The Target chain’s omnichannel excellence helped drive a 23% increase in Q1 sales. But persistent out-of-stocks remain a challenge.
There are plenty of chains that did well during the pandemic. And then there’s Target. After watching fiscal 2020 sales jump nearly 20% to $92.4 billion, adding an eye-popping $15 billion to the company’s coffers, the Minneapolis-based retailer beat analysts’ predictions again in the first quarter of this year. Comparable sales shot up 22.9% from Q1 2020 — which saw a 10.8% gain versus 2019 — bringing it another $1 billion+ in additional market share.
Although much of the Q1 growth was driven by higher traffic in stores, Target owes much of its recent success to its e-commerce business, up 50% in the first quarter of fiscal 2021 — on top of a 141% gain a year earlier. Same-day services (in-store order pickup, curbside pickup and home delivery) were a key driver, jumping 90% in Q1 to represent well over half of all digital sales. However, chairman and CEO Brian Cornell was quick to point out in a first quarter earnings call that customers’ ability to move seamlessly between in-store and online shopping is what’s really spurring growth. “Guests turn to Target because of our stores and our digital options, not one versus the other,” he told analysts.
Industry observers agree. “Target really owns omnichannel excellence,” says Don Stuart, managing director of Wilton, Conn.-based Cadent Consulting Group. “It has built a really nice bridge between brick and mortar and e-commerce.” He adds, “Walmart is a behemoth in food, generating approximately 50% of its sales from edibles to Target’s 20%, and Amazon rules e-commerce. But Target is better at tying it all together with an integrated omnichannel experience.” Combine that with one-stop shopping, great quality at an attractive price, innovative merchandising, an enhanced in-store experience, and a wide selection of valued store brands (more than 45), continues Stuart, and it’s no surprise the chain is doing so well.
“However, Target is going to have a hard time matching last year’s achievements because so many other retailers are open for business again,” he remarks, citing strong gains recently by chains like Whole Foods that don’t offer one-stop shopping like Target. “So it will be facing a much broader competitive landscape.”
In fact, there are signs it’s already happening. While Q1 food comps were in the low- to mid-single digits — pretty impressive since guests were “aggressively stocking” pantries, fridges and freezers a year earlier, according to Cornell — Target appears to be dropping off faster than its peers since then. In the natural frozen meals segment, for example, its sales during the latest 24 weeks are down almost 17% versus an 8% drop for total MULO.
FOOD OFFERING ‘PRETTY STANDARD’
While Target “gets a lot of things right,” according to Neil Saunders, managing director of retail at New York-based GlobalData, he admits that, traditionally, it’s done a much better job with non-foods than foods. “Frozen and refrigerated departments are pretty standard,” he says, echoing what we heard from manufacturers as well. (Actually, the term “plain vanilla” was used by more than one).
Although recent improvements in the grocery section may not be as transformative as those elsewhere in the store, the shopping experience is definitely better, says Saunders, citing new shelving, lighting, signage and better, more prominent displays of produce. “But I would argue that there’s still more to do on grocery and that Target should be a lot more innovative and experiment with things like counters, fresh products and meal solutions.”
‘Target seems to be caught between being a top-up shop and a full-line grocery store.’
However, he continues, “My sense is that Target still hasn’t decided what it wants to do in grocery so there’s a reticence to invest in changing things up. At the moment, it seems to be caught between being a top-up shop and a full-line grocery store.” The opportunity for Target to capture a greater proportion of spend from shoppers is there, Saunders adds, but the chain doesn’t appear ready to take it.
“Target may be trying to figure out exactly what it wants to be in food and beverage versus other areas where it plays harder and better,” says Stuart. Or perhaps the chain recognizes that margins are lower in food and beverage compared to other categories it competes in but knows it still needs to play there because food drives trip frequency.
In the absence of a more expansive grocery offer, proper assortment becomes even more critical. While some observers think Target is on the right track, especially when it comes to its own brands, others aren’t so sure. But let’s start with the positive. Boasting an all-time-high 36% gain in Q1, “Private label brands have been a critical factor in Target’s success,” says Tiffany Vasilchik, senior vp, growth strategy, at Minneapolis-based Magid. “It comes down to executing their private label playbook well. They launch, develop unique features and win a following all while effectively offering good quality, well-designed products in relevant, on-trend categories.” For example, she says, Good & Gather items are made without artificial flavors and sweeteners, synthetic colors and high-fructose corn syrup, illustrating Target’s “mastery of trends” as well as a clear understanding of what its customers want. With more than 2,000 SKUs, the line runs the gamut from staples to more premium items under the new Good & Gather Signature sub-brand. And in May, Target debuted Good & Gather Plant Based, including more than 30 SKUs across multiple dayparts. With more than $2 billion in sales last year, “Good & Gather has been a very smart bet by Target,” says Vasilchik.
To complement Good & Gather, Target rolled out another new own brand, Favorite Day, this past spring. It includes more than 700 sweet and savory products in categories like ice cream, baked goods, snacks, candy and beverage mixers. Focusing recent private label activity on both plant-based and indulgence — two trends accelerated by the pandemic — demonstrates “a masterful understanding of consumer preferences,” says Cadent business analyst Katherine Policelli. But has the retailer gone too far on hot trends? Some manufacturers think so.
For example, says one, “Target went heavy into plant-based, adding brands like Amy’s, Sweet Earth, Purple Carrot and Gardein, and yes, that category is doing well, but there are still a lot of meat eaters out there. They’re trying to be progressive like in non-foods, but they may have gone too deep with the plant-based meats. I’m just not sure there are that many sales there.”
Manufacturers say the brand mix is also problematic — and heavily skewed toward big CPG players. “Target is way too locked in to grocery behemoths like P&G and Conagra,” leaving little space for the variety consumers crave, says one vendor partner, repeating a complaint we heard from multiple sources.
‘Target is way too locked in to grocery behemoths like P&G and Conagra.’
“The brands they bring in don’t always match up with what guests are looking for,” adds another manufacturer. “In the natural set, for example, Conagra-owned Gardein is the No. 6 brand at Target because it’s distributed nationally, but it’s not even in the top 15 overall. And then there are other brands, like, say, Rao’s, that are doing a great job everywhere else but aren’t even in the top 10 at Target because they’re only in limited distribution.”
Despite its close relationship with major CPG players, Target did just kick off its first Target Takeoff accelerator program for emerging food and beverage brands. Eleven companies were welcomed into the first class, including one frozen brand, Bagelista bake-at-home bagels.
SIGNAGE, DISPLAYS GET HIGH MARKS
While the assortment may not be everyone’s cup of tea, industry observers give Target high marks for in-store signage and displays. For example, says Vasilchik, “A recent store check of the frozen aisle found case after case labeled with large, well-placed triangular banners calling attention to such on-trend items as “Non-Dairy,” “Plant-Based,” and “100% Sustainable Seafood” offerings.” She also noted frozen entrees and combos of frozen items labeled “Easy Family Meals” and “Meals in Minutes.” We also spotted ample signage touting the chain’s own brands, including one that lists all the ingredients Good & Gather doesn’t contain; a few describing the various wellness icons Target uses on-shelf; and several that promote e-commerce options like same-day delivery.
In addition, says Vasilchik, “The vast majority of end-aisle displays featured bold topper signage that alternated by aisle between the long-term value message ‘Priced Right Daily’ and the short-term value message ‘Sale! $X.XX.’”
But that space does not come cheap, making it cost prohibitive for all but the biggest players, says one manufacturer partner. “That’s why you see the same brands there week after week.” However, on the day we visited, the most striking thing about both the endcaps and a nearby display of frozen and refrigerated products for grilling was how empty they looked, highlighting a persistent problem at Target.
“Out-of-stocks are a key shortcoming at Target that has led to hundreds of millions of dollars in lost sales,” confirms Stuart. Although the chain has reportedly committed to increasing in-stocks in high-volume stores by 3 percentage points this year, it’s clear there’s still work to be done.
“Out-of-stocks is by far Target’s biggest weakness, but they don’t seem able to fix it,” says one manufacturer.
“It’s a never-ending issue,” adds another, who says his team’s efforts to correct problems itself in-store are always quickly nullified.
“We often see product just sitting there on pallets in the back when it’s out-of-stock on shelf,” reports yet another supplier partner, who wonders if it’s simply a matter of not restocking enough or adhering to an overly rigid restocking schedule.
That’s how one manufacturer sees it. “Unfortunately, instead of hiring more help to stock shelves more frequently, Target has reverted to deleting items in every section in an attempt to expand shelf space for higher velocity items” — a common occurrence across supermarkets but more noticeable at smaller ones.
However, another manufacturer partner says he’s seen some improvement in store-level operations and in-stock positions since the start of the pandemic. “That said, things have not gotten any better on the distribution side,” where problems with FDCs and C&S remain. “Securing delivery appointments is a consistent challenge and warehouse space is limited. Plus, the Target team’s communication with C&S is horrible, and that makes delivering frozen products a nightmare.” The planned addition of four new regional distribution centers by the end of 2022 should help, but manufacturers aren’t certain that will be enough.
Another downside to dealing with Target is frequent managerial changes. For example, says one manufacturer partner, “The frozen meals category manager has only been there 18 months and he’s already being promoted. It’s a challenge when there’s a new category manager every two to two-and-a-half years because sometimes they don’t get the chance to implement changes.”
In general, however, Target is regarded as a good partner, though several manufacturers mentioned its rigidity. “It’s very structured,” says one. “There’s not a lot of flexibility or innovation versus a retailer like Kroger that’s open to trying new things to drive growth. With Target, they have to make a certain profit margin percentage, and there’s no deviation.”
“Doing business with Target used to be great,” reports another vendor partner. “But now it’s just about increasing margin. For a mass merchant, though, I don’t think that strategy is feasible in the long run. Only so much margin can be squeezed from the supplier side. Soon they’ll have to raise prices, which will put them at a competitive price disadvantage.”
Clearly, that’s something Target would rather avoid, evidenced by a handful of reports from suppliers that Target is refusing to accept price increases. That doesn’t bode well for all of the manufacturers planning them in the near future in response to current inflation.
‘TWO THUMBS UP’ FOR REWARDS PROGRAM
In addition to its omnichannel excellence, private label prowess and in-store merchandising efforts, industry observers call Target’s Circle rewards program a real asset to the chain on several levels. “First, it encourages and drives spending at Target because shoppers can collect points that give them money off future purchases,” says Saunders. “Second, there’s an element of community engagement as customers can vote, based on their points, for which local charities Target should donate to. And third, the scheme allows Target to capture a lot of data on customer habits and buying preferences, which, most importantly, helps them understand consumer behavior across different channels.”
The program reportedly includes more than 90 million households, which receive customized offers and coupons through the Target app and e-mail. Target Circle isn’t as advanced as Kroger or Amazon, “But I give it two thumbs up versus Walmart, whose Walmart+ program for online shopping does nothing with loyalty or longitudinal tracking of individual households over time,” says Stuart.
Stuart also likes Target’s plan for expansion, which include the addition of 30 to 40 stores every year, mostly in urban and dense suburban locations and college campuses, “creating greater connection with the next generation of guests. These smaller neighborhood stores will help diversify the consumer base while larger, one-stop shops will serve consumers who want efficiency,” he adds.
Target is also planning 150+ remodels this year, which not only boost consumer satisfaction but generate 2% to 4% incremental growth in their second year, says Saunders. “So in a sense, these improvements pay for themselves and help Target maintain its lead.” One important area of investment is the optimization of front-end Drive Up (a.k.a. curbside pickup) areas, which saw first quarter sales volume nearly 21 times higher than two years ago.
Because of Target’s unique stores and hub model, more than three-fourths of its Q1 digital sales were fulfilled by stores. “The main benefit of this approach is that it keeps costs down, which is why Target has remained very profitable even as online sales have risen,” says Saunders. So continued investment in that area is likely to yield positive results.