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Target Sets Its Sights on On-Site Processing-- Finally



Kodak and Fuji Make Major Plays for Last Great Photofinishing Account

Ask any student in Retailing 101 to name the largest retailer in the U.S. (and the world) and, without a nanosecond of hesitation, you'll get the response: Wal-Mart.

Ask anyone in the photo industry who is the largest photofinisher in the U.S. and you get the same answer, Wal-Mart.

Ask who is Wal-Mart's biggest competitor in the discount sector and the chorus will sing out: Target.

Jerry Lansky

Ask where Target is ranked on the scale of photofinishing and all in the business will agree: well below the radar.

Why should a retailer with Target's successful track record be so lackadaisical about a category that is claimed to be one of Wal-Mart's most profitable? Because Target hasn't been in the photofinishing business. Yes, they offer on-site processing in their stores, but these are essentially leased departments run by Kodak employees using Kodak-owned equipment that is serviced by Kodak's field staff and using Kodak consumables. Any merchandising of the department was half-hearted and without impact. All Target supplied was the floor space and utilities; little or none of its renowned merchandising expertise.

Was the deal a good one? For Target, yes, Kodak no. I understand that when the deal was cut some years ago by Peter Fitzgerald, then Qualex president, it was on the basis that Kodak would "guarantee" a profit to Target. I have been told by a source that Target received a payment of 10% of the GROSS sale. Considering that Target's only contribution was a few hundred square feet of floor space, utilities and about 50-cubic feet of storage space, this was a sweet deal for Target.

At the time, a Target individual said it would offer digital Picture Maker services in each store and two-night drop box service with Qualex, but would not have on-site film processing.

In November, the other shoe dropped. As required, Kodak filed a Form 8-K with the SEC that read, in part, as follows: "On November 17, …Kodak committed to a plan to exit from the service business of staffing and managing retail on-site processing lab operations for a customer (Italics: mine)… These actions are expected to be completed by October 2005… The company will pay approximately $3 million in severance costs to employees and will incur other exit costs amounting to approximately $17 million."

Who was this "a customer," anyway? Of course, it was Target. For their own reasons Target would not let Kodak include their name in the filing and have kept up a veil of secrecy by not returning telephone calls looking for additional information. Likewise, Kodak, usually very cooperative with information, has not been forthcoming at the request of its customer, Target. As a result, much of my information has come from "sources."

The bottom line to the announcement is that Kodak would no longer be running a "leased department" operation at the 1,313 Target stores in the U.S. The thousands of employees dedicated to the program and who ran the on-site operations within Target would be terminated by Kodak.

Competition has been fierce between Kodak and Fuji over a lucrative photofinishing account with Target. A plan to equip Targets with on-site minilabs rivals only Wal-Mart's in size and scope.

All sorts of implications here: Does Kodak lose out on the paper and chemistry consumables used in this large Target chain? Does Target just fold the photo category and go on to other things? If not, who will replace Kodak's service and Gretag's labs? Will its own in-house photo operation wake up the Target management to the category and create a more intense competition as they chase Wal-Mart and everyone else for the share of the business that they would likely expect?

Some Answers and Some Speculation

It appears as though Target has been planning for the breakup for the past year and have been talking to all equipment suppliers about a program that would replace the Kodak business model. So, yes, Target wants to be a player.

An account of this importance doesn't come along that frequently and you can bet that the top guy for every manufacturer polished his shoes and turned off the cell phone for this presentation. This was a plum.

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