) is one of the biggest retailers in the U.S. and offers a variety
of products such as hardlines, apparel & accessories, household
essentials, home furnishing, and foot & pet supplies. However,
it still trails its competitors in groceries, which is an essential
product category due to its high degree of immunity to
macroeconomic fluctuations. Although the company began its
operations in the 1960s, it did not introduce groceries until
The share of groceries in Target's overall revenues, although
still low, has grown steadily over the past few years due to
enhanced focus and the launch of P-Fresh store remodel program. We
believe that the figure will continue to rise with the expansion of
CityTarget stores (more groceries) and grocery-centered marketing
campaigns. However, the company may find it difficult to match the
prices of Wal-Mart, the largest and the cheapest grocer in the
country. Besides Wal-Mart's smaller format stores, Target will have
to compete against a strong network of dollar stores in urban
See our complete analysis for Target
Why Are Groceries Important?
Consumer spending on groceries can be classified as
non-discretionary as they fall under people's basic necessities.
Grocery sales are less correlated to macroeconomic factors. This is
evident from the fact that during the 2008-2009 recession, consumer
spending on food and beverages remained more or less stable,
according to economic data provided by the Bureau of Economic
Groceries are also important for the retailers because customers
are 10 times more likely to visit a grocery store than a pharmacy
or a general retail store. This improves cross sell and increases
the overall basket size for the retailers. For instance,
Target stores with partial-line groceries in them had higher
overall sales than stores without them. There is no doubt that
groceries are an indispensable product category for big retailers
such as Target and Wal-Mart.
How Has Target's Grocery Business Evolved?
About 15-20 years ago, Target was not known for grocery items as
it offered only a few products such as milk, chips and Hot Pockets.
However, with the success of Wal-Mart's Supercenters, the retailer
also started adding groceries to its aisles as it opened its first
Super Target store in 1995. This store included a grocery section
with fresh produce, dairy and meat. Same year, the company
also launched an exclusive line of groceries under the name "Archer
Farms" which offered staples such as bread, milk, pasta and bottled
As groceries were never the primary focus for Target, the
category's share in the company's overall revenues has remained
low. However, there has been some progress in the recent years as
the company realized the importance of this product category and
started making some efforts on this front. Back in 2009, groceries
contributed about 16% to Target's overall revenues. The figure
steadily increased to 20% by 2012, and stood at 21% for the first
half of 2013.
What Is Target Doing For Its Grocery Business?
Target launched its "P-Fresh" store remodel program in 2009
aimed at expanding its groceries business. P-Fresh is an
expanded fresh food layout located in a highly visible location
within Target's stores which displays frozen and dairy products,
perishable items, snacks, beverages and other grocery items. With
this layout, the grocery offerings in the stores went up by about
40%. Additionally, it led to an increase of 90% in the food
category and 60% in SKUs available at the stores. ((
Target To Expand P-Fresh To 350 Stores in 2010
, Supermarket News, Nov 18 2009)) This format was successful as it
boosted Target's comparable store sales growth and revenues from
groceries in 2011. In the beginning of 2013, about 1,100 Target
stores had the P-Fresh food section and about 250 stores had a full
line of grocery items.
Target is looking to promote itself as a grocery retailer with
appealing and unconventional marketing campaigns. The retailer
launched a few ads earlier this year that tried to associate its
groceries with fashion and glamor. For instance, one of the ads
features a model standing besides cake mix boxes and blueberry
muffins exploding in different colors. Also, the retailer is
expanding its smaller format CityTarget stores in densely populated
urban areas to continue its expansion in the U.S. and compete with
dollar stores. Since dollar stores mainly offer grocery products at
discounted prices, Target will have to add more grocery items to
its smaller format stores in order to stay competitive.
What Threats Does Target Face?
The main threat that Target faces for its grocery business is
competition from Wal-Mart. The retail giant earns about 55% of its
revenues from groceries and is the biggest grocer in the U.S. It
will not be easy for Target to attract customers as its products
are slightly expensive than Wal-Mart's. According to a semi-annual
pricing study by Kantar Retail, a basket of goods at Wal-Mart was
about 4% cheaper than a similar basket at Target. Target relies on
specific and occasional discounts rather than providing low prices
everyday, which makes it difficult for the retailer to compete with
Moreover, Target's CityTarget stores are expanding slowly while
Wal-Mart is aggressively opening its smaller format Express stores.
In the last two years, Target has only opened 7 CityTarget stores
compared to 76 small format stores opened by Wal-Mart. The company
may need to ramp up its expansion. Apart from Wal-Mart, it faces
stiff competition from dollar stores. These stores are essentially
very small discount stores that are conveniently located in low
income neighborhoods. With aggressive expansion, dollar stores
such as Family Dollar, Dollar Tree, and Dollar General have taken
away some share in the groceries market from traditional grocery
stores and drug stores.
Our price estimate for Target stands at $76
, implying a premium of near 20% to the market price.
How a Company's Products Impact its Stock Price at