March, 2017

Fruits of Thought

Revival Of Target Stores Requires Greater Focus On Food

When executives at Target recently unveiled their plans to revive its retail stores, the company’s stock took a 12 percent nosedive in one day. Now this is not necessarily because the plan is a bad one. It could be that the very need for a plan of this scope – $6 billion in spending on new stores and supply chain, plus another billion in what is euphemistically called by retailers “price investment,” which means reducing prices and margins to be competitive – was depressing enough to see the stock plummet.  Undertaking the plan also creates execution risk, which the market might use to discount the value of the company.

Target is getting hit from all sides. It sold its pharmacy business to CVS, but like perishables, the prescription drug business is highly valued by retailers, not just for its own profitability, but because of its ability to draw customers to the store. Many prescriptions are written by doctors because people are sick, and these have to be picked up at retail right away. Many consumers prefer the certainty of picking up even regularly renewed drugs taken for chronic conditions rather than getting them through the mail, or they value an opportunity to ask the pharmacist questions.

Because of the fact that prescriptions have this value to attract people to the store, decisions of what price to offer to insurance companies and the drug benefit management organizations involve more than the profitability on the specific. Long and short, when Target sold its pharmacy operation to CVS, it also constrained the value that CVS could get from fulfilling prescriptions at Target. In other words, Wal-Mart can offer lower prices on drugs because its executives know that a certain percentage of the pick-ups of those drugs represent additive visits to Wal-Mart.

Wal-Mart executives know that, on average, each additive visit represents a certain amount of purchases, and profits, on clothing, toys, food and more. In contrast, CVS doesn’t get that benefit and has to bid less aggressively for business from the health insurance companies, which results in business migrating to other retailers. So when Target sold its pharmacies, the impact was that it also reduced the extent to which the pharmacies attracted shopping trips to Target, and this helps to explain why same-store sales are down at Target.

Food — and especially perishable food — plays a similar role of drawing people into the store at higher frequencies. Yet just as Target was not committed to pharmacy, it is unclear to what degree Target is committed to food, fresh items included. Just recently, Target CEO Brian Cornell explained that he didn’t think it was in Target’s DNA to be a full service grocer, and he thought of Target’s role as being additive in this field.

Of course, this has little to do with DNA – Wal-Mart was not born a grocer, but is the largest grocer in the world. Cornell is expressing a hesitance to invest fully in food and in transforming its stores into supercenters as Wal-Mart has done with almost all its old general merchandise stores. The real cause of this hesitancy is that nobody has ever squared the circle of how Target’s distinctive consumer presentation can be translated to food. 

The “upscale discount” format that led to consumers to say they bought items at Tar-jay is easy to execute in some areas. Target, for example, sells a collection of items designed by Michael Graves, the famous architect, which are inexpensive but they offer a little style. These types of items create a reason for many consumers to go to Target, rather than, say, Wal-Mart. So Target knows how to do this with a tea pot – but not with ham or a HoneyCrisp apple.

People have speculated about long-range solutions:  Giving up food, giving up perishables, just having a convenience store of food within each store, selling food only on line and many other ideas. This writer had written years ago that the whole reason for having the Archer Farms branding was to maintain some flexibility if the executives decided that the food operation should be sold or spun off.

Food is about 20 percent of Target’s sales, so such decisions won’t be made lightly, but Target has put itself in a bit of a spot. To draw shoppers to the store and sell them higher margin signature Tar-jay items, it needs to sell more fresh foods, not less. Nothing else will drive the traffic volumes Target needs to boost same-store sales the way it must. 

The sale of the pharmacy operation makes one think that Target executives are not focused on the secondary effects of driving
store traffic. One hopes they have learned their lesson and recognize that the road to selling high margin tea pots is right through the produce aisle.                                                                                         pb