Can food fix Target?

After a botched entry into Canada, Target is restructuring its business here.

Target sells groceries, but it is not a grocery store. This became clear as I approached the checkout at my local Target in east Toronto with a shopping cart half-filled with orange juice, sandwich bread, yogurt and other items.

The pedestal-style checkout kiosk lacked the necessary surface area to handle more than a few items. The cart’s wheels locked as I exited the store–a countermeasure against a recent wave of buggy thefts. An employee cheerfully disabled the lock, enabling me to continue to a parking lot suffering from a notable shortage of corrals.

It would be uncharitable, but not inaccurate, to say the wheels also seized on Target’s Canadian launch last year. It spent billions of dollars opening 130 stores here–its first foray into a foreign market. Bare or poorly stocked shelves seemed to confirm ongoing inventory difficulties. Relatively empty aisles–such as on my recent Saturday afternoon visit–testified that Target has thus far failed to recapture last year’s inaugural traffic surge.

Indeed, this past August, Target reported the first period for which it could supply comparable store sales in Canada. They were down a jarring 11.4%. Financial performance has been appalling, leading some to speculate that Target may soon retreat from Canada entirely.

“The cost of leaving Canada is just as steep as the cost of staying, and neither is palatable,” wrote CIBC analyst Perry Caicco in a recent report that examined this possibility. “The most likely option is a sale of the assets to another resident retailer.”

It’s quite possible, though, that Target will tough it out. Following significant changes to its executive ranks over the last six months, it redoubled efforts to resuscitate its Canadian operations. Brian Cornell, appointed as Target’s U.S.-based CEO this summer, has vowed to make frequent visits to supervise a Canadian restructuring. He has a food and beverage background, having held senior positions at Pepsi and Safeway.

So, what role might the grocery aisles play in a comeback?

According to a CIBC estimate, roughly three million of Target’s total 14 million square feet in Canada are allocated to grocery. Target’s original objective for those aisles was conventional: to encourage customers to visit more frequently. Its approach was informed by years spent duking it out south of the border with fellow discounters such as Walmart and regional grocery chains such as Kroger. There, food accounts for roughly 20% of sales.

About two-thirds of its approximately 1,800 U.S. stores are classified as having “expanded food assortment,” and there are also 250 SuperTarget stores with full grocery sections. Private labels such as Archer Farms helped the company stand out. In 2009, it unveiled an initiative known as “PFresh” that added new square footage for fresh meat, vegetables and dairy. In the grocery category, and most others, Target is regarded as a formidable competitor.

Target’s Canadian grocery offerings are similar, but more limited. Here, the offering favours shelf-stable products, but also includes some frozen and perishable goods. That’s partly a function of Target’s recent arrival.

READ: Target’s to-do list for 2014

However, competitive realities also tempered its appetite for food. It was already acquainted with earlier Yankee migrants such as Walmart and Costco. And on a conference call last year, CFO John Mulligan observed that Canada’s national grocery giants were “much stronger than what we see in the U.S.” Lastly, as much as grocery often helps retailers generate traffic, Target didn’t anticipate needing much help on that front.

Cross-border shoppers showed considerable enthusiasm for its U.S. stores for many years, and many of the Zellers stores it acquired were in high-traffic locations.

In retrospect, Target’s grocery aisles failed to entice hordes of shoppers, and some of the reasons were evident during my visit. I conduct weekly grocery expeditions at a nearby Loblaws, complemented by periodic visits to a Costco for bulk items.

I could only find half of the 20 items on my list at Target, and got the impression my cart might have cost less at Loblaws. The most pleasant aspect was that the pristine, nearly empty aisles contrasted with the dreaded sensory assault I typically encounter at Costco. But on balance, nothing about the Target experience will shake me from my regular habits.

Anecdote is not evidence, but past consumer surveys suggest I’m not alone in deeming Target’s Canadian prices underwhelming. Target aims to crush such perceptions.

In August, consultancy Kantar Retail visited competing Walmart and Target stores in the Toronto area as part of an ongoing independent pricing survey.

It compared a basket of 33 branded items, including grocery items such as bread, soup and milk, as well as health and beauty aids (see chart, page 33). Whereas prices were found to be roughly equivalent during a previous survey in March 2013, this time Kantar found Target’s overall basket cost 3.9% less than Walmart’s.

“Target, in light of significant sales shortfalls, has clearly invested in price as one means of drawing traffic,” Kantar concluded. In an email to Canadian Grocer, Target said it will compete “with the lowest-priced leaders in the country.” It recently implemented a price-match policy for printed ads, flyers and select online retailers.

Lower pricing is only a partial remedy.

“Selling discounted varieties of Coke to drive traffic is playing the big man’s game,” J.P. Morgan analysts noted dryly in a report on Target earlier this year.

“Big man” referred, of course, to Walmart. “So good luck with that,” they added.

Low prices can achieve only so much when Target’s limited food assortment fails to stand out in a country already well served by existing grocery operators.

“Target’s got a problem here,” says Keith Howlett, a consumer analyst at Desjardins Securities. “ are going to be very slow to develop here, because they haven’t developed anything distinctive. They’re going to have to rethink those categories.”

READ: Here comes Target

Target, which did not grant an interview, likely recognizes that. Mark Schindele, appointed president of the Canadian operations in late May, vowed to improve inventory management and introduce new clothing, small appliances, cosmetics and home decor items.

Target aims to create an experience “as similar to our U.S. shopping experience as possible,” a spokesperson explained. But while the company promised more than 30,000 new items during the final months of 2014, it barely mentioned grocery.

None of the analysts consulted by Canadian Grocer thought Target’s main focus will be–or should be–this particular category.

CIBC’s Caicco wrote that even with “all guns blazing,” Target Canada wouldn’t be able to add more than $50 million in annual grocery sales. That’s peanuts compared to an expected $2 billion in total sales, and $500 million EBITDA loss for 2014.

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But analysts have suggested revamping grocery to appeal directly to core customers, particularly young women shopping for households.

Robin Sherk, who analyzes Canadian retailers for Kantar, suggests Target should abadon any thought of becoming a grocery destination. Even at U.S. stores, she says, grocery stimulated little traffic; rather, it helped Target increase sales per visit as customers pick up a few additional convenience items.

“Where there’s some opportunity is becoming a place to stock up on non-edible grocery, such as diapers and toilet paper,” she says, adding that emphasizing baby goods might drive more traffic. “I’m a mother... I know how often you have to buy diapers.” Howlett suggests natural and organic products designed for children.

Howlett notes Target organized its Canadian grocery aisles such that it could introduce PFresh later. He suspects that’s now off the table.

READ: John Morioka: the man from Target

“If they can’t get people to go there, then adding PFresh will just add another layer of complication that they don’t really need.” The company could allocate less square footage to grocery and still distinguish itself, he says. Sherk also thinks Target will focus primarily on traditional areas of strength, such as home and apparel.

“I don’t see them emphasizing food grocery in the near term.” So even if it decides to stay, your local Target likely still won’t resemble a grocery store. Before making much-needed changes to its food offerings, though, it must first develop a stronger sense of what it actually wants to be.

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