Hitting the bull’s eye

Famous for trendy apparel and home goods, Target is now scoring a direct hit with its “guests” on groceries and perishables with its PFresh format.

Every supermarket operator wishes they had this predicament—shelves, freezers and refrigerated cases picked bare of merchandise nearly every weekend evening. Not because of striking stockers, trouble with the warehouse or broken down trucks, mind you, but because of a perfect storm of sheer customer traffic coupled with the right assortment of national brands and high-quality private labels at more than competitive prices merchandised in a pleasant, clean, easy-to-shop atmosphere.

Take a walk through a local Target at 6:00 p.m. on a Sunday evening and chances are that will be the case. While there, glance into the shopping carts of some of the “guests”—Target shoppers are above customer status. In addition to Converse One Star sneakers, Nick & Nora pajamas, a Taylor Swift CD, Cherokee jeans, Kitchen Essentials from Calphalon cookware and perhaps a Smith & Hawken watering can or garden gnome, chances are there will be a box of Cheerios, can of Campbell’s soup, sack of King Arthur’s flour, pouch of Jack Link’s Beef Jerky, pound of Hormel Black Label bacon, cup of Chobani yogurt, jar of McCormick spices, bag of Fresh Express salad, bottle of Panera Bread salad dressing, box of Ellio’s frozen pizza and a Hungry-Man TV dinner.

“Target has successfully transitioned from a mass merchant discounter to a full service household shopping needs provider,” says Richard J. George, Ph.D., chair and professor of food marketing, Gerald E. Peck Fellow, Haub School of Business, at Saint Joseph’s University in Philadelphia. “While ‘everyone is selling food’ for traffic purposes, Target’s new format represents an attractive and different way of presenting food in a discount setting.”

That format, which is called PFresh, will have been implemented in about 1,100 of Target’s 1,755 stores by the end of this year, say company officials. With its wide, clutter-free aisles, fixed-weight produce, freezer coffin cases stocked with the latest specials and a huge assortment of unique and upscale private label offerings, Target is bringing to the grocery side of the business the same excitement, panache and je ne sais quoi that have made its nonfoods side legendary, exemplified by the current catchy Alouette “Color Changes Everything” campaign.

Look for that “Alouette” French flare to become a little more prominent next year when Target expands north of the border into Canada, opening as many as 150 stores in former Zellers locations. Canadian grocer Sobeys will supply frozen, dairy and dry grocery to the stores.

“We have done an enormous amount of research with our guests on what would make their Target experience better and we consistently heard feedback that if we would have fresh food as part of our product offering it would just make their life much easier and convenient,” Annette Miller, senior vice president, merchandising, grocery for Target Corp., tells Grocery Headquarters in an exclusive interview.

The proof that guests love the addition of food can be found in the numbers.
The food and pet supplies segment of Target’s business continues to grow each year, accounting for 19% of the retailing giant’s $68.5 billion in annual sales in 2011. By some counts, in just one year Target has been able to snare 2% to 3% of the entire sales in the supermarket industry.

It is for these reasons and many more that Grocery Headquarters is proud to honor Minneapolis-based Target as its 2012 Retailer of the Year.

“For decades, the words ‘Target’ and ‘innovation’ have gone hand in hand,” says Matthew Shay, president and CEO, of the Washington-based National Retail Federation. “The company’s unique branding, marketing, design and ability to adapt to ever-changing consumer demands have historically set it apart from the others.”

“Target has caught the attention of most conventional supermarket retailers who now see them as a very serious source of competition in core categories, whereas before they were primarily viewed as a mass merchant with strong apparel and home kinds of categories, but not so much groceries,” says Edward McLaughlin, Robert Tobin professor of marketing, director of Food Industry Management Program, at Cornell University in Ithaca, N.Y.

“They also do it with a little bit of panache relative to other discounter operators who have tried the same thing. I think consumers appreciate that. The stores that have been converted to the PFresh format have been largely well-received by consumers,” McLaughlin says.

“I think what Target brings to the table is a more sophisticated level of merchandising and marketing that a lot of grocery retailers need to pay attention to,” says Spencer Hapoienu, president, Insight Out of Chaos, a New York-based consulting firm. “They have been investing very heavily in data and been very smart about how they use it to understand what drives customer behavior, their shopping patterns, and I think they are taking advantage of it both from marketing and merchandising points of view.”

Officials at Camden, N.J.-based Campbell Soup Co. have firsthand knowledge of how Target uses technology to build sales. “Recently, we’ve worked on increasing grocery awareness with Target guests by employing shopper marketing tactics to drive grocery conversion—which is when a general merchandise customer begins to add grocery items to purchases,” says Lisa MacMillan, customer vice president, Target Team, Campbell Soup Co. “This has been especially successful within fresh bakery, soup and shelf-stable juices. These top categories for Campbell are significant areas of opportunity for Target, so our partnership and alignment continue to become stronger and help both companies achieve sustainable, profitable growth.”

History with grocery

Since the former Dayton Co. department store chain opened its first Target discount store on May 1, 1962 in Roseville, Minn., food—namely snacks and beverages—has been a part of the mix. In 1995, the first Super Target opened in Omaha, Neb., featuring a full-scale grocery store attached to a Target general merchandise store. Today there are about 250 Super Targets nationwide, with each store averaging around 174,000 square feet. In 1995, Target also debuted Archer Farms as its first food private label.

In 2008, Target began testing a new format selling a more extensive line of grocery within the four walls of a conventional Target store, dubbed PFresh. The first test stores were in Minnesota, and were remodeled to add about 10,000 square feet of food space to the conventional 135,000 square foot traditional Targets. No departments were eliminated, but home, apparel and accessories areas were shrunk. “That allows us to have 90% of the product categories that we carry in the Super Target,” says Miller. About the only things lacking are a service deli, service bakery and floral.

PFresh has surpassed Super Target as a growth concept, industry observers say.
“There are about 250 Super Targets and that number has not really changed much over the last couple of years,” says Michael Montani, associate managing director for New York-based ISI Group. “As a result, since the company has been growing, as a percentage of the total store base Super Target has been coming down. I don’t see them closing Super Target down, but they have incorporated the grocery and frequency component through this PFresh strategy. Could the Super Target store count go up to 260? Sure, but I don’t think it is a primary growth vehicle for them.”

“Target has been much more successful converting to the PFresh format within the existing four walls without having to go through all the community opposition that Walmart is going through across America in trying to develop new supercenter sites,” says Burt P. Flickinger III, managing director at Strategic Resource Group, a consumer industry consulting firm based in New York.

“PFresh gives the guest an opportunity to shop at Target for convenient food staples, especially perishables,” says Steven D. Althaus, director of business planning, vice president, consumer product sales for Austin, Minn.-based Hormel Foods. “Ultimately, PFresh allows Target to enter guests’ shopping routines more frequently because they offer food and perishables, just like a traditional grocery outlet or their primary mass competitors without having to invest in building stores with a larger Super Target footprint.”

The retailer is shifting those shopping routines away from conventional supermarkets into its discount stores, observers say.

“The benefit to Target comes across in traffic,” says Montani. “The strategy is to capture the weekly fill-in trip. For them it was a reason for consumers who are already going to Target to hopefully shop one more time during the week and really drive frequency. When you have that individual in the store, hopefully they will cross that aisle and buy some apparel items as well.”

Montani says PFresh is not an effort to confront Walmart, but rather to get its guests to shop the store more frequently than the typical once a month that they previously did. “If they can entice that individual to come once a week it would obviously be a tremendous lift. That is the goal,” he says.

“What is interesting about Target’s strategy is that the vast majority of incremental spending is coming from existing customers who are coming more frequently and buying fresh,” says Colin McGranahan, a senior analyst at New York-based Sanford Bernstein & Co., who follows the chain. “Where were they buying fresh before? Very likely they were buying it in a grocery store. PFresh is not a substitute for a full grocery store visit, but it is certainly a great fill-in, and it is probably taking a little bit of share away from the traditional grocery store chain.”

That might be the consumer who wants to buy a mop and perhaps a bottle of Mr. Clean to go with it. “People generally think Target is a great place for that,” McGranahan says. “They are cheaper, but sometimes a little further out, so maybe they aren’t as convenient. But once a store has been remodeled with PFresh, they will say, ‘While I am here I will pick up some hamburger for dinner and some bananas for the kids.’ Clearly that is taking away the incremental visit from Kroger or Safeway.”

Team effort

According to Miller, the success of the PFresh concept is the result of a company-wide collaborative effort.

“I would really like to highlight the team here at Target and the really true cross-functional effort that went into this strategy,” Miller says. “We’ve converted hundreds and hundreds of stores with fresh food in a very short amount of time, and that’s only been possible because of the partnership we have internally, whether that is with our distribution team, store planning team, technology team, our team members who work out in the stores. Everyone at Target has been involved in this and we’re really proud of the results that they’ve delivered,” she says.

Those results are about a 6% lift in sales for each store that has been remodeled, analysts say.

“As they’ve gotten a cohort of stores into the second year after the remodel, they are getting on average about a 2% comp gain,” McGranahan says. “They are delivering on the strategy of driving traffic initially with fresh food, migrating that customer to the bigger grocery assortment, and then in the third year migrating the customer to the more discretionary categories as well. In general the strategy is playing out exactly as they had envisioned it, and they’ve done a nice job with it.”

“To the extent that their goal was to increase the sales per foot of the store and to increase traffic counts, that has certainly been the case,” says Montani. “It remains to be seen if they are getting the cross-shop that they wanted when they initially set out to do this program. Today it is just south of 20% and in an ideal world they would rather have it more than 25%.”

“We are very pleased with our PFresh results, both from a financial perspective as well as from our guest perspective,” Miller says. “The feedback that we get from our guests is very positive about the format and about the offering. That’s what’s most important to us. Our guests reach out to us in e-mails and letters as well as when we’re doing shopalongs and guest surveys and other ways that we get feedback.”

Besting Walmart

One thing that Target guests love is the chain’s competitive prices. “Target is investing very vigorously to save shoppers as much money as possible,” says Flickinger. “In our pricing studies across America, Target is meeting or beating Walmart. In addition, Target has a more powerful promotion program than Walmart.”

Yet, one key area where Target is lacking is in distribution. “What we are seeing is where Target self-distributes it seems to have a fast-growing success in terms of market share growth, but where Target has outsourced distribution, the stores really struggle with in-stocks on weekends,” Flickinger adds.

Miller says Target opened its first food distribution center in Cedar Falls, Iowa, in 2009. Today, out of its 37 distribution centers, four are for food. A fifth is under construction in Denton, Texas, and will be online in 2013.

“We use a lot of different metrics to monitor our inventory and stock levels,” Miller says. “In general, based upon guests surveys, feedback and all of our internal metrics that we use to measure in-stocks we’ve been very pleased with our results in food and the consistency of the guest experience.”

“Target makes less money selling food than does Walmart,” says McGranahan. “They don’t have nearly as efficient of a supply chain. Until recently they didn’t even have a fresh food supply chain, but they mix out the store with the 40% of the merchandise that is apparel and home that offers 40% -plus margins, so they end up at roughly the same spot.”
“As Target sells more groceries and perishables, it becomes more economical to do more self-distribution,” Montani says. “They have a goal to eventually get all of that in-house.”
It looks like the company’s plan of becoming a major force in the food industry is right on target.

Style and the City

Target has a reputation for bringing a sense of urban chic and style to the suburban masses, but aside from the store adjacent to its downtown Minneapolis corporate headquarters, the chain really hasn’t had much of an urban presence. That is changing this year with the debut of its newest format—City Target.

Designed to offer compact assortments tailored to urban residents, Target is focusing in on  busy downtowns with City Target. The first is opening in July in the heart of Chicago’s Loop in the historic Louis Sullivan-designed Carson Pirie Scott & Co. department store building.

“I applaud Target for bringing this urban store concept to Chicago, as well as the new jobs and economic opportunity this store will create,” then Chicago Mayor Richard M. Daley said at a February 2011 press conference announcing the store’s construction. “Target will be an important addition to State Street, one of Chicago’s most important retail centers, and will be located in one of the city’s most architecturally significant buildings.”

In July City Target will also open in the Newmark Building in downtown Seattle and at the Westwood Marketplace in Los Angeles. In October, City Target will debut at the 7th and Fig Retail Center in downtown Los Angeles, where it will occupy space that was once a Bullock’s department store, and in San Francisco at the Metreon Center, a failed shopping/entertainment complex steps from the Moscone Convention Center. In 2013 City Target will open in downtown Portland, Ore.

“We believe there is a compelling business opportunity to open smaller stores of about 60,000 to 100,000 square feet with a reduced, optimized assortment when larger sites simply aren’t available,” says Jamie Bastian, a Target spokesperson. “Our stores are designed to stay relevant to all of our guests, regardless of where they live or work.”

“The City Target format is much smaller than our traditional stores, so all of the content in a City Target is going to be edited from what you would see in our PFresh store, but it will still have all of the categories represented and food will be a part of that mix,” says Annette Miller, senior vice president, merchandising, grocery, at Target Corp.

Target officials have high hopes for their new urban concept. “Based on extensive research, we know that our brand and merchandising content appeals to the urban demographic,” says Bastian. “Urban residents have an affinity to the Target brand; they appreciate high quality; they are hip and chic; they look for value; and they’re designed focused. It’s been hard to reach those guests with a large format store.”

“Target’s innovative efforts of developing small store urban formats are a testimony to its creativity and continued focus on evolving customer needs,” says Richard J. George, Ph.D., chair and professor of food marketing, Gerald E. Peck Fellow, Haub School of Business, at Saint Joseph’s University in Philadelphia.

Targeting the kitchen

Ever since it premiered its Archer Farms brand in 1995, Target has been using private label to endear itself to its “guests” and further set itself apart from the competition.

“When it comes to customizing exclusive things for Target we really focus on our Own Brand efforts,” says Annette Miller, senior vice president, grocery, Target Corp., based in Minneapolis. “We look to our Own Brands to really create those products that are unique to Target, exclusive to us, tailored to our guests and really driving loyalty to our brand.”

Products are designed and developed in-house. “We have an internal Own Brand Team,” Miller says. “We have food development scientists and quality assurance specialists. They work hand-in-hand with both our vendors and our merchants when creating our Own Brand product.”

Currently Target has five Own Brands lines:

Archer Farms. This premium, affordable brand offers more than 1,600 items centering around premium groceries, fine cooking ingredients, organics, baked goods, frozen pizzas and appetizers. All Archer Farms products contain zero grams of added trans fat. “Archer Farms delivers on Target’s ‘Expect More. Pay Less.’ brand promise—high quality, innovative products at an affordable price,” Miller says.

Market Pantry. The retailer’s line of more than 1,900 items offers the quality of national brands at 10% to 30% lower price. Market Pantry includes cheese, milk, eggs, flour, sugar, cereal, poultry, seafood, fruit snacks and granola bars. “Families on a budget can easily and inexpensively stock their kitchens with Market Pantry,” Miller says.

Sutton & Dodge. This brand offers a full menu of perfectly marbled, premium quality USDA Choice Angus beef that is naturally aged and hand-trimmed. “It is the same quality beef found in the best steakhouses—at a fraction of the price,” Miller says.

Wine Cube. Target’s boxed wine is available in a number of varietals—many of them award-winning—including Merlot, Chardonnay, Cabernet Sauvignon, Pinot Grigio, Sauvignon Blanc, Cabernet/Shiraz blend, Red Sangria, White Sangria and Riesling. “Target Wine Cubes offer delicious, high-quality wine without the high prices, broken corks, limited shelf life and fragile glass packaging typical of bottled wine,” Miller says.

up & up. The retailer’s line of more than 900 non-grocery everyday essential products spans more than 40 categories, including household cleaners, paper goods, health care, beauty, baby and personal care. “The up & up brand is equal in quality to national brands, but at a lower price, offering an average savings of 10% to 30%,” Miller says.

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