Getting the goods on Target

Much ink has been spilled guessing what effect Target will have here, in Canada, when it takes over all those Zellers locations by 2013. Most articles I've read predict a supersized, meteor-like bang! followed by some inevitable casualties. I agree that a few retailers could falter (yes, Sears, I'm looking at you) but grocery is far from Target's main business. So the effects will be different. We can speculate at what they might be, of course. A better approach, though, is to examine the situation in the United States and how Target is impacting the grocery market there.

In America, Target has long had a full grocery format, called SuperTarget. But most of the heavy lifting in the last two years has come from a new program with a catchy name, P-Fresh. P-Fresh, which can be dropped into an existing Target in a matter of weeks, combines a decent selection of dry groceries and frozen with a limited assortment of fresh. Thanks to P-Fresh, food (and pet supplies) now makes up 17 per cent of sales, up from 16 per cent last year and 15 per cent two years ago. As small as those gains seem, each percentage point adds up to hundreds of millions of dollars in revenues for Target.

City by city, it's a different story. Target's grocery market share is less than five per cent in most parts of the U.S., says David Livingston, a grocery consultant in Wisconsin. A typical P-Fresh, he says, does about $180,000 a week in grocery sales compared to $800,000 to $1 million by a Walmart Supercentre. "Target isn't really even in the ballpark yet in grocery. They're still in the minor leagues," Livingston quips.

But like any bush leaguer, Target is trying hard to crack the big time. One way is on price. A few months ago reporters at the Charlotte Observer in North Carolina compared the cost of 18 common food items at Target to Walmart and Harris Teeter, the market leader in Charlotte. On the 18-item shopping basket, Target was $3.38 more expensive than Walmart, but $11.74 cheaper than Harris Teeter.

Overall, Target's food prices tend to be one to three per cent higher than Walmart (now America's largest grocer). But it has a secret weapon: a loyalty program, called RedCard, that offers five per cent off all purchases. Shoppers armed with a Redcard can pay up to four per cent less for grocery items than at Walmart, says John Dean, a supermarket analyst in Minneapolis, Target's hometown.

Dean says that Target doesn't promise great variety in food, especially meat and produce. "They operate on the idea that 20 per cent of the items will get 80 per cent of the sales" so let's focus on that 20 per cent. The smaller selection is often enough to convince shoppers who are in a Target anyway to pick up their dinner needs right there, and skip the extra trip to a supermarket.

American grocers I spoke with admit that Target's food selection does have an impact on their sales, albeit sometimes slight. One IGA owner in New Jersey says she lost business primarily in cereal, dog food, frozen food and laundry detergent when a Target P-Fresh opened nearby.

Of course, Canada isn't the U.S., and Target will face its own problems here. For one, P-Fresh is rather flimsy. It's simply not good enough to pass muster with fresh-obsessed Canadians. Target must also contend with the ferocity of our discount stores, notably No Frills. CIBC World Markets analysts Perry Caicco and Mark Petrie estimate that Target's food sales in Canada will be in the $700-million range by 2014, which is slightly more than Shoppers Drug Mart's food sales now.

But don't discount Target's ability to ramp up business quickly from there. Target will undoubtedly introduce the RedCard loyalty program here. That will give cash-strapped shoppers a compelling reason to visit its store frequently. (Eight per cent of Canadians are already members, according to one survey.) Also, keep in mind that Walmart wasn't really a grocer when it arrived in Canada, in the early 1990s. But eventually it became one. A good one, too. Target isn't there yet. But given time to tinker, it just might.