Next on Target's plate: Revamped groceries

Target Corp. has a food quandary.

Six years after it began adding more groceries to its stores, executives say they missed the mark. Its food section is neither as extensive as Wal-Mart's, they say, nor as distinctive as Trader Joe's.

"We're not really special and we're not a full grocery," John Mulligan, Target's chief financial officer, said at a recent investors conference. "So we're sitting in the middle of no man's land."

Fixing food is a crucial piece of the puzzle as Target aims to reinvent itself. Last week, the Minneapolis-based company cut 1,700 headquarters employees in a move executives described as an effort to improve efficiency.

The savings from the job cuts will help fuel investments in one of CEO Brian Cornell's biggest strategic priorities, which is ramping up Target's digital prowess. But analysts say finding the company's positioning in groceries could actually play a bigger role in a rebound.

Digital sales, while growing at a rapid pace, account for only about 3 percent of Target's $73 billion in annual sales. Food, by comparison, accounts for about $20 billion — or about a fifth — of its business.

If a more appealing grocery department can drive a Target shopper to make just one more trip to the store every three months, that would mean an extra $2.5 billion in annual sales, executives say.

"We clearly think it represents a significant opportunity for us," said Cornell, who joined the company last summer after previous leadership roles at PepsiCo, Sam's Club, and Safeway.

Target is planning a major overhaul of its grocery department. In the last six months, it has been surveying customers about its current offerings and executives have been checking out competitors. To help lead the charge, it is looking for a new head of groceries after its previous leader in that area recently left.

Target will begin testing some ideas this summer in the Chicago area and plans to roll out changes chain-wide next year.

Cornell has already signaled the overall direction toward more organic, natural and gluten-free products, which are in higher demand among millennials with young families who are its core shoppers.

"They have to bring the Tar-zhay into food," said Scott Mushkin, an analyst with Wolfe Research, referring to the retailer's cheap-chic reputation in its apparel and home goods business. "That is job No. 1."

Target needs to differentiate itself in the market with unique items you can't get anywhere else, he said. And it should jazz up the physical look of its grocery aisles, too. "They need some more theater in there," Mushkin said.

In 2009, Target first began dabbling with an expanded grocery assortment that includes fresh produce such as apples and lettuce as well as ground beef and deli meats. But it stopped short of having a full bakery and a meat counter.

The format, known as P-Fresh, was designed to entice consumers coming out of the recession to make more trips to Target in the hopes that once in the store, they would splurge on some higher-margin items such as printed scarves or baubles for their home.

It initially showed good results, and Target rolled out the format to 1,300 of its 1,800 stores. Over time, though, it became clear to shoppers they couldn't substitute a trip to the grocery store with one to Target.

"It always seemed to me to be a somewhat halfhearted attempt," said Jim Hertel, managing partner with consulting group Willard Bishop. "It underwhelmed. It was not a destination."

Part of the problem, he added, is that Target has been ambivalent about whether it wants to be a serious food player.

Wal-Mart went all in, converting many of its stores to supercenters. But Target hasn't shown any interest in rolling out more SuperTargets, which account for just 250 of its locations.

At the meeting in New York, Target executives used phrases to describe the repositioning such as "inspiring guests" and celebrating the "joy of food." And they spoke of a new shift in thinking about it as "food" instead of "groceries."

"Groceries are transactional and food is emotional," Kathee Tesija, Target's chief merchandising officer, said.

Part of the grocery makeover will include more healthy meal solutions for busy families and in planning for events such as birthdays and dinner parties. It will spruce up displays to "connect emotionally" with the shopper. And it will have more localized assortment.

In addition, Target will boost six categories: yogurt and granola, coffee and tea, better-for-you snacks, wine and craft beer, specialty candy and premium sauces and oils.

For executives, the goal is to make groceries a reason why shoppers come to Target, not an afterthought. "Food is something that our guests shop for while they are at Target — not why they come to Target," said Tesija. "And that has to change."

One of the biggest challenges for Target will be how to have a credible, appealing selection of fresh groceries when most of its shoppers go there once a month, compared with several times a month to grocery stores. Stores need a lot of traffic to help turn over products that have a shorter shelf life.

"I just don't see that they have enough store traffic to sustain any sort of fresh food model at all," said Kurt Jetta, CEO of consumer analytics firm TABS Group. "You need a lot of repeat purchase and heavy traffic to move merchandise, particularly things that spoil quickly."

And, he added, it will require more store labor since employees have to be well trained and motivated to keep the section looking fresh. There's not as much work to be done with frozen or dry foods, he noted, since vendors often stock those items themselves.

Mushkin of Wolfe Research said Cornell is as aware as anybody of those challenges.

"This is his shtick," said Mushkin. "He probably understands food better than anybody."

Kavita Kumar • 612-673-4113