As target searches for a supercenter strategy, the competition keeps lengthening its lead

DSN Retailing Today, April 5, 2004 by Mike Duff

Supercenters are the question mark in Target's discount store equation, but the question may be getting clearer. With the retailer turning more toward food and consumables, supercenters may play multiple roles as a retail outlet and a laboratory where the company can test and develop ideas that it can apply on the discount store end.

Supercenters have been a bone of contention among Target analysts, who frequently question their value in the company's larger scheme. In part, that's because they don't seem to work as effectively for Target as supercenters do for Wal-Mart. "Target's customer has the highest income among discount store customers and they have more choices than Wal-Mart's customers have," said Eric Beder, a Northeast Securities analyst. He noted that with its supercenters, Target doesn't get "the pickup" Wal-Mart does. "With Wal-Mart customers, that store becomes a life store. That doesn't happen to Target," he said.

Also, Wal-Mart has made supercenters its main expansion format--not so for Target. According to Beder, executives at Target have talked of supercenters as growth vehicles for three and half years, and they haven't done it. "If it was a huge growth driver, it seems like we should have seen more growth," he said.

While it is commonly observed that Target's supercenter portfolio pales in comparison with Wal-Mart's, it is the second-fastest growing among major operators. The other supercenter operators are either growing by just a few units per year, not growing at ell or shrinking.

Rather than compare Target's operation to Wal-Mart, it is possible to compare it to that controlled by Kroger. For Kroger, the Fred Meyer operation provides leverage and expertise for its general merchandise operations and as a test operation. Kroger has actually shrunk the Fred Meyer store base as it has learned from it. Kroger developed the marketplace format based on work done at Fred Meyer and facilities that had bore the Fred Meyer banner. Soon, all Fred Meyer stores outside of the Pacific Northwest will be converted to the marketplace format. And Kroger will add a ground-up marketplace to test whether the format might be a growth rather than simply a conversion vehicle.

Target has recently moved the food merchandising in its supercenters closer to the model currently being used in general merchandise. Thus, what it learns in the supercenter operation may be more easily translated into discount store operations. If Target wants to experiment with or roll out hybrid concepts, it may do so with better data if it can test operations in supercenters.

In developing supercenters, Target took on a tough assignment. Upscale middle-market food retailing traditionally has been a tough business. Even supermarket chains with years of experience, such as Byerly's and Harris-Teeter, failed in attempts to take their stores outside of core markets. Fred Meyer is another example of an upscale middlemarket retailer that hasn't had a lot of success while operating outside its home turf. Shortly before Kroger purchased Fred Meyer, the company tried to expand into Northern California and had to pull back. Its operation is somewhat up market of Target, but even so, as a food and general merchandise pairing, its experience provides another lens to look at what Target's challenges are.

Of course, not all better mid-market food retailers fail in their expansions. Publix has been a conspicuous success even if it is a bit more mid than, say, Harris-Teeter. Wegman's recently has pushed out of its traditional New York and Pennsylvania strongholds to open stores in New Jersey and Virginia. And even if H.E. Butt isn't looking to make any sort of big push outside The Lone Star State, it has been aggressive in developing and adding new concepts to its chain.

Yet, executing an upscale food merchandising strategy hasn't been easy. Target has tried to develop proprietary labels or cross own brands from the general merchandise to food side of the store with decidedly mixed success. The crossover efforts seemed to gain little traction and Blue Ginger, a major own-brand, is targeted relatively narrowly in a segment that has little national-brand focus, Asian foods. As for traditional private labels, Target has forsaken the Archer Farms brand as it applies to its food operation and added a more traditional lower-priced ownbrand to shore up its private label strategy. However, it is using wine expert Andrea Immer to brand its private label wine initiative in an approach that's not dissimilar to what it does in home furnishings and apparel.

Taken from the broadest perspective, Target's supercenter operation can is as a work in progress. Although that's not an original observation, what may need to be reconsidered are the dimensions that the development of Target supercenters may explore.