A Closer Look At Target’s Grocery Focus
After disappointing sales in the holiday season and missing consensus estimates for both EPS and revenues in Q4 2016, Target (NYSE:TGT) has been working on several initiatives to drive sales in recent months. Increasing its focus on its grocery section is one such initiative, and the company started building dedicated teams to manage its grocery section last year and increased its focus on more gluten free and organic foods. (Read Why A Focus on Groceries Is Essential For Target?) Groceries account for nearly 20% of Target’s revenues, and an appealing grocery section can attract more customers to its stores, since online grocery sales are relatively miniscule as customers still prefer to pick fresh produce themselves. This could also help drive sales for other categories of products stocked by the company as well, as it would boost store traffic. The grocery market in the U.S. is pegged at $675 billion, and with 90% of households shopping for groceries at least once a week, the grocery segment can be critical for Target’s success. To drive revenues for the segment, the company recently hired Jeff Burt (a Kroger veteran for 30 years) to head up its grocery business. The company is also investing heavily in revamping its stores, making them more customer friendly and introducing beer, wine and more “grab and go” foods at many stores to drive sales.
Higher customer spend on groceries can drive Target’s average revenue per square foot, and we expect this number to grow steadily from $283 to $290 over our forecast period.
A more rapid pace of increase in this metric could lead to upside to our price estimate.
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The grocery business is a key driver for Target’s growth, and the company’s increased focus on this segment is justified. Experts believe that Target is facing an “identity crisis” at its grocery segment. The company can choose to be either a private brand destination, a convenience store or a full line grocer (which is likely the most difficult choice). However the company cannot keep its grocery business in limbo for long. Management is focused on the grocery segment and is making progress on procurement and supply chain improvements in addition to working on competitive pricing of its products. While the grocery section still faces several issues, we believe Target’s focus on aggressively revamping the key segment makes strategic sense.
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