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Here comes Target

It didn't start out as a grocer, but lately, all signs point to food as a big part of Target's U.S.

On Oct. 1, 2012, Target Corp. announced it had begun hiring for its first Canadian stores. It was the latest in a series of statements dating back to January 2011, when America’s No. 2 discount department chain (behind Walmart) bought the leases of some 220 sites operated by Zellers. Target’s much anticipated Canadian invasion was officially underway.

Over the next two years, Target wrote more than 20 additional press releases, immediately devoured by the media, the public and retail competitors. Now, a mere season away from the opening of the first 24 Targets across Ontario and 36 more in Alberta, B.C., Manitoba and Saskatchewan, Canadian retailers are taking a closer look at the potential product assortment to be offered. And grocers are wondering: How much food is Target going to sell and what kind of threat does it pose?

Target isn’t going to sell a full line of groceries in Canada, as it does in America through its double-size SuperTargets. Rather, merchandising is expected to be closer to Target’s PFresh format, a relatively new department that mixes a convenience-sized dollop of produce, bakery, meat and dairy products with frozen and centre-store aisles. In PFresh, produce and deli items are pre-weighed and barcoded, eliminating the need for scales or weight-based pricing. And national brands share space with Target’s well-known private-label food brands Target Canada has already inked a supply deal with Canada’s second largest grocery chain, Sobeys. So clearly it’s going to sell groceries. Sobeys will supply Target’s food and grocery requirements for frozen, dairy and dry grocery products, including both national brands and Target’s private-label brands. Beyond that, Target Canada’s executives are keeping their cards close to their chests. “We aren’t able to share a whole lot of specifics at this point except to say food will definitely be an important part of our overall store strategy,” a spokesperson told Canadian Grocer last month.

It’s safe to say that in its first few days in Canada, food will not be Target’s No. 1 priority. The reason: The army of Canadian moms in Toronto and elsewhere who regularly journey across the border to shop at Tarjay (as the retailer is affectionately called) for its cheap and chic fashions. These budget-conscious mothers are Target’s primary customers. And when Target debuts in Canada, they will descend en masse to its stores looking for cute footwear, not frozen pizza. Target is going to have to get its fashionable-yet-affordable apparel department right from the get-go. Groceries may have to wait.

That said, competitors in the grocery category shouldn’t discount the important role of food in Target Canada’s business plan long term. Company executives in the U.S. are adamant that food is an important part of their strategy to increase store traffic and build incremental sales. It’s doubtful that strategy will be wildly different here.

To understand how Target Canada’s food program might evolve, it’s worth peering south of the border to see how the retailer has developed its food offerings. After all, in America, Target has, in a relatively short period of time, gone from a purveyor of apparel and general merchandise to a Top 10 seller of groceries. It’s done this with an unwavering determination to use food to drive customers to its stores more frequently and by learning from–and quickly fixing–its mistakes. That same approach will likely help it succeed as a food retailer in Canada as well, experts say.

Target does not pack the grocery sales punch of Walmart. The Bentonville, Ark., behemoth is America’s largest grocery retailer, ahead even of Kroger. Walmart has reached that position by spending the last quarter-century building its food business through multiple store formats, including Supercentres, Sam’s Club and Neighborhood Markets.

Target, on the other hand, has been slower to turn to food. Sure, on the day the first Target store opened (in May 1962, in suburban Minneapolis), it’s parent company, the Dayton department store chain, took out newspaper ads billing Target as a “discount store and supermarket.” But like most emerging discounters of the 1960s, including Walmart and Kmart, Target spent the next 25 years focused on clothes and hard goods, not groceries.

That strategy started to shift a few years after Walmart launched its Supercenters, in 1988. Target began to add more grocery items to its standard Targets and larger Target Greatland stores. By the time the first SuperTarget opened, in 1995, the retailer had begun adding groceries in earnest, bringing perishables into the mix of dry groceries, snacks and beverages within its traditional formats.

Target’s real strength then, and today, says Ryan Mathews, CEO of Black Monk Consulting, a Detroit-based analyst of consumer trends, was its ability to learn the food business fast. The first SuperTargets, Mathews says, treated grocery as just another fashion aisle. He recalls going into one store and seeing a head of cabbage on display. “It had been cut in half at 8:00 a.m. and proudly displayed, unwrapped, over the produce section.” The only problem, Mathews says, “I was there in the afternoon and the cabbage looked like a food poisoning display or a child’s science project gone horrible awry.”

It didn’t take Target long to replace mouldy cabbages with fresher fare and unique items. Target launched a premium private-label line, Archer Farms, in 1995. Six years later came a lower-tier brand, Market Pantry, which promised, “Big brand taste. Priced much, much lower.” At the same time, marketers at the company’s growing food departments were addressing both assortment and merchandising issues to attract shoppers from the apparel and general merchandise areas as well as pulling in new shoppers from competing formats. This strategy would prove critical to Target’s success with food in the U.S.

To be fair, Target still treats some grocery SKUs like fashion lines. But its improved its approach by launching one-of-a-kind and exclusive packaged food items, the same way it creates enormous buzz working with fashion designers such as Prabal Gurung to create its chic and cheap handbags. In September, for instance, Target inked an exclusive deal to sell Candy Corn Oreos ahead of the Halloween season. Available for a limited time, the Oreos feature a vanilla wafer and yellow-and-orange-coloured cream. This summer, meanwhile, Target became the only store to sell Campbell’s tomato soup with colourful pop-art labels to commemorate the 50th anniversary of Andy Warhol’s famous painting, 32 Campbell’s Soup Cans.

Because Target has exclusive rights to sell these items, it’s able to create its own niche in the grocery category. Target’s considerable marketing machine is able to promote these packaged foods as if they were the latest must-have shoes, thereby building excitement and drawing customers to its food aisles. Ryan is impressed with Target’s ability to negotiate deals with CPG manufacturers to create “only available for a limited time at Target” items. He thinks Target sometimes displays a better understanding of consumers than many supermarkets. “That ought to worry Target’s Canadian competitors,” he adds.

These days, the heavy lifting of food sales isn’t being done by SuperTarget stores. It’s handled by Target’s PFresh departments. Launched in 2008, PFresh is a layout concept carrying meat, produce and other fresh foods. Because it can be plopped into existing discount stores with minimal renovations, Target has been able to quickly ramp up its food offerings in the U.S. In 2010 alone, the company converted some 350 of its existing stores to PFresh. Last year it converted another 400, with 230 scheduled to be completed this year. Target’s president, Gregg Steinhafel, says that when PFreshes are dropped into existing Target stores, sales go up at least six per cent in the first year and 10 per cent within three years.

Thanks partly to PFresh, food items, which Target defines as including dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce and pet supplies, represented 19 per cent of total sales at the retailer, or about US$13.3 billion, last year. This figure, up from 16 per cent, or US$10.4 billion, in 2009, is expected to top 20 per cent this year, making Target the ninth largest grocer in the U.S.

Like Walmart, Target has taken to actively promoting grocery items across media channels in the U.S., using freestanding inserts, television ads and, more recently, social media, to market products found in supermarkets. While a considerable amount of the US$1.36 billion advertising budget goes to apparel, hardlines and housewares, a growing amount is earmarked for grocery items. For instance, a recent newspaper insert in the New York City metro region had five full pages of food specials, including the back cover. Target also started running mobile banner and audio ads featuring fresh food offerings across the various platforms of Pandora, the popular music application, last year.

Herb Sorensen, a retail expert and author of Inside the Mind of the Shopper: The Science of Retailing, says Target is especially interested in using food to drive traffic. Here, perhaps, Target is taking some cues from Walmart. “When Walmart entered the food business, there were a lot of naysayers who thought it was a misstep, but it ultimately was a key component to driving Walmart further to the retail pinnacle,” he says. Sorensen says Target is adopting a similar strategy that paves “the way to the top through the stomach.”

Some observers have doubts about Target’s grocery push in Canada. In a report examining Target’s entry into the country, Barclays Capital said it doesn’t expect Target to initially have a significant impact on the grocery sector because “it does not appear the retailer is focusing on food.” The report predicted that Walmart, Sears Canada, Old Navy and Canadian Tire are the retailers most at risk as Target concentrates on apparel and general merchandise.

Then again, food and other grocery-type products are becoming a much larger part of Target’s overall sales. Food and pet supplies now make up as much of Target’s sales mix as apparel and accessories (see chart on next page). Meanwhile, everyday consumables, such as laundry detergent, contribute the most sales: 25 per cent of Target’s overall US$68.5 billion in revenue. Target officials freely admit the growing importance of these categories to their business. “Less discretionary categories like food, health and beauty continue to lead the way,” Kathryn Tesija, executive vice-president of merchandising, noted in a conference call with analysts in August. “These categories have been growing faster than overall sales for more than a decade,” she added.

Many experts say Canadian food retailers must actively meet the potential threat of the Target grocery merchandising engine, or risk the loss of market share. “I believe key markets at Target will include a fresh section for heavily shopped items including bananas, meat, dairy and bakery,” says John Boccuzzi, Jr., vice-president at ICC Decision Services. “They have three years of perfecting the PFresh concept in the U.S. and those learnings will certainly help them get up to speed with fresh food in Canada faster.”

Canadians, meanwhile, seem poised to do some of their grocery shopping at Target. A survey by Kantar Retail and TNS Canada in August found that 43 per cent of consumers say they are “likely” to buy food and health and beauty products at Target. Certain shoppers, however, were more inclined to buy groceries at Target. For instance, 51 per cent of women aged 35 to 54 said they would likely shop for groceries and health and beauty at Target. Meanwhile, 54 per cent of people who shopped at Real Canadian Superstore or Costco were likely to head to Target for groceries. Slightly fewer (48 per cent) of Sobeys and IGA shoppers, on the other hand, planned to buy food there. Robin Sherk, a senior analyst with Kantar Retail in Cambridge, Mass., says that because Target has only recently begun local marketing efforts in Canada, consumer awareness–and interest in its offerings–will only increase as its March 2013 debut draws closer.

One problem for Target in Canada is that its newly acquired Zellers stores are slightly smaller than most of the company’s existing American discount stores. The thinking, therefore, is that Target may be inclined to cut out grocery items. Reducing the selection of fashions would only raise the ire of those moms used to an ample selection of boots, sunglasses and handbags at American Target stores. Then again, the company may already have a solution to deal with this problem: CityTarget. This new urban format, which opened this year in L.A., Chicago and Seattle, is smaller than Target’s regular U.S. stores. Yet the company’s merchandisers have been able to insert a significant amount of fresh, frozen and dry groceries within. No wonder Boccuzzi and others believe that Target will bring some of the concepts being tested at CityTarget to its Canadian stores.

Whatever the format, Target’s adventure north of the 49th Parallel will certainly evolve over time. “One thing I’ll bet on,” says Black Monk’s Ryan, “is that Target’s grocery operation in Canada will look different a year from now. Not perhaps in the general approach, or the selection or setup of the aisles, but in those small nuanced things that customers notice.” That, of course, will make Target a much harder competitor to face off against, Ryan predicts. “Retail is less a matter of getting one big thing–such as ideal format size–right, and more a matter of getting a thousand small things done correctly. That’s a lesson Target seems to have learned, and learned well.”

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