TARGET GROCERIES BRIEF

Background: Target's valuation in the stock market has fallen. Stock market analysts have suggested that target leave the grocery business as it is a competitive industry and has low returns. Review the options and give a recommendation to the CEO about what to do with the grocery business.

Brief:

The best way to improve the growth of Target would be to scale back the grocery business to non-perishable and convenience items. This option would allow Target to maintain some of its brand equity, while freeing up floor room for higher-margin goods. This gives Target a unique opportunity to be selective with their grocery inventory, making sure they optimize their offering to only what people want. Continuing groceries on a smaller scale, would still encourage customers to come into the Target stores on a frequent basis, hopefully leading the purchase of other goods. To carry out this option would mean remodeling fees for each store. However, not only would Target have the potential to profit more from the higher margin goods, they would also be saving money from eliminating the volume of perishable foods, which have costly supply chains, and run the risk of spoiling before being bought. A potential downside is that this strategy could be seen as a confusing format change. However, this can be mitigated with clear communication. There is also concern that scaling back would fail to make a difference, however the math proves otherwise. The grocery business is highly competitive but with very low margins. The industry profit averages as a percentage of sales for the profit before taxes in supermarket category is 1.7, which is half of almost all the other categories such as men’s clothing and department stores. Therefore, it can be reasonably assumed that in the reallocated space they would only need to sell a fraction of higher margin goods in compared to groceries to make the same profit.

While other solutions considered had merit, their flaws that make them less ideal. One option was to outsource the grocery business so that Target would no longer have to pay the costs of running and supplying the business. Precedent from the outsourcing of the pharmacy business proves that this strategy can be successful. However, the pharmacy industry is different from the grocery industry and so there is no guarantee the results would translate. Additionally, the grocery business has low margins, and so there would likely be little profit to share. Furthermore, the more efficient grocery chains may be less likely to want to partner if they have a store in the area as they wouldn’t want to cannibalize their own ventures. And finally, certain types of outsourcing would take up valuable floor space that could be filled with higher margin goods.

Another option that was considered was abandoning the grocery business altogether in order to free up a large amount of floor space. However, this option comes with many downsides including expensive remodeling fee, loss of brand equity, and disruption to regular course of business. Furthermore, customers might not come to Target as often, reducing sales even with the addition of more higher margin goods. But most importantly it could result in a loss of loyal customers who liked getting at Target.

The last option considered was to continue with the format that is already in place because as of now the grocery business, grocery category’s performance is stable. This option allows Target to continue to leverage the brands and supply chains it had created. However, growth for the grocery business has stagnated, staying at 21% of sales for the last three years. Therefore, Target would not be fully optimizing its potential because they might be able to earn a larger profit by stocking more higher margin goods.

Scaling back the grocery business is the best way forward for Target. However, before the plan can be executed, there should be further market research carried out to understand which groceries customers buy frequently and those that they do not, so the inventory can be strategically cut back. The research should also look into new things people want that are not offered, in which Target’s already existing food brands could fill the gap. The risk with this strategy is competitors trying to pull Target customers away by pointing out that they have a higher grocery variety than Target does with a scaled back grocery business. However, Target’s differentiation technique is to be “stylish” and offer flagship merchandise and the same strategy should be applied to food. Target should create niche snacks that are worth traveling for. In terms of implementation, after gathering data on shopping habits, they should start remodeling the stores in which, customers utilize the grocery business the least. This would mean less customer resistance because they don’t use the service as much in those areas. It also gives Target time once it has made the announcement to gauge the reaction from customers in other areas before remodeling can begin in those stores. They could do collect this information through sentiment analysis by scouring the internet as well conducting focus groups made up loyal customers and occasional customers.