Photographer: Patrick T. Fallon/Bloomberg

Target Isn't Winning the Food Fight

If Target Corp. is hungry to keep its newfound momentum going, there's an obvious place it should look: the grocery aisle.

Target said this week that, in the latest quarter, comparable sales rose at all of its major departments -- except for food and beverage, which was essentially flat.

Of course, food price deflation has long been weighing on many retailers that carry these kinds of goods, and surely that played a role in Target's weakness here. But Wal-Mart Stores Inc. reported on Thursday that it recorded its best quarterly comparable sales growth in grocery in five years against those same currents. It all underscores the fact that Target urgently needs to lay out a much clearer, more distinctive plan for scoring sales in this category.

Target isn't as dependent on food sales as Walmart, where grocery comprised about 56 percent of the sales haul last year. But groceries still accounted for about 22 percent of Target's revenue in 2016. That's a bigger share than either the apparel category or the home-furnishings category, both of which Target has gotten a lot of mileage out of fixing up.

Grocery Matters

Food is an important component of Target's total sales

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Source: Company Filings

And grocery isn't just important because of the direct sales Target gets from these goods. It is a crucial entry point for the chain to drive traffic to its more high-margin departments. If shoppers come in regularly for high-frequency purchases such as milk or bread, Target will have that many more opportunities to catch their eye with, say, cute swimsuits or chic candle holders. Target said that in the latest quarter, it saw a significant increase in fill-in trips. Just imagine how much they could turbo-charge that if shoppers thought of them as more of a grocery go-to. 

It's not that Target hasn't done anything to bolster its grocery business. It's been working to build a bigger assortment of organic and wellness-oriented products and has improved its supply chain in order to ensure that shoppers find fresher produce on its shelves. But that's not enough.

The grocery industry is on the edge of a particularly dramatic tremor of change. Amazon.com Inc. is set to acquire Whole Foods Market Inc., which promises to scramble the competitive landscape in untold ways. Lidl, the German grocery giant, is starting to open stores in the U.S., and Aldi is digging in for the fight with ambitious plans to add 400 more stores by 2018. 

Food Fight

Target is getting a crush of new grocery competition as a variety of players open stores

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Source: Fung Global Retail and Technology

Aldi expansion to be completed by the end of 2018. Walmart's count includes new, expanded and relocated stores.

Given all this backdrop, Target needs a more differentiated identity when it comes to food. Whole Foods is known for high quality and its wide selection of prepared foods. Lidl aims to woo customers with specialties such as fresh flowers and just-out-of-the-oven pastries. Aldi will keep banging the drum of eye-popping low prices. Target lacks that kind of clearly-defined profile.

For answers, Target might do well to look at its own beer and wine business. Executives said this category saw a "double-digit" increase in comparable sales last quarter compared to the same period last year. Part of that is thanks to redesigned selling areas for these items. But Target also has worked hard to localize its assortment of craft beer, giving shoppers a regional selection that reflects the vibe and preferences of a town or neighborhood. It seems to be paying off, so perhaps Target could find ways to translate this model into more of its food assortment -- and to trumpet to customers that it's a destination for that kind of specialized curation.

In some ways, it is especially puzzling that Target hasn't articulated a clear grocery vision. CEO Brian Cornell came to the big-box giant from Pepsico Inc., where he led the global food division. That pedigree should make him especially well-equipped to tackle this challenge.  

There are fresh hints that Target might be taking grocery issue more seriously, though. The company announced this week that it hired two senior leaders for its food business. They follow Jeff Burt, the executive that Target recently poached from Kroger Co. to head up its grocery division. 

If the company is to defend and expand in the forthcoming food fight, these new hires had better have big ideas. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.