About 21% of Target’s annual sales come from the food and beverage category, but its grocery aisle has become more important as shoppers buy fewer non-essential items.
Melissa Repko | CNBC
For many Americans, going Target Reminiscent of a shopping cart full of pillows, makeup, or cute clothing.
Retailers want more customers to think of it when checking off their shopping lists, too.
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In its most recent fiscal year, just 21 percent of Target’s annual sales came from food and beverages, according to the company’s financial filings.This is the same as rival walmartnearly 60 percent of its annual sales come from the grocery aisle.
Grocery stores, however, are gaining in importance as a driver of footfall as inflation-conscious shoppers watch their budgets and focus on needs rather than needs. Investors will learn this week whether Target can make up for weaker sales in apparel, electronics and home furnishings by selling more boxed pasta, gallons of milk and boxed eggs. The company will report earnings before the market opens on Wednesday.
Target will report results as the company’s stock falls, in part due to challenging pandemic comparisons and its own stock missteps. Target shares closed at $160.57 on Monday, down nearly 30% from their 52-week high.
The big box retailer is also hoping to drive shoppers to non-essential items they wouldn’t otherwise buy by luring shoppers into essentials like gallons of milk.
“It’s really a gateway to the rest of the store,” Chief Food and Beverage Officer Rick Gomez said in an interview with CNBC. “It drives traffic to the store. It drives traffic to our website. Then when they pick out the food and drink they need, they browse the rest of the store and maybe pick something up at Ulta (Beauty at Target) or clothing something about it.”
A ‘Tarzhay’ spin at the grocery store
On a recent trip to a Minneapolis-area grocery store, Gomez surveyed the colorful fruit and vegetable displays. Nearby, shoppers can order freshly sliced turkey at the store’s full deli counter or order a custom birthday cake at the bakery.
The store captures Target’s grocery ambitions, even though it offers a much wider food mix than many of the retailer’s other stores. A retailer’s store sizes vary, as do their grocery departments.
Gomez has overseen Target’s efforts to improve the quality of its grocery division since entering the food and beverage industry more than two years ago. It starts with some hard truths: Customers are unhappy, he said.
“We were doing focus groups and one guest said, ‘You know, I know Target sells food and drink, but it felt like an afterthought. It felt like reinforcement. It didn’t have the ‘Tarzhay magic,’ the store everywhere else,” Gomez said.
“It’s kind of frustrating, but instead of being frustrated and disappointed, we said, ‘You know What, Let’s use it as a rallying cry,'” he said.
Even before the pandemic hit the supply chain, Target had been grappling with stock-outs in the unit, he said. Fruits and vegetables are not always fresh. The grocery department doesn’t capture a celebratory or seasonal style like the rest of the store.
Target can now offer greater reliability with a new distribution center it opened in Maryland in October, he said. It hired more staff with grocery expertise and increased product specifications to prolong freshness, improve taste and enhance presentation, such as ensuring avocados are a consistent size.
he said target has Added more merchandise to key private-label grocery brand Good & Gather launching in 2019 and Favorite Day, a snacks and dessert line launching in 2021.
It’s modeled after Trader Joe’s, releasing creative merchandise you won’t find anywhere else, like s’mores trail mix and Avocado Toast Flavored Chopped Salad Set. Some items are also seasonal, like the peach jelly bean whipped cream for Easter.
Gomez credits others for the changes to boost sales revenue. Target’s food and beverage category has posted double-digit sales growth in each of the past two fiscal years.
The division’s sales have remained relatively flat as a percentage of Target’s total annual revenue, but its overall sales have soared. Food and beverage sales totaled $22.9 billion in the fiscal year ended in January, up about 52% from $15.0 billion in the fiscal year ended in late January 2020.
Target’s grocery sales are taking on more weight as shoppers in other regions hold back. Company leaders said at an investor conference in January that the retailer had taken action to address budget sensitivities they were seeing from consumers. The company stocked up on more food and essentials after taking aggressive action to clear excess inventory.
Its inventory in the discretionary category was down about 13% compared with the end of last year’s fiscal fourth quarter. Target also said it will offer more items at lower prices, such as $3, $5, $10 and $15.
Grocery Competition Gets Fierce
Competition for grocery shoppers has heated up, especially as consumers work on tight budgets.Discount stores like Aldi, Lidl and dollar general More stores are being opened, and warehouse clubs like Costco, BJ’s Wholesale Walmart-owned Sam’s Club has attracted more members by offering cheaper gas and bulk items. at the same time, hook up Want to grow bigger through acquisitions Albertson.
Target is the fourth-largest grocer in the U.S., with a 5.3% market share in 2022, according to market research firm Euromonitor. The figure excludes online grocery sales, which Target saw growth through curbside pickup and its home delivery service Shipt.
Michael Lasser, a retail analyst at UBS, said the retailer is not attracting as many shoppers as its rivals who take a big weekly grocery trip. But he said it catered to convenience by selling clothing and toys and offered value through an expanded private label.
“Over the past few years, Target has increased its relevance in grocery,” he said. “Today’s shoppers can do more with Target than in the past.”
But overreliance on groceries is a risk, Lasser said. The division has lower margins than other categories — plus its cheap-chic style in homewares, clothing and more is a key part of attracting shoppers to its website and stores.
Credit Suisse retail analyst Karen Short said that as a shopper, she wouldn’t buy fresh food from Target. It doesn’t offer the same freshness as a grocery store, which sells more produce and has a quicker turnaround of berries and bagged salads, she said.
However, if the company expands its product selection, it risks throwing more products in the trash, she added.
“It’s a perpetual dilemma for Target,” she said.
But Target’s Gomez said the company does have fresh food velocity: “The volume is there. The traffic is there.”
Short added that Target has another problem building a grocery business that is tied to Walmart. Over the past few quarters, Target has lost some of the shoppers and store visits it gained during the pandemic as consumers emphasized affordability over convenience, she said. She said there’s a cognitive problem with this, as some people associate the retailer’s flair with higher prices.
In the Minneapolis area, Target’s prices on staples are nearly in line with those at a Walmart less than two miles away. For most of those items, like a dozen eggs, a gallon of milk and a box of pasta, Target is paying about 5 or 10 cents more, according to a CNBC analysis.
In an interview with CNBC at a store in Minneapolis, Gomez mentioned a recent ad campaign for “affordable happiness.” He points to simplified displays at the end of the aisle, which advertise single low prices on items like cereal boxes.
Value also goes beyond price, Gomez said.
“When times are tough and you’re living paycheck to paycheck, you can’t afford food that no one eats,” he said. “So it’s very important for us to offer a product that is value for money, that is, price. Reasonable, but also very good quality.”
It’s unclear whether Target is making an effort to brand itself as Affordable grocery stores will resonate with consumers.
price is the most important Megan Harvey, 29, from New York City. She loves visiting Target and is a member of Circle, its loyalty program. However, she and her boyfriend, Ben Horansky, 29, don’t do their grocery shopping there.
Instead, Harvey said, she typically goes to retailer stores around the Upper East Side for beauty supplies, like facial cleanser, or household items, like bath towels. For example, on Sunday, she stopped by to buy a pack of razors.
Over the past three months, Harvey said she has cut back on her trips to Target to reduce the temptation to walk into the store for two and leave with 12. The couple decides where to shop for groceries after tracking local grocery store prices on a spreadsheet.
“When I think about grocery shopping, Target isn’t the first place that comes to mind,” Horansky said. But he said he might add it to a price spreadsheet to see how it stacks up.
Correction: Target’s food and beverage sales were $22.9 billion for the fiscal year ended in January, and The previous year was $15 billion. A previous version of this story incorrectly stated those numbers.