MINNEAPOLIS — Officials at Target reconfirmed their commitment to making grocery an integral part of the retailer's future, saying they would keep up a steady pace of “P-fresh” store conversions and work toward a smaller format that would better fit into dense markets.
Industry observers contacted by SN had mixed reactions to the news, which officials shared with reporters in a rare press conference here late last month. They don't question Target's commitment to food — or even its success, so far. But whether the retailer can realize the traffic benefits of a food offering without surrendering margins or its brand cachet is a matter of some debate.
Target, which began rolling out “prototype fresh” stores in 2008, will have such departments around 850 stores by the end of 2011, Target's chief financial officer, Douglas Scovanner, told reporters at the press event. The company currently operates about 300 P-fresh stores among its 1,743 stores nationwide.
Leon Nicholas, director of retail insights for Kantar Retail, Cambridge, Mass., said it was too early to say whether P-fresh stores were drawing incremental traffic to Target stores, citing insufficient data. He acknowledged the concept has some strong believers, but expressed concern that the stores could wind up costing Target profits.
“There's a debate going on, with one side saying, it's the trip they are making anyway; they're just putting more things in the basket,” he told SN. “The other group says, they are making more trips — with more consumable items in there. In either scenario, it puts more pressure on the bottom line.
“The concern over the longer term is what happens to margins at Target,” Nicholas added. “Instead of having customers spend $100 with a 45% margin, they are spending $100 with a 25% margin.”
Although Target officials had previously acknowledged working on a smaller concept to better penetrate urban markets, they confirmed plans to open its first such store in Seattle within two years. The store would be about 90,000 square feet, compared to typical Target stores ranging from 125,000 to 180,000 square feet.
Target also said it would expand smaller stores to 10 other markets including Baltimore and San Francisco, ranging from 60,000 to 100,000 square feet, reports said.
“We've never been a cookie-cutter retailer, but we are increasingly realizing that one size doesn't fit all,” according to John Griffith, executive vice president of property management at Target, quoted in an Associated Press article.
A smaller box would introduce additional margin dilemmas for Target, Nicholas noted. He said the company is currently testing reduced selections at stores in Napa, Calif.; St. Louis Park, Minn.; and Edgewater, N.J.
“The big question for Target is going to be what will a small-box target contain? A 90,000-square-foot Target is hard to conceive of because Target relies so much on a mix of discretionary goods like apparel and home goods to drive margin. But it's the consumables that drive traffic. The question now is what is the right mix to still be a Target experience and have the consumables that drive traffic. It's a bit of a paradox for them.”
Burt P. Flickinger III, managing director of Strategic Resource Group, New York, had a more positive view of Target's move to groceries, saying markets like Philadelphia and Minneapolis with numerous P-fresh stores have become increasingly difficult markets in which to compete.
“It's one of the biggest threats to the supermarket sector in decades,” Flickinger told SN. He said the concept has been well-received by Target's core women-with-children shoppers. “Food is the focus of the store, not pharmacy or fashion anymore.”
Observers said Target has tended to struggle with out-of-stocks, and can't be as convenient as competitors selling food, giving traditional competitors advantages to exploit.
