Target: Groceries

Discount merchandiser adding food to capture traffic from Wal-Mart, other retailers

MINNEAPOLIS -- Target Corp., under pressure from an activist shareholder, is using fresh foods and other recession-proof groceries as the cornerstone of a plan to quiet criticism and reverse a slide in sales, according to The Wall Street Journal. The Minneapolis-based retailer is pinning its rebound hopes on transforming a corner of its discount department stores into a grocery store to take on the likes of Wal-Mart and other food retailers.

Target is rolling out the new concept to 100 new and remodeled stores this year, said the report; it may add "mini-groceries" [image-nocss] at most of its 1,300 Target stores.

Though in the past Target has distanced itself from down-market Wal-Mart, the retailer is now moving closer to the Wal-Mart mold: selling more food and emphasizing low prices. It is recasting its ads to focus on bargains. Last month, it began a pilot program to match the prices of competitors in three regions of the country. The program could go nationwide by fall, it said.

An expanded grocery offering should boost sales by giving customers a reason to increase their visits to Target, Target CEO Gregg Steinhafel told the newspaper. It also increases the "one-stop" potential for the chain. Sales at stores open at least a year fell 2.9% last year. Food draws customers in good times and bad, he said. "That's the power of this. This concept is not cyclical."

Target has tried to emphasize food previously. In 1995, it opened the first of 245 SuperTargets, which include a full array of groceries. But it has been reluctant to rapidly add to those 175,000-square-foot stores, unable to find enough profitable locations, the report said. Its sales last year of groceries, including pharmacy and beauty products, accounted for 37% of revenue compared with 59% of Wal-Mart's U.S. department-store sales.

The new mini-grocery stores inside existing discount department stores have increased food sales 50% at test stores, and lifted sales of other items as well, Steinhafel added.

The grocery area carries a narrow selection of products from 90% of the food categories found in a larger grocery store, the company said. To speed up check out, Target has removed the need to weigh or bag produce. Even individual potatoes come wrapped in plastic and stamped with a bar code.

Moving deeper into grocery sales is not a safe bet for Target, the Journal said. Food is a low profit-margin business that depends on high sales volumes, and Target has boasted relatively healthy gross-profit margins of 30%, compared with grocery-heavy Wal-Mart Stores' 24%.

Investor activist William Ackman chided the company for failing to cope with the economic downturn, the report said. "Target is not Gucci. It should be a business that does well even in tough economic times," he told about 1,300 people who listened in person or via the Web. His Pershing Square Capital Management hedge fund is Target's sixth-largest shareholder and has nominated a dissident slate of five nominees for the company's May 28 shareholder meeting.

Ackman said he thinks his board nominee, Jim Donald, who led and expanded Wal-Mart's grocery business in the early 1990s, could help Target do the same. He told the paper that he is not yet familiar enough with Target to make suggestions. But he added that he was surprised that the retailer has not opened more of its SuperTargets to compete with Wal-Mart Supercenters.

Steinhafel said he has no wish to try to be like Wal-Mart, which he characterizes as "a grocer that happens to also sell general merchandise." He acknowledges that Target must overcome perceptions that Target is more expensive than other grocery stores.

Target will continue to add more SuperTarget stores, but Steinhafel calls the new mini-grocery effort a "high-impact, low-cost" venture.

Minneapolis-based Target has 1,699 stores in 49 states.

Other traditionally nonfood retailers are getting or have gotten into the grocery and convenience retailing game. Last week, Toys R Us rolled out the R Market section of its stores, featuring snacks, candy, beverages, diapers and other "quick-pickup" goods. (Click here for CSP Daily News coverage.)

And Home Depot has been testing c-store/gas stations at several locations over the past few years, although as of mid-2008, it had not moved forward in support of the concept. (Click here for coverage.)