Target Takes a Chance on P-Fresh
March 2, 2010
Target, Minneapolis, is counting on its new P-Fresh stores to help it meet the challenges of the post-recession market, but the format also affords it an opportunity to capitalize on consumer and retail trends.
P-Fresh gives Target the chance to add more extensive food operations at a lower cost than would be the case with rapid supercenter expansion. Emerging in a pair of Minneapolis stores in 2008, P-Fresh added limited produce and fresh meat to an existing format called extended pantry that already offered consumers in the vicinity of 100 refrigerated and frozen food doors as well as extensive grocery. The company expanded P-Fresh to 100 stores in 2009 and, late last year, announced it would convert 350 additional discount stores to the format in 2010.
During a November 2009 conference call as transcribed by SeekingAlpha, Gregg Steinhafel, Target chairman and CEO, said, “Because we firmly believe this concept is a low investment…way to add convenience for our guests and drive greater trip frequency, we committed to this initial 100-store pilot last year after a highly successful two-store test and when many retailers were retrenching.”
P-Fresh may have its advantages, but Target still faces challenges in expanding its edibles operations. Over the past two decades, as Walmart invested in the food business, Target focused on fashion, Neil Stern, senior partner and analyst for retail consultant McMillan Doolittle. The retailer’s strategy enabled it to build market basket size and margin. As a result, Target not Walmart emerged as the darling of investors, and the example of how a mass-market retailer should manage the new millennium marketplace.
Then recession hit, and the weaknesses in Target’s strategy became evident. Dependent on product categories consumers could do without, Target couldn’t shift its emphasis to food and other necessities as effectively as Walmart could when the economy turned. As its rival was building supercenters and an extensive food distribution system, Target opened supercenters sparingly and only hung its bull’s-eye logo on four DCs, and that with help from its major food supplier, Supervalu.
“It was curious to see Target, when Walmart was opening 250 supercenters, opening 20 supercenters and 80 discount stores,” Stern says. “The reason they got into trouble is they didn’t make the big decisions 15 years ago. One way or the other, they are trying to reverse those decisions by, in essence, going back into the same box and finding a way to wedge food into it.”
In a real way, Target’s launch of P-Fresh represents the retailer making a virtue out of necessity. Target has acknowledged that it sped the development of its food business in response to the recession and changing consumer shopping patterns. Yet the move was not strictly defensive. The recession afforded a particular opportunity. Most food retailers experience 10% customer turnover yearly, Stern notes, with the number of new and departing shoppers roughly balancing out. And most of the turnover is the result of shoppers changing residences or jobs. Force of habit helps food retailers hold on to customers, but it makes winning new customers a tough proposition.
The recession wrecked the turnover equation. Concerns about money pushed a large proportion of consumers to rethink where and how they purchased food. Yet, even in a recession, consumers who make a change will begin to form a habit.
“Inertia kicks in again,” Stern says “The reverse hold is going to continue to take place.”
The economic downturn presented Target with an opportunity to attract consumers looking for alternatives. In the recession, the way to do that was to present consumers with a value, and it certainly wasn’t a coincidence that the retailer shifted its marketing emphasis from fashion to value at the same time it was expanding food and consumables.
In a way, fellow retailers have set the table for Target’s expansion of P-Fresh. For 30 years, a trend away from traditional supermarkets with wide-ranging assortments has been building. Today, food retailers enjoying sales gains based on food and consumables largely operate outside the traditional supermarket sector. Warehouse clubs, dollar stores and alternative grocery operations such as Trader Joe’s, Aldi and Save-A-Lot are drawing consumers even though their food assortments are so limited they virtually force customers to shop other stores. The success of the limited assortment approach to food retailing is evident in the SKU reduction occurring in mainstream supermarkets. Consumers seem to accept that, now, visiting multiple food retailers is the only way to obtain everything on their shopping lists.
Given those trends, the assortment at P-Fresh, if limited, is likely to be acceptable to many consumers. Indeed, the new, high-efficiency version of Walmart’s supercenters, which encompasses less floor space and carries fewer SKUs than its predecessors, also tends in the direction of P-Fresh.
“We looked at a Target P-Fresh and looked at a Walmart high-efficiency store,” Stern says, “and, looking at both, it seems as if consumers are being retrained in their expectations of what selection and variety mean. That plays well for P-Fresh.”
In an interesting turn, today, Target is expanding its food assortment in stores remodeled to the P-Fresh format while competing retailers are reducing the number of SKUs they carry.
“By carefully evaluating the number of items in each category, this enhanced assortment includes 90% of the food categories and approximately 60% of the SKU’s available in a Super Target store, and the concept incorporates unique fixturing and visual elements that clearly convey our commitment to a credible food offering in a general merchandise format,” according to Steinhafel.
P-Fresh may afford Target an opportunity, but opportunity doesn’t guarantee success, and the retailer faces challenges in its food business. The number of supercenters and DCs Target operates pales in comparison with Walmart. Even if they are inexpensive to open versus supercenters, P-Fresh stores require significant investment to launch and operate.
During a visit to a P-Fresh store in eastern Pennsylvania, the labor investment required to operate the format became apparent. Under a manager clearly assigned departmental responsibilities, a team of employees scrambled to restock the fresh, frozen and refrigerated food section at midday. After the main effort, two employees returned regularly to dress the section.
Doron Levy, president of Captus Business Consulting, Toronto, who works with store-level management on execution issues as part of his practice, says Target will have to make a consistent commitment to systems and people to maintain its P-Fresh stores. The 10% to 15% increase in unit labor that food operations demand is only the most obvious investment Target must make, he notes. As operations in the Pennsylvania store demonstrated, Target also must commit significant management time to the food department. Managers are needed there to supervise employees as they stock out arriving food shipments and to conduct section maintenance spot checks throughout the day.
“In addition to quality products, a successful food program requires competent people that understand the perils of food merchandising,” Levy says. “Inventory management and rotation is key when dealing with perishables. Proper rotation and merchandising is how you sell food products. Maintaining the image of food sections is more intense than regular merchandise and requires more time and more personnel than the rest of the store.”
With the opportunity P-Fresh and food provide, Target accepts a risk. If it can’t make the edibles operation work at P-Fresh stores, food could taint the Target brand.
“Disheveled sections will affect the customer experience and ultimately affect the store’s reputation,” Levy notes. “Refrigerated, frozen and fresh food in itself is a marketing vehicle for retailers. Word of mouth marketing can spread very quickly if the merchant offers excellent products that are merchandised logically. The emotional connection customers have to food can make or break a retailer, especially one just entering this category.”
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