How quickly Target should grow its food business is among the issues chewed over in the tit-for-tat proxy battle between management and investor William Ackman, and the debate reveals a lot about Target plans and limitations.
Target's management recently announced that the company's discount stores would add produce and meat to an operation that only recently saw a significant expansion of grocery and frozen food. Among Ackman's assertions is that he and his candidates, if elected to Target's board, would further accelerate expansion of the retailer's food business.
In a letter and an SEC filing responding to Ackman criticisms, Target detailed its vision for food expansion:
In the past 10 years, Target has grown its consumables and perishables as a percent of its total sales from less than seven percent in 1998 to 15 percent in 2008. Annual food sales, in dollars, have grown at a compound annual rate of 19.7 percent over this period to nearly $10 billion dollars. Consistent with this past success, our new expanded food concept has been well received by our guests, and we expect this concept to be incorporated into approximately 100 new and remodeled Target stores by year-end 2009. If we continue to experience favorable results from these stores, we would intend to incorporate this expanded food offering into a substantial portion of our chain over the next three years.Ackman has suggested that Target's relatively sluggish growth in food, certainly by comparison with Wal-Mart, had placed it in an inferior position in the recession. Some criticism of Target's hesitation in committing to food operations is warranted. Early in the decade, the retailer's supercenter growth was lackluster enough to draw speculation that management only conducted supercenter experiments to appease food enthusiasts among its investors
Our goal is to provide our guests with the added convenience of one-stop shopping, drive additional fill-in grocery trips and generate incremental sales across the store.
If Target had grown food operations quicker, it might be drawing more consumers to stores in the recession, but it's uncertain how big a difference that might make to its current performance. A rush might not have given the retailer time to develop a food presentation that it could effectively brand and integrate into the larger store operation. Besides, Target's food operation never screamed bargain the way Wal-Mart's does.
Moreover, Wal-Mart can count on a highly effective food distribution system it spent years building. At one point, the company even purchased a distribution company, McLane, to access knowledge and efficient food logistics systems. Target only launched its first perishables distribution center last year, and its distribution partner, Supervalu, has helped run the facility. So, effectively, Target's logistics wouldn't be more efficient than those of other food retailers Supervalu serves. Supervalu gets high marks as a distributor, but few would believe it is as effective in servicing discount store and supercenter food operations as Wal-Mart.
Additionally, as noted in its SEC filing, Target has positioned itself to gain smaller fill-in shopping trips, not to grab big-bucks stock up visits Wal-Mart attracts.
The idea that Target could jump start food and pull Wal-Mart numbers in what's left of the recession is in line with sponsoring a kid with training wheels still on his bike to compete in the Tour de France with Lance Armstrong. The kid might have the talent but not the equipment or the experience. Without those, the effort would be a waste of time and Target money.