Can Target Fix Its Grocery Business?

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A banana display at a Target store in Seattle. The retailer has made efforts to revamp its grocery business, which accounts for a fifth of Target’s revenue, or $18.5 billion in annual sales. Photo: David Ryder/Bloomberg News

Target Corp. TGT 2.43 % has a problem in its grocery aisles: Shoppers aren’t visiting often enough to buy the retailer’s fresh meat, fruits and vegetables before they spoil.

Perishable foods, which usually are the big traffic drivers at most grocery stores, have been a drag on Target’s profits, according to people familiar with the matter. And in May, Target said customers were making fewer trips for smaller purchases. “We have seen some trip erosion with guests coming in for that fill-in trip,” CEO Brian Cornell said on a conference call.

Lauren Shaber, who lives in Tualatin, Ore., said she visits Target once or twice a month for home décor, cleaning supplies and other merchandise. While there, she walks through the food aisles and picks up “whatever catches my eye,” the 24-year-old said. “But I don’t go out of my way to do grocery shopping at Target because there are so many other specialty stores.”

Since he took over in 2014, Mr. Cornell has made several efforts to revamp the grocery business, which accounts for a fifth of Target’s revenue, or $18.5 billion in annual sales. The company changed leadership, added more organic and gluten-free items and invested in store design.

But Target has warned that overall sales at existing stores could decline 2% in its second quarter, which it is slated to report Wednesday.

Executives have admitted that the grocery assortment has been lacking.

“We sit in the middle,” John Mulligan, the company’s chief operating officer, said in March 2015. “We’re not really special and we’re not a full grocery. And so we’re sitting in the middle of no man’s land.”

Target’s board of directors has been wary of capital-intensive options to improve groceries after being unable to generate meaningful returns from previous investments, according to people familiar with the matter.

The issue, in part, is that Target’s supply chain wasn’t built to transport items with a short shelf life. Perishables currently are funneled through one of the company’s four food distribution centers or through infrastructure owned by C&S Wholesale Grocers.

Distributing items such as eggs and milk can be tricky. Losses often are incurred due to spoilage and other problems. But Target’s loss of inventory in the perishables category has been higher than industry average, according to a person familiar with the matter. In recent months, the company has considered moving more business to C&S or other outside vendors, said people familiar with the situation.

“We know we need to operate the food business differently and it’s a much bigger task than simply reconfiguring part of the store,” a Target spokeswoman said. “We are still in the early stages of our food repositioning effort,” which “includes evaluating how we get fresher foods to our guests faster and finding ways to better leverage our distribution centers and partners.”

Shifting more control to a third-party vendor would move Target in the opposite direction of its biggest competitors. Wal-Mart Stores Inc., WMT 0.12 % which gets more than half of its U.S. revenue from grocery, has invested in infrastructure to transport fresh foods on its own.

The average Target shopper visits a store less than once a month, but more frequent trips are required to turn over items with a short shelf life, said Kurt Jetta, CEO of TABS Analytics, a retail and consumer analytics firm. “They will continue to have a problem with spoilage. They need to double their traffic for perishables to be successful,” he said.

Salwan Azar, 38, who lives in Lake Forest, Calif., said she has visited Target for toiletries, but prefers her local supermarkets for grocery shopping. Target is “new at groceries.…I go to Stater Bros. because that’s what my family is used to. People don’t like to change.”

In February, Target executive Aaron Alt joined the grocery category, making it the only one with two senior vice presidents. Mr. Alt was instrumental in closing all Target stores in Canada and selling the company’s pharmacies and clinics. He brought in a team of consultants, including Alvarez & Marsal, to evaluate the company’s grocery-supply chain, according to people familiar with the matter.

He is working with Anne Dament, a former Safeway Inc. executive who had run the food business since April 2015. She has hired other employees from Safeway in recent months to update the perishables selection and help cut inefficiencies.

In addition to expanding wellness items, the company has been focusing on seasonal produce and working to localize the offerings in each store, the people said.

Like Wal-Mart and grocers seeking affluent shoppers, Target has made an aggressive push to add organic and gluten-free brands. In the first quarter, the company said it added about 1,000 new food items, including 55 new wellness brands, and expanded its private-label organic brand Simply Balanced across 30 additional categories.

Target also has spent more than $1 million per store to improve the look and inventory management of 25 locations in Los Angeles. The refurbished grocery area features new lighting and signage that highlights the organic and fresh products. The stores now get more frequent deliveries and carry more localized products. But rolling out those changes to all 1,800 Target stores nationwide would require a massive investment, analysts say.

Khadeeja Safdar at Khadeeja.Safdar@wsj.com





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