), primarily known for its home products and clothing, is trying to
expand its presence in the grocery segment with its new ad campaign
and P-fresh program. The ad campaign tries to make groceries more
appealing by featuring models interacting with grocery items and
other home products and treating them like fashion accessories.
Meanwhile, Target is also expanding its in-store food and grocery
section, P-Fresh, that it started in 2009.
While competitors such as Wal-Mart (
) and Costco (
) earn a majority of their revenues from groceries, the category
accounts for just 20% of Target's revenues. However, the revenue
contribution has increased slightly over the past few years. We
think there is a significant opportunity for Target to grow by
increasing its presence in groceries. This will also increase the
retailer's resistance against economic headwinds as grocery sales
are less correlated to the state of the economy compared to other
See our complete analysis for Target
What Is P-Fresh Store Format?
P-Fresh is an expanded fresh food layout within Target's stores
which displays frozen and dairy products, perishable items, snacks,
beverages and other grocery items. This section is positioned in a
highly visible location. With this layout, the grocery space in the
store can increase substantially by about 130%. Additionally, there
is an increase of 90% in the food category and 60% in the SKUs
(specific kind of units) available at the stores.
Target launched this program in 2009 and has seen decent success
so far. In 2011, this format boosted Target's comparable store
sales growth and increased revenues from groceries. Currently,
about 1,100 Target stores have the P-Fresh food section and about
250 stores have a full line of grocery items.
What Is The New Ad Campaign All About?
With expanded food assortments at most of its stores, Target
decided to advertise its groceries in a non-conventional way. In
its new ads, the retailer tries to garner customer attention
towards its grocery items through fashion and glamor. For instance,
one of the ads features a model standing besides cake mix boxes and
blueberry muffins exploding in different colors. Although this does
not really help in demonstrating the product's usefulness, it
certainly catches the customer's eye and may help Target in getting
the best out of its efforts to improve grocery sales.
The campaign will include eight television ads, newspaper
inserts, a digital short film for online channel and three
different ads for radio. It appears that Target does not want to
leave any loose ends and is trying to target most of the media
What's The Value For Target?
As explained earlier, Target wants to increase its presence in
the grocery market which has proved lucrative for other big
retailers such as Wal-Mart and Costco. Not only can Target grow its
profits through this approach, but can also reduce its business
risk as grocery sales are less correlated to the swings in the
economy. From an investor's perspective, Target's stock could
become more attractive if its dependence on groceries increases
However, to compete with retailers such as Wal-Mart and Costco,
Target will need an appropriate pricing strategy as low price
remains the key selling point. Target can do so by offering more
private label brands (like Costco does), which have lower prices,
higher margins and are of comparable quality to national
Additionally, if Target can increase its grocery sales
substantially, it will end up buying a much higher volume of
grocery items. This will allow the retailer to better negotiate
purchase prices with its vendors. This is one of the advantages
that Wal-Mart currently enjoys.
Our price estimate for Target stands at $60
, roughly in-line with the market price.
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