MINNEAPOLIS — Although Target Corp. here expects to take market share away from the grocery sector as it expands its food offerings, Wal-Mart Stores is likely to cause more damage, Douglas Scovanner, Target's executive vice president and chief financial officer, told an investors conference late last month.
While Target has only a 1% or 2% market share in dry groceries, dairy and frozen foods, “Wal-Mart nationally is in the 20s,” he said.
“So if our P-fresh [expanded food] concept turns out to be an absolute home run, we might add 50% to 100% to our current share position, which could take us all the way to a 3. But Wal-Mart is likely to gain a lot more share points in those categories than we are in the next several years, so [our effort] isn't something that will be felt directly and painfully by other food retailers.
“Wal-Mart will inflict a lot more pain on those retailers over the next three to five years than we would.”
Target's goal with expanded grocery offerings is to generate more crossover shopping across the entire store by the customer, Gregg Steinhafel, chairman, president and chief executive officer, told the investors.
“If she loves us on one side of the store, we know eventually we'll get a greater share of her spending on the other side of the store as well,” he noted.
“Once we get them to frequently purchase all of our commodity categories, we will start bombarding them with crossover opportunities in home and apparel or footwear. And we will do bounce-back offers to get sample and trial in those areas, so it's kind of a progression.”
He said he's not sure how that process will grow, “[because] we're still in such an early stage that we really didn't have much expectation to capture a large share of the discretionary spend this early.”
As previously reported, Target officials said the expanded food offerings have boosted sales and traffic between 6% and 10% over a 12-month period in the Philadelphia test market, which translates into 1,000 extra trips per store per week, or potential gains of $4.5 million per year.
Philadelphia has become the chain's second-best market, Steinhafel said, with most of the traffic increases so far coming from the existing customer base, Steinhafel noted.
“But it takes a little time for consumers to change their shopping patterns,” he pointed out. “During the holiday season a lot of guests that came into Target and saw P-fresh for the first time are now starting to change [to doing their grocery shopping there], and we're encouraged by the fact Philadelphia is performing so well in January.”
Target said it expects to expand P-fresh to 350 remodeled stores this year, which Steinhafel said would result in critical mass for the category in 18 Target markets, including some as large as Chicago and others as small as Madison, Wis., where the chain has four stores.
Stores with the P-fresh program devote 55 gondola sides to food — 50% more than the general merchandise stores Target was opening in 2008, he said, and roughly half the space devoted to food in a SuperTarget. He said P-fresh offerings include 90% of the categories in a SuperTarget, with 60% of the food items.
Building a store with the P-fresh design increases the average construction costs for a general merchandise store by about $1 million, the company said. By comparison, a typical SuperTarget with a full grocery offering costs about $10 million more to build than a general merchandise Target store.
Steinhafel also said Target will continue to use a hybrid grocery distribution system for the next few years.
“When we reach sufficient density by geographic area, we look to self-distribute,” he pointed out. “Right now we have our own self-distribution network that handles the majority of supply chain in food, plus we use C&S [Wholesale Grocers] on the coasts and we use Supervalu, to the smallest extent, in some parts of the Midwest.
“As we add more P-fresh and more SuperTargets to reach critical mass, then at some point we invest in an infrastructure of our own. The first facility we opened was in Lake City [Florida] in September of 2008, and we opened a second facility in Cedar Falls [Iowa], and we'll continue to have a blend over the next five to 10 years.”