MINNEAPOLIS -- SuperTarget's enticing looks and mix of gourmet offerings may be sending mixed messages to customers, who don't realize the prices are within 1% to 2% of those of Wal-Mart Stores, Bentonville, Ark., and 10% to 15% lower than those of traditional supermarket operators.
"The challenge is the goods look so good that guests aren't understanding we're priced as low as we are," said Robert Ulrich, chairman and chief executive officer, Target Corp., at a press session following the company's annual shareholder meeting last week at the Art Institute here. "We need to do a better job of getting that message out."
SuperTarget represents 30% of Target Stores' growth and is showing results that are "very solid," said division President Gregg Steinhafel. "We're serious about the grocery business."
This year, the company ramped up its ability to warehouse and distribute its own dry groceries, finishing the year handling about 50% of those goods, according to the company's annual report. It was a record year for growing distribution muscle, Target said, with four new regional distribution centers built and two new import warehouses.
Target said it expanded the number of stockkeeping units in its proprietary foods brands, Archer Farms and Market Pantry, by 60% in 2003. Target sees those brands as underpenetrated and is "working diligently" to expand its offering, according to the annual report.
In its first-quarter earnings conference call with analysts a few days before the annual meeting, Target also said it is striving to focus the grocery assortments at SuperTarget stores on local consumer preferences.
"We're increasingly focused on refining our assortments to reflect local market food preferences, as well as trying to communicate with consumers more effectively through marketing and more direct in-store signage while making our food distribution system more efficient," said Steinhafel.
The company operates 119 SuperTarget stores, including one opened during the first quarter. Steinhafel said Target plans to open seven more SuperTargets during the current quarter.
He also said the chain's Target discount stores are showing greater strength in sales of consumables, pharmacy, health and beauty care items, and household chemicals.
But the biggest development this year has been the rollout in March of P2004, the company's new prototype store plan, which roughly doubled the space allotted to food and showed that the company will be innovative in mixing high-margin convenience foods with high-frequency household staples.
The prototype has performed 20% above plan thus far, Douglas Scovanner, chief financial officer, told analysts during the conference call. At the meeting, company executives said they plan to have 200 P2004 stores by year-end.
In a research note, Mark Miller, analyst, William Blair, Chicago, characterized the expansion of P2004 as "a good strategic move as it better conveys the value proposition, which we've long felt has been under-appreciated by consumers."
Ulrich said during the conference call that the chain's new discount-store prototype has overcome some initial out-of-stock problems that resulted from sales that were greater than anticipated. "It's easier to adjust inventory upward rather than overstocking a store, and we are particularly careful that we don't front-load on date-coded products," he explained.
In response to a question, Ulrich said the dollar-store sections Target has been testing at 125 stores are doing well. "So far, we're pleased with their performance. We've cycled through different merchandise categories and determined these items provide incremental add-on sales, and we're pleased with the sales and profits.
"However, although we've made no decision on a national rollout, we are encouraged by what we've seen so far."
Although both flagging retailers Mervyn's and Marshall Field's are still officially part of Target Corp., Ulrich focused his opening remarks at the annual meeting solely on the flagship division's performance for the past 10 years, pointing out that Target is now, at $41 billion, roughly the size Wal-Mart was a decade ago.
Expansion for the next decade will focus on the U.S., and he expects the company to double its footprint and triple sales in that period. Eventually, he said he expects the retailer will go international, likely starting in Canada or Mexico, but there are no immediate plans to push beyond profitable domestic territory.
In 2003, Target Stores added 54 new discount stores and 24 SuperTargets, adding 12.3 million new square feet, an increase of 8.8%. It expects to post similar numbers this fiscal year, with 80 to 85 net new stores.
All told, Target operated 1,249 stores across 47 states, as of May 13. In its strongest markets, including Minnesota, California and New Jersey, it commands 10% or more market share, according to company data.