) is one of the biggest retailers in the U.S. and offers a variety
of products across hardlines, apparel & accessories, household
essentials, home furnishing and 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 1995.
The share of groceries in Target's overall revenues has grown
steadily over the past few years, driven by its enhanced focus and
the launch of P-Fresh store remodel program. With the expansion of
CityTarget and Target Express stores, the retailer's grocery share
will likely increase in the future, albeit at a slow pace.
However, despite showing some progress, groceries are far from
becoming a meaningful category for Target. The company earns less
than one-fourth of its revenues from food & consumables, and
has found it extremely hard to attract grocery buyers due to fierce
competition from its cheaper counterpart, Wal-Mart (
). Although the "cheap chic" retailer is looking to expand its
business in urban markets, Wal-Mart's aggressive foray in the
grocery space along with the existing vast network of dollar
stores, will create a tough environment for Target. Subsequently,
we do not see any significant development in Target's grocery
business in the foreseeable future.
Our price estimate for Target stands at $70
, implying a premium of over 20% to the market price.
See our complete analysis for Target
Why Is The Grocery Business So
Consumer spending on groceries can be classified as
non-discretionary as they come under 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
Analysis (BEA). Also, groceries are a big market segment,
accounting for annual sales of over $560 billion.
Groceries are also important for 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.
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 prominently visible
location within a Target store, displaying frozen and dairy
products, perishable items, snacks, beverages and other grocery
items. The grocery offerings in the stores with the new layout 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. 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 full-line grocery items.
In addition to expanding its grocery segment, Target tried to
promote itself as a grocery retailer through appealing and
unconventional marketing campaigns. The retailer launched a few ads
in 2013 representing groceries as fashionable and glamorous.
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. These stores offer
products relevant to urban dwellers' basic needs, mainly including
groceries. Target has recently developed another format called
Target Express, which specifically focuses on groceries that have
high selling frequencies.
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 with a grocery section in 1995. 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
Since groceries were never the primary focus for Target, the
category's share in the company's overall revenues has remained
low. Although there has been some progress in the recent years with
the company's stressing more importance to the product category,
the business hasn't made any meaningful contribution. Back in 2009,
groceries contributed about 16% to Target's overall revenues, which
gradually increased to 21% in 2013. At this rate, the retailer
might be able to take its grocery revenue share up to 24%-25% over
the course of next four to five years, which will still remain
significantly below Wal-Mart's share of 55%.
It must be noted that Target made a name for itself in the U.S.
retail industry not by selling groceries but by offering affordable
fashion products and household essentials. However, if the company
wants to increase its revenues from the groceries business, it
needs to push aggressively to achieve its goals. A marginal
increase in revenue contribution will not do much good for the
What Has Troubled Target's Grocery Business?
The main drag on Target's grocery business growth has been the
biggest grocer in the U.S., Wal-Mart. It hasn't been easy for
Target to attract customers as its products are slightly more
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.
Last year, Target opened just three CityTarget stores, compared to
more than 100 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. Wal-Mart hasn't given Target much room for
its grocery business growth in the big-box space and the smaller
format arena isn't looking good either.
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