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RETAIL VIEW: Target to expand produce offerings

Minneapolis-based Target Corp. has announced that it will expand its fresh foods offerings, including produce, in about 100 of its 1,700 stores by the end of this calendar year.

Target spokesperson Jill Hornbacher said that in 2008, the giant retailer test- marketed the expanded grocery concept in two stores near its Minnesota headquarters. The test proved successful enough to expand it to include eight other stores in various geographic locations.

Ms. Hornbacher said that the expansion to 100 additional stores goes beyond the testing concept. She said that the company expects this new idea to take hold, and if it does, fresh food expansion will occur in many more of the chain's stores over the next three years.

Ms. Hornbacher said that Target first expanded its food offerings about six years ago and that has been an ongoing effort rooted in the dry goods category, as well as the dairy and frozen sections.

"What makes this different is that we are expanding our fresh food categories," she said.

The three areas that will see increases in SKUs are fresh produce, fresh meat and fresh bakery. In the produce category, Ms. Hornbacher indicated that the chain would concentrate on staple items, such as bananas, strawberries, bagged lettuce and potatoes. The checkout stands will not be equipped with scales, so each item will be pre-priced and will include a barcode for scanning purposes.

Ms. Hornbacher said that the number of produce items in an individual store will depend upon the geographic location of the store and the needs of the surrounding community.

She acknowledged that Target uses a combination of its own distribution centers and third-party partners to supply the individual stores with their general merchandise, and the same combination of supply chain management options will be used with produce and the other fresh items.

A story on the Target expansion appeared May 12 in The Wall Street Journal, with the writer speculating that Target was adopting a concept championed by its chief rival, Walmart Stores. Walmart has long offered groceries and fresh produce, but it once was strictly a general merchandise retailer like Target.

Target did follow Walmart into the supermarket business in 1995 when it began building Super Targets, which carry a full line of grocery items. Ms. Hornbacher said that currently there are 245 Super Targets, with new locations opening every year when the demographics of a particular location warrants it.

In the WSJ story, Target Chief Executive Officer Gregg Steinhafel said that the expanded grocery offerings should boost sales by increasing the frequency of store visits by its loyal patrons. In these difficult economic times, Target has experienced a drop in same-store sales of close to 2.9 percent in the past year, while Walmart has registered an increase of 3 percent in the same time period.

Bruce Peterson, who was instrumental in Walmart's foray into fresh produce about two decades ago, said that Target's announcement is clearly a reflection of the current economic times.

"It is pretty well understood that a significant presence in food increases your traffic," said Mr. Peterson. "If you can have compelling food offerings, people will shop at your store more often."

But he added that it does not necessarily mean a store will increase its profit margin, explaining that food is typically a low-margin item compared to general merchandise. When Target creates the expanded food section in an existing store, it has to remove something else. Depending upon what it removes, sales -- or at least profits -- may drop.

What Mr. Peterson said he finds interesting is the juxtaposition that has taken place between Walmart and Target over the last several years. When the economy was going well, Target was outperforming Walmart and Walmart was clearly de-emphasizing its low-cost position and trying to be more upscale - more like Target, if you will.

Now that the economy is struggling and low prices have become a driver once again, Target is moving in the direction of Walmart. Besides increasing its food offerings, the chain is also emphasizing its bargain prices in its recent promotions.

"When the middle class was trading up, everyone wanted to be like Target. Now that the middle class is trading down, everyone wants to be like Walmart," Mr. Peterson said.

While the longtime Walmart executive was certain that this expansion of fresh food was a well thoughtout strategy, he was not certain that it would be a winning strategy in the long term.

"Target is a smart company, and I am sure they have not done this without test marketing it and are pretty certain it will work," he said. "Keep in mind that Target does not self-distribute, which puts them at a significant disadvantage vis a vis other food retailers."

He said that without a large network of its own distribution centers, Target will have difficulty servicing all its outlets in an economical and efficient fashion. But he added that Target is "an excellent company, so I would never discount them."

Mr. Peterson said that all great retailers must evolve if they are to be successful, and he indicated that both Walmart and Target have proved adept at this in the past.

He said that produce suppliers should try to take advantage of this repositioning effort and work with Target to add value to its offerings and help the retailer be successful.

While Target is going to have a limited number of produce offerings and no per-pound pricing, Mr. Peterson sees this as the wave of the future. "With traceability becoming a bigger issue, I think we will see more and more packaging in the fresh produce department," which is the format that Target is launching with its fresh produce expansion.