Target is a quandary when it comes to food. Its “Cheap Chic” approach that led it to be characterized by shoppers across America as “Tarjey” in a mock French pronunciation was extraordinarily successful right up to the current recession. It was not, however, instantly obvious how such a positioning could be applied to food and certainly not fresh produce or perishables.
Sure Target could hire famed architect Michael Graves to design a line of stylish houseware items that would look stylish and still sell for a discount price, but how would that strategy translate to selling bananas?
And, of course, although Target has Supercenters and, as we mentioned here, has dipped its toe into building the infrastructure that might one day lead to self-distribution, it has been notably slow in converting discount stores to supercenters and, in general, slow to build the supercenter division.
Now the word is out that Target is expanding the amount of food — including some perishables — it will sell in some of its standard discount stores. The Minneapolis/St. Paul Business Journalheadlined its article, Target to Add ‘PFresh’ Grocery Concept at 350 Stores:
Target Corp. plans to expand 350 stores in 2010 to accommodate its new “PFresh” grocery concept, the discount retailer announced as part of Tuesday’s third-quarter earnings announcement.
The Minneapolis-based retailer first tested the new format last year at its stores in downtown Minneapolis and Minnetonka. It now has 108 “PFresh” stores.
Target has long maintained sizable groceries at its SuperTarget stores, but the latest effort revolves around its smaller, general-merchandise stores.
The “PFresh” stores carry 50 to 200 percent more food products than traditional general-merchandise stores, including more produce, meats and bakery items. Those stores have roughly 1,500 square feet of retail space dedicated to fresh food, still substantially less than at the company’s SuperTarget stores.
Moving forward, Target said it will introduce new PFresh locations to existing stores in “high-priority markets.” The company didn’t specify those markets.
The retailer said it plans to invest $1 billion in the widespread rollout of PFresh, and in the construction of 12 new stores. In addition to the 350 PFresh operations to debut next year, Target will add an unspecified number of the fresh-grocery amenities in 2011 and possibly 2012.
The “P” in PFresh stands for prototype and some are claiming that these stores will carry 60% of the food SKU count and 90% of the food categories of a Target supercenter.
We think the article is wrong when it talks about expanding the stores, it is just the food section in the stores that is being expanded. In any case Target executives obviously felt the results at the first 108 stores were encouraging enough to expand the program and, ultimately, these executives talk about running the program in many more Target discount stores.
How significant is this effort — for Target and for the broader industry? Well, we quickly got input from three well known retailers. One questioned Target’s very commitment to food:
Essentially, I have always felt, and continue to feel, that Target has yet to determine a “food strategy”. The “P-Fresh” format is said to have about 65% to 80% of the assortment that is in a Super Target, which is a bit of a stretch given that they devote limited space to this in a discount store.
But then again, the assortment in a Super Target is not very robust in the first place.
Essentially, I view this as being similar to the old “Pantry” format in a Wal-Mart Discount Store. But the difference is that Wal-Mart committed itself to food, and essentially, over time, remade any Wal-Mart store of any significance a Supercenter.
Target has yet to determine what it wants to be with regards to food. And keep in mind that they don’t self-distribute, so they are challenged right off the bat with being competitive in price and assortment.
That said, even a small food revenue stream in 350 stores adds up. And certainly a limited assortment that lacks any depth won’t put a strain on their inventory costs.
I don’t think it will appreciably add “frequency of visits” to their units nor will it put much pressure on their margins. It should add somewhat to their average ticket, but that’s about it.
Bottom line, in my view, remains that top executives at Target do not really want to be in the food business but were forced to move in that direction by their shareholders when Wal-Mart made its aggressive move into food. Even their Super Targets are weak as they are “caught in the middle” in trying to be more “upscale” and at the same time, represent a “value proposition”. “Target-chic” never panned out in food and still doesn’t in this roll out.
Another well respected retailer saw more upside for Target in the rollout:
The effort is a good interim attempt at grocery while they continue to expand their super center concept. It will help in their DC expansion to have some mass until the super center network is fully in place.
As I understand it, these are somewhat similar to smaller format stores such as Tesco’s Fresh & Easy, and Wal-Mart’s Marketside concepts but placed in the confines of a traditional “big box” discount store.
With Wal-Mart having slowed down its supercenter expansion and Tesco electing not to enter the market with super centers, the mega-retailers seem to have come to the conclusion that a grocery store inside the bigger box may not be hitting the mark on sales and profit. But the results that they have experienced seem to be enticing them to try a different tack.
One effort was to try these “small format” stores. Yet as we have seen in Phoenix, simply offering a smaller store (Fresh & Easy or Marketside) does not necessarily equate to a flood of business — and certainly not a flood of profits.
Smaller stores require a completely different strategy than do big box concepts. In a smaller store you actually have to (gasp…) interact with customers and offer the correct value equation for that particular market. So the metrics of the entire P&L will be different than those of the big box. The smaller stores will need to be supplied more often, culled more often, cleaned better, etc, etc.
This “Corner Store” mindset may not be immediately embraced by the strategists at Corporate, and certainly the General Merchandise mindset may be the immediate downfall of the program.
Consumers who are upset by something at a new concept store will probably be more likely to return to their old shopping habits pretty quickly. So there will really need to be something offered that is unique… or as Jay Abraham and the other marketing gurus call it… a “USP” — [unique selling proposition]. Simply offering a price, a “me too” or being linked to Wal-Mart or Tesco or, for that matter, Target, most likely will not be enough.
So since super centers are more and more difficult to site in locations where they will generate a sufficient return on investment, and since “small format” stores are too difficult for the corporate mentality to make work — Target is trying an in-between tack
Target is an innovative retailer that seems to be pretty adaptive. There is word out that Target intends to open a small format store.
In a large city like New York or San Francisco, where consumers can live with no cars, it may work if they can get things executed properly. In a city that has mobile consumers and a supermarket on every corner (like Denver, Phoenix, Orlando, Dallas, Los Angeles, etc.) it will be a more difficult concept to sell.
In my mind, nobody has executed on these small format stores very well so far except a few independent grocery retailers. Smart/local entrepreneurs will run circles around centrally controlled mega-retailers every day of the week.
As far as putting small grocery and perishable sections in discount stores, they will sell some volume just because any sales times 350 starts to add up. But the volume will be small enough to not depress overall store margins very much and they will not likely be a food destination in many places, not with all the competitors out there.
The numbers don’t lie but there may be a question of how they are being interpreted. The very fact that Target executives propose to increase the number of units equipped with this concept indicates they think it is a success. We have our doubts that, properly figured, it is really a winner.
Target has a lot of customers and so anything they put out will sell a lot. That is not a sufficient reason to add a food section. If McDonald’s added hot dogs to its menu tomorrow, then tomorrow McDonald’s would become the biggest seller of hot dogs in the world.
Yet the issue is more complex. Each item adds to menu complexity and slows down service. Will hot dogs attract a new customer? If hot dog sales cannibalize hamburger sales, will profits drop? All these questions and more must be considered. The fact that McDonald’s does not sell hot dogs gives us some insight as to how these assessments have worked out.
Discount stores always sold some food; whether selling perishables makes a lot of sense is unclear.
Will consumers visit a discount store more frequently because it sells a few perishable items? We have our doubts.
Will the food category generate higher margins than general merchandise? Typically not.
Will the perishables and, especially, the fresh produce be maintained in manner that it will always enhance the reputation of the store for cleanliness and freshness? We have severe doubts.
For the produce industry, it is, at least theoretically, desirable to have produce in more venues, although we need to be wary of weakening the venues that are more likely to support new products, do innovative merchandising, etc.
Still, another venue means another opportunity for an impulse sale. So for producers, this means more sales venues, more customers — this is all good.
For Target, though, unless the goal is to build up food volume to ease transition to a self-distribution model off of which many more super centers will be built — as one of our retail commentators suggests — the move to open small superettes inside a discount store doesn’t seem likely to either attract more customer visits or enhance profits, which means it is not clear it is the best strategy.
Still, we wish the folks at Target good luck and are glad the industry has an expanded venue to sell to.