Q1) Target's marketing team recently submitted a proposal to the CEO Brian Cornell to authorize a budget of $900 million to redesign and relaunch its loyalty program. More and more Target customers are now shopping online and these online shoppers prefer Amazon. To improve Target customers' loyalty to the store and thus increase their share of wallet, the marketing team wants to introduce a revamped loyalty program with an attractive cashback provision as well as exciting prizes that can be redeemed with accumulated points. They claim that this will encourage Target shoppers to spend more money at Target, both in brick-and-mortar stores as well as online.

Target had a revenue of $75.3 million in the US in 2019. The financial statement for the US business for the last year is shown below.

2019 Financials for US market (All values in USD Millions)

Sales/Revenue

$ 75,356

Cost of Goods Sold (COGS)

$ 55,523

Depreciation & Amortization Expense

$ 2,474

SG&A Expense

$ 15,631

EBIT

$ 4,202

The retail chain has 1860 stores in the US market. About 100 million householdsabout 78% of the US householdsalready shop at Target. The marketing team plans to increase the purchase frequency and basket sizes of some less loyal households through the new loyalty program. Based on past shopping data, the marketing team divided Target households into two groups, high-loyalty households and low-loyalty households. Forty percent of the households were categorized as high-loyalty households with an average 5.2 trips per month and an average spend of $96.15 per trip. The remaining 60 percent of the households were categorized as low-loyalty households with an average 1.6 trips per month and an average spend of $52 per trip. Using market research, the marketing team estimated that they would be able to shift about four hundred thousand customers from the low-loyalty category to the high-loyalty category with the proposed $900 million marketing spend in one year.

a) How many customers will each Target store have to convert from the low-loyalty category to high-loyalty category to break even on the proposed investment in the loyalty program?

b) Target has a policy that all marketing investments should break even in one year. Based on the marketing team's conversion estimates, should Brian Cornell approve the investment in the loyalty program?