Target Could Dump Supercenters with P-Fresh Success
Target (TGT) has a simple strategy to improve its business that, oddly enough, may end up leading the retailer to abandon supercenter operations.
Not the mini supercenter business. Target runs full-fledged supercenters that can be 50 percent larger than the discount stores it operates. However, Target has developed the P-Fresh format that introduces a limited selection of produce and meat into its latest-generation discount stores, which already included substantial grocery, frozen food, self-service deli and dairy operations. They may not carry as broad a food selection of a supercenter or supermarket, but P-Fresh mini supercenters carry enough products for consumers to cover their weekly shopping basics.
P-Fresh stores are critical to Target's sales and profit growth. At a recent Goldman Sachs Global Retailing Conference presentation, Doug Scovanner, the company's CFO, said as soon as a standard discount store is converted into a mini-supercenter, sales gain from six to seven percentage points. With consumers still slow to spend in the soft economy, the sales lift has been a bonus.
Yet, although P-Fresh stores can boost sales substantially, profits are another matter. Target has two sets of products, ones that carry margins of around 20 percent, others that have margins around 40 percent. Not surprisingly, the lower profit products are often those that Walmart (WMT) also carries, and they also are more likely to be food and everyday needs. Think Campbell's soup and Bounty paper towels. Conversely, just about all apparel and the great majority of home items lack Walmart counterparts and carry the higher margin.
So P-Fresh stores add a full-range of food products and get a sales lift -- particularly from low-margin items, although Scovanner said demand has begun rising for higher profit goods in apparel and home departments. That phenomenon is happening in a building that is smaller, less expensive to build -- or remodel in a conversion -- and less expensive to operate than is the case with a supercenter. With a bigger assortment of food and everyday needs, a supercenter might produce greater overall sales than a P-Fresh store, but it would be in products that offer little if any profit. Given that P-Fresh stores have pretty much the same general merchandise selection as supercenters, it's unlikely that they would enjoy many additional sales in higher margin general merchandise product categories than do their mini counter parts.
So, in that way, Target's explanation about why P-Fresh stores have been successful also is an argument for not opening more supercenters.
Target is the Number Two supercenter operator after Walmart with 250. But Walmart is in a league of its own, operating many times more supercenters. Target took a decade or so to reach 250 supercenters, but it will open 340 P-Fresh conversion and ground up stores this year to bring its total to about 400. Next year, Target will convert "hundreds and hundreds" of stores to the mini-supercenter format, Scovanner said, with the total likely to surpass the number that metamorphosed this year. And it will enjoy additional sales of profitable items with a minimal addition in cost, which makes P-Fresh the vehicle Target should focus on to churn more cash into company coffers.
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