demographics and brand awareness. With looking at these factors, it can be determined what the positives and negatives of each of these CPRs are. The names of the CPRs are Gopher Place, Whalen Court, The Barn, Goldie Square, and Stadium Remodel.
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What is Target’s capital-budgeting process? What is the key value driver for Target? What is management’s highest priority in their decision making process? Is it consistent with the company’s business and financial objectives?
Target’s Capital Budgeting Process
Every company has some sort of a capital budgeting process. Capital budgeting is the process through which companies decide which projects to accept or reject and which long-term investments to make. Capital budgeting includes the valuation of potential long-term projects, which create cash flows for several years. The decision whether to accept or reject a project depends on many factors. These factors are different for all companies and/or industries. The most common factors include the project’s Net Present Value (NPV), its Internal Rate of Return (IRR), and the cash flows that are created by the project over its life time. Target’s capital budgeting process is comprised of the Capital Expenditure Committee (CEC).
The top executives of Target make up the CEC. They meet monthly to evaluate all the Capital Project Requests (CPRs) that are greater than $100,000.The CEC can accept any CPR up to $50 million. However, the Board of Directors accept or reject the CPRs in excess of $50 million. There are several different types of CPRs that the CEC evaluates. These include rebuilding, remodeling, relocating and the closure of an existing store in order to build a new one. The CPRs that are usually rejected are the ones that have questionable costs, especially during the initial appraisal period. If a CPR happens to have a negative NPV, it does not mean that CEC automatically rejects the project. Before accepting or rejecting the CPR, the CEC reviews its strategic importance to the overall company and to other business units. Targets main financial objective is to maximize its profitability. It is evident that the level of competition is very serious between Target and some of its main competitors.
As stated above, these competitors include Wal-Mart and Costco. In order for Target to maximize profits, it is extremely important to make the best investment decisions after carefully evaluating each of the CPRs. The review process of the CPRs are very meticulous due to the fact that the CEC recognized that the capital investment could have a significant impact on the short and long-term profitability of the company. Therefore, making the decision of whether to accept or reject a CPR is not taken lightly. Precedents are usually considered before making a decision of whether or not to accept or reject a CPR.
For example, a CPR for remodeling would be excluded, if the initial investment is too high compared to other remodeling CPRs. Even though the NPV is positive for this particular CPR, it would still be rejected. This is mainly because it will develop a troublesome precedent for the preceding CPRs. Usually an agreement is reached for each CPR decision. On the contrary, the CEO typically makes the final decision when there are too many disagreements within the CEC. Generally, CPRs take between 12-24 months of development before being forwarded to the CEC for review. For the new store CPRs, a real-estate manager is assigned to a specific geographic region.
They are responsible from the start to finish of the project. They perform the research of the area in which the they think the new store should be established. Before the real-estate manager presents the CPR to the CEC, they collect data about the new store location including real-estate and tax incentives.
A significant amount of time and effort is necessary for the real-estate managers to find the most reasonable opportunities and to present it to the CEC in such a way that it increases the chances of the CPR being accepted.
