Skip navigation

Target Projects 12-Month Return Cycle on Fresh DCs

MINNEAPOLIS Target Corp. here said last week that its growing density of SuperTarget locations offering meat and produce and the expanded food offerings in its traditional general merchandise stores will justify the rollout of self-distribution for perishables. As previously reported, Target plans to open its first perishables distribution center next year in Lake City, Fla. We believe that within

MINNEAPOLIS — Target Corp. here said last week that its growing density of SuperTarget locations offering meat and produce and the expanded food offerings in its traditional general merchandise stores will justify the rollout of self-distribution for perishables.

As previously reported, Target plans to open its first perishables distribution center next year in Lake City, Fla.

“We believe that within the first 12 months of operation, we will achieve the sufficient scale to deliver the appropriate economic benefits that we're expecting out of this supply chain strategy,” said Robert Ulrich, chairman and chief executive officer, in a conference call discussing the company's fourth-quarter results.

The company said it plans to open 30-35 SuperTargets this year, including its first such stores in California. In addition, Target said it was incorporating a “larger food presence” in all of its new and remodeled stores in 2007. In 2006, the company opened 113 new stores in 36 states, including 19 new SuperTargets, net of closings.

“The SuperTarget store count this year will be our largest opening round ever,” said Greg Steinhafel, president.

Going forward, the company expects about a third of new openings will be SuperTargets. Five of the 15 stores the company is opening this month will be the supercenter format.

The new perishables distribution centers — the company indicated it has multiple DCs planned, but so far has revealed the location of only one — will supply both the SuperTargets and the expanded dairy, refrigerated and frozen offerings in traditional general merchandise stores that have 38 or more refrigerated cases. The self-distribution will supplant distribution services currently provided by Supervalu, Minneapolis, and C&S Wholesale Grocers, Keene, N.H.

Target already self-distributes dry grocery through its regional distribution network.

The switch to self-distribution of perishables will have an impact on the company's bottom line, Target said, as it invests “several hundred million dollars in distribution capacity.”

“The margin benefits of being self-supplied will produce enough incremental profitability to earn a proper return on the invested capital,” said Ulrich, who noted that the spending “needs to be analyzed in the context of $4 billion to $5 billion in cap-ex per year and $15 billion to $20 billion in the next four or five years, of which maybe half a billion will be in this arena.”

He said there could be a slowdown in the company's share repurchase program as a result of the incremental investment in cap-ex. “It's certainly not a free activity at the bottom line,” he said.

GOING TO CALIFORNIA

Asked by an analyst during the conference call about the challenges of opening SuperTargets in California after the opposition that Wal-Mart has faced there, Steinhafel said he sees plenty of room for both supercenters and traditional general merchandise stores in the state.

“We have quite an opportunity, I believe, to grow our SuperTarget format and to grow our overall presence even beyond SuperTarget in California,” he said. “We certainly have some individual markets where it's difficult to find large enough land parcels that are adequately zoned, but generally speaking, zoning and entitlement issues are not the issue that determines our SuperTarget growth — it's the challenge of finding large enough parcels of land in trade areas that have sufficiently dense household counts with households with income demographics and other attributes that tell us it would be a great market for a SuperTarget.”

He also said that while Wal-Mart is focused almost exclusively on supercenter development in California, Target is more flexible in rolling out its stores there. “When an opportunity wasn't available for a site large enough for a SuperTarget, we'd put in a very, very profitable regular store which also has our expanded food offering to draw additional traffic but does not happen to have fresh produce and meats.”

For the fourth quarter, which ended Feb. 3 and included an additional week, the company said net income rose 19.7%, to $1.12 billion, on a 16.3% gain in revenues, to $19.7 billion. Comparable-store sales were up 4.8% for both the quarter and the full year, which also included an extra week.

Net income for the full year was up 15.7%, to $2.79 billion, on a revenue gain of 13.1%, to $59.49 billion.