Wednesday, March 01, 2017

Whole Foods Inside of Target?

Brian Sozzi of has reported in recent days rather extensively about Target's disappointing financial results.   Target experienced a 1.5% decline in same store sales in the most recent quarter, while rival Wal-Mart produced a 1.8% gain in same-store sales.  Moreover, Target missed earnings estimates this quarter, and the firm decreased its estimates for 2017 earnings.  Sozzi has some interesting ideas as to how the firm might turn things around.  For instance, he's focused on the grocery part of the business, noting that Target must decide who it wants to be with regard to the food portion of the stores.   Sozzi proposes one solution that might startle some observers:

Food sales represent more than 20% of Target's business, and it's vital it finally gets this business right. Same-store sales were pressured throughout last year, as the company battled with pricing strategies in a competitive backdrop. Further, Target continues to deal with not having a broad enough assortment in fresh categories such as fruit, vegetables and meat and deli (would like it if they sold some fresh fish and more grab-and-go sandwiches at my local Target, for example). 

The retailer has to decide whether it wants to be a grocery store and, if so, how it could do it more effectively. Becoming a successful grocer could lift sales throughout the store. As I have said in the past, Target should consider outsourcing its grocery department to a Whole Foods (using its new 365 value banner) in the same fashion as it outsourced its pharmacy business to CVS Health. Let someone with the expertise in food service handle the business, freeing up Target to focus on what it does best -- higher quality general merchandise vs. Walmart at good prices.

I certainly find the concept intriguing.  By all accounts, Target made a wise decision to outsource its pharmacy business to CVS Health.   It did not have the same capabilities as CVS, and yet, having a strong pharmacy in the store had important benefits in terms of building foot traffic.  CVS made for a perfect partner.  However, the Whole Foods partnership raises some questions.  Yes, Whole Foods offers strong capabilities in the grocery business.  However, Whole Foods has a very premium image, and it is known for high prices ("Whole Paycheck").  Yes, Target hopes to differentiate itself from Wal-Mart and offer a premium shopping experience for guests.  Is Whole Foods a bit too far in that direction though?  Will it turn off shoppers looking for good value (Expect More, Pay Less)?  Sozzi recommends using the new 365 value banner from Whole Foods, but that store concept is not yet proven.   Perhaps more importantly, Whole Foods is facing many struggles of its own right now, both trying to reinvigorate its flagship stores as well as launch the 365 stores.   CVS Health was a strong, high performing partner for Target.  Is it the right moment to partner with a firm such as Whole Foods, given the challenges that the grocer is facing at the moment?   Finally, outsourcing 20% of your business is a far different decision than shifting the small pharmacy unit to CVS Health.  Sozzi certainly raises an interesting idea though, and I'm sure others will press Target's management to consider similar moves if same-stores sales growth does not improve.  


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