The future of embattled department store Target became a little clearer on Monday when parent company Wesfarmers revealed it would be shrinking the retail chain.

It was part of what Wesfarmers calls its new “brand agnostic” approach, which could see unprofitable Target stores across Australia converted into more profitable Kmart stores.

In a media conference on Monday, Wesfarmers managing director Rob Scott revealed lower-than-expected sales at Target had forced the company to record a “non-cash impairment” of $300 million – which, for any non-accountants who might be reading, is not a good thing.

To counter the bad news, Mr Scott pointed to Kmart’s strong performance. He said the company would be “doubling down on the business where we have the biggest point of difference with customers, and that is Kmart”.

He went on: “Target over time will ultimately become a more focused retailer, potentially with a smaller addressable market.”

From now on, he said Kmart and Target’s financial results would be reported as one, but was quick to quash any suggestion Kmart and Target might merge.

His words seemed to suggest that Target would be selling a smaller range of products to a smaller number of customers in a smaller number of outlets, while Kmart would be growing.

And where Target was no longer viable, it would likely become a Kmart.

So far two Target stores have converted to Kmarts – in the Melbourne suburbs of Broadmeadows and Templestowe.

But another conversion is already in the pipeline at Victoria Park in Western Australia, and The New Daily understands more such conversions are on the horizon.

None are planned in the opposite direction, ie Kmart to Target.

Target’s sales slump

Just six years ago there was nothing between Target and Kmart.

In 2011, Target’s sales came in at $3.8 billion, while Kmart were just above that, at $4 billion.

But fast forward to 2017, and Target’s sales had fallen to $2.95 billion. Kmart, meanwhile, had surged to $5.58 billion.

Despite Kmart’s huge outperformance, it has fewer stores – just 220 across Australia, to Target’s 303.

Nathan Cloutman, senior industry analyst at IBISWorld, said increased competition in the retail market and lower consumer spending had worked in Kmart’s favour because it serves the bottom end of the market.

Target, which traditionally serves the mid-market, suffered from this trend. In an attempt to adapt to the changing conditions, it started selling cheaper products.

“This market positioning has led to Target being in direct competition with Wesfarmers’ other department store, Kmart,” Mr Cloutman said.

“Consequently, Kmart has achieved solid growth while demand for Target has dwindled.”

Mr Cloutman added that the arrival of Amazon in Australia would put extra pressure on Target over the next five years. He said it was mid-market retailers like Target that tended to be hardest hit by the rise of online retail.

So why don’t they just merge?

Mr Scott gave two reasons for not merging Target and Kmart.

First, doing so would mean Wesfarmers would “lose a lot of the flexibility around what we do with Target”.

What he meant by that was not entirely clear, but it seemed to suggest they hadn’t finally decided upon Target’s future.

But his second reason was much clearer: “I think it would be quite destabilising for the Kmart business, and does put at risk the clarity of focus that the Kmart team has.”

In other words, they’re onto a very good thing with Kmart, and they don’t want to jeopardise that by merging with a failing retailer – even if that retailer is owned by the same parent company.