Has Target's Food Foray Missed the Mark?

Its supercenters may be too far away to lure frequent shoppers

Amy Olson can't help but be impressed as she strolls the aisles of a new SuperTarget store in St. Charles, Ill., passing a white-clad server dispensing roast beef samples on a silver platter and mountains of exotic cheeses. It's the same merchandising flair the 28-year-old small-business owner has come to expect from Target Corp.'s (TGT ) discount stores. She almost always pops over to the grocery section when she visits Target. But she's not about to ditch her local supermarket. When it comes to food, better deals and a shorter drive trump SuperTarget's elevated shopping experience. "It won't replace my weekly grocery store trip," she says.

That's bad news for Target, which embarked on its grocery strategy as a way to wring more growth out of its all-important Target chain. The discounter has been one of the few to thrive in the shadow of the Wal-Mart Stores Inc. (WMT ) juggernaut. It does so by offering an array of affordable products by such chic names as Mossimo and Michael Graves. With its cool assortment, Target doesn't have to beat superefficient Wal-Mart on price.

But that formula isn't working with groceries. Wal-Mart pioneered the idea of coupling a discount store with a supermarket and has become the nation's No. 1 grocer. But while Wal-Mart's Supercenters lure shoppers back 3.1 times a month, SuperTarget's shoppers visit only about 2.1 times a month, not much more often than they head to regular Target stores, says researcher Service Industry Research Systems Inc. Promotional ties to the likes of celebrity chef Ming Tsai, fresh-daily sushi, and gourmet bread haven't been enough to convert shoppers such as Olson into regular customers.

The Minneapolis-based retailer would not comment on its combination stores except to say they have sales that are 50% to 100% higher than its standard stores. That may be, but in the war for market share, Wal-Mart Supercenters are besting SuperTargets. Each Supercenter, on average, held steady at 4.5% share of the local market in 2001, according to retail monitor Metro Market Studies. The average SuperTarget's share, however, dropped to 1.35% from 1.9% the prior year. Analysts expect Target's earnings to rise 15% this year, but to keep that up long term, it will need to augment its discount stores.

But food may not be the answer. Target has opened just 82 SuperTargets since 1995, and new openings will account for just 25% to 40% of square-footage growth next year. Wal-Mart, meanwhile, has opened 1,243 Supercenters since 1988, and the format will account for about 210 of 335 openings next year. "If Target was winning, they would speed it up," says John Watkins of food brokerage Acosta Sales & Marketing Co.

Why are SuperTargets missing the bull's eye? For starters, they're located in more urban areas, where expenses are higher, customers won't drive as far because of traffic, and grocery rivals are more entrenched. They're also spread out geographically, forcing Target to rely on outside distributors. That adds two or three percentage points to Target's cost of goods in a business with carpaccio-thin margins.

And while the stores' lush look is appealing to customers, it doesn't necessarily stimulate big spending. "They're pretty, almost to the point of being untouchable," says a former Target exec who worked on its entry into food. Meanwhile, pricing surveys by UBS Warburg suggest Wal-Mart Supercenter prices are 20% to 25% lower than those of national supermarket chains, while SuperTarget prices are just 8% lower. That's not enough to overcome the inconvenience of a longer drive.

Groceries were supposed to be a new growth engine for Target's successful discount stores. So far, though, the recipe that worked so well in merchandise is falling flat when it comes to food.

By Robert Berner in St. Charles, Ill., with Gerry Khermouch in New York and Wendy Zellner in Dallas

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