Ackman Could Choke on Target Food

Bill Ackman may wait a long time for his investment in Target to pay off because the retailer, innovative and dynamic though it has been, isn't positioned for strong performance in a recession.

Ackman tried to cajole Target into selling off credit card operations and real estate to boost an investment fund he developed with the retailer in mind. That didn't work and now he's apologizing to investors, putting his own money in the fund and talking about looking at Target long term. For a significant return on investment, though, he needs the company's share price to rise a lot, and he'll have to wait awhile for that. Food is the crux of Target's dilemma, the very department that has boosted rivals such as Wal-Mart and Costco, which have enjoyed a significant edibles offset to general merchandise weakness. Target has a relatively small percentage of supercenters so, while it has expanded food in its discount stores, it lacks meat and produce departments in the overwhelming majority of locations. As a result, it can't take major weekly grocery shopping trips consumers make away from its rivals, and that's where the big pay off is.

Another problem is its private label. For years, it has invested in its upscale Archer Farm brand, creating vibrant packaging and trendy products. Its bargain Market Pantry brand, though, languished in boring boxes and bottles containing less inspired products. While Target advertising lately has pushed Market Pantry in an effort to market low-price alternative products, the company hasn't made major improvements in package or contents so it doesn't necessarily come off as an attractive replacement for consumers trading down from national brands. In contrast, Wal-Mart has expanded its bargain Great Value brand over the past few years developing enhanced products as demand has shifted. Not only that, but the company is in the midst of a timely refurbishment of the product line, Citigroup analyst Deborah Weinswig recently reported. Meanwhile, Costco has consistently upgraded its Kirkland brand while maintaining it as a bargain alternative.

Food is enjoying modest comparable store sales gains at Target, up in the low single digits for January according to a company sales call. Still, because of the scale and scope of the operations, Target's food can't offset declines in general merchandise to the same degree as it can for competitors with more thoroughgoing edibles operations.