Target to launch food distribution

With groceries becoming an ever-bigger part of its business, Target Corp. soon will take a major step toward bringing its food distribution process in-house.

The Minneapolis-based retailer said Tuesday construction of its first perishable food distribution center in Lake City, Fla., is nearly complete and should be shipping out fresh produce as well as frozen and refrigerated foods by August. The plant will be operated with Eden Prairie-based Supervalu, and will supply SuperTargets in the Southeast.

This spring, Target will convert a Supervalu facility in Fort Worth to its own procedures, and Supervalu will continue to manage the plant. By late summer of 2009, Target will open another facility in Cedar Falls, Iowa.

For Target, the move offers a chance to improve profits by cutting out the middleman. It also allows the company to have greater control over food assortments and how quickly items reach store shelves.

For Supervalu, it's unclear whether this is a boon or a blow.

Since acquiring the Albertson's chain in 2006, Supervalu has reversed its traditional business model from one dominated by wholesale trade to one heavily dominated by its grocery stores. These days, Supervalu gets about 10 percent of its operating profit from distribution, according to Ajay Jain, an analyst with UBS in New York.

Jain estimates Supervalu gets about 2 to 3 percent of revenue from Target, making it well-prepared for Target's eventual shift toward self-distribution.

"It's a potential win-win solution for both parties," said David Brennan, of the Institute for Retailing Excellence at the University of St. Thomas. "Target can improve efficiencies and squeeze more out its margins. And it can rely on Supervalu's experience with logistics, one of its core competencies. For Supervalu, if it doesn't have a grocery store in a given area, maybe it's more beneficial to sell that operation to Target."

Target expects to have a "hybrid network" of food distribution for the next four to five years, in which it increases the number of its own facilities while still relying on Supervalu and New Hampshire-based C & S Wholesale Grocers, said Gregg Steinhafel, in a fourth-quarter conference call with investors.

While handling its own perishable food distribution has an upside, it's a different operation than selling clothes, toys, trendy teapots and bookcases. But with 175 SuperTargets, and more planned, the company has reached critical mass to increase its role in distribution, said Stephanie Hoff, an analyst with Edward Jones.

"Perishables are harder to do, and there's more risk because you own the inventory," said Hoff. "But the rewards probably more than offset the risks at this point."

Jackie Crosby • 612-673-7335