business

First comes the cupcakes. A whiff of bacon hits next.

Even before reaching the test kitchens at Target Corporation's downtown Minneapolis headquarters, visitors can smell the work going on inside the newly expanded facility. Here, two dozen food scientists in white lab coats weigh, measure, cook, taste and test all manner of groceries sold mostly under Target's in-house Archer Farms and Market Pantry labels.

"Test, verify and confirm," said Kaarin Ottman, a product-performance scientist, as she stuck a meat thermometer into a fresh-from-the-oven hunk of chicken Cordon Bleu. It's a likely Archer Farms entree of the future.

Target may have made its name with affordable-yet-fashionable clothes and home furnishings, but in recent years, the nation's No. 2 discount retailer has been steadily beefing up its food business. Sales of Target's private labels represented less than 1 percent of its total food sales in 2001. This year, the retailer expects its brands to account for 20 percent of food totals.

As thrifty consumers have stopped buying the clothes, furniture and other discretionary items that have plumped up Target's sales in the past, it's Target's groceries that are drawing shoppers to stores these days.

Target won't reveal specific numbers. But Greg Duppler, 53, who's driving the expansion of the food business, put it this way: "Archer Farms is flying, but Market Pantry is really flying," he said.

The downside, as Target's recent declines in overall same-store sales show, is that food is a lower-margin business than apparel or home furnishings.

"That's the delicate situation Target's balancing now," said Jeff Klinefelter, an analyst with Piper Jaffray in Minneapolis. "Long term, you can't have sales gains only in low-margin products -- which is one reason why the private-label initiative is so important to them. It's got higher margins than average food items."

Profit margins on store brands run 10 to 15 percent higher than on sales of national brands, according to industry analysts. And Target is finding that it's much easier to pass along price increases for milk and eggs than it is for end tables.

Wine Cube and Choxie too

The test kitchens and product development labs, which opened in July with triple the space given the previous operation, is just one sign of Target's commitment to private labels. The retailer also is putting significant capital into building and operating its own distribution centers for fresh produce and fresh and frozen foods.

Aug. 4, Target opened its first facility in Lake City, Fla., a 420,000-square-foot, semi-automated plant that it shares with Eden Prairie-based Supervalu. A second distribution center is scheduled to open in Cedar Falls, Iowa, in 2009.

Target, which opened its first SuperTarget in 1995, now operates 231 of them, and has expanded groceries at all 1,648 stores.

Archer Farms, Target's high-end organics offering, and Market Pantry, its low-priced rival to national brands, make up the bulk of Target's private-label offerings. Target also owns the Sutton & Dodge meat label, Wine Cube and Choxie chocolate and candies.

With quality improving and prices running 15 to 30 percent below national brands, in-house grocery brands have been gaining ground on national brands for years.

Private-label sales of food and beverages have risen 9 percent to $50 billion in supermarket sales in the past year, while national brands grew only about 4 percent, according to recent data from the Nielsen Co. Still, national labels still account for more than 80 percent of supermarket sales.

Store brands, which long ago ditched their generic and colorless labels, have become a key way for grocery chains to build consumer loyalty. Trader Joe's is a major player, with private-label goods making up 85 percent of its merchandise. Supervalu has won industry awards for its Signature store brands, which include Carlita, Nature's Best and NutriPlan.

Surveys by BIGresearch and others consistently show that consumers have positive feelings toward store brands such as Kirkland (Costco), Sam's Choice (Wal-Mart), 365 (Whole Foods) and Private Selection (Kroger).

"The consumer food sector has worked hard to improve the taste, quality, and health and wellness of the branded products because they see the potential to gain dollars," said Patricia Novosel, who directs global food strategy for Ernst & Young. "There's also a lot more innovation. Companies are putting together portfolios of products -- like [Oscar Mayer] Lunchables that have meat, crackers and cheese."

Six months of granola

Target's expanded commitment to private label comes as it is expanding grocery offerings across the chain. A SuperTarget built in 2001 had 16 sides of food shelves, the industry yardstick. By 2004, Target had expanded that by 50 percent. Today's SuperTargets now have 38 sides of food.

With more than 2,000 items, the Archer Farms line takes up the most shelf space of Target's brands. But Market Pantry has a higher sales volume among its 1,600 items. And Market Pantry has done particularly well in the past year, as cash-strapped consumers seek out bargains.

Duppler, the senior vice president of merchandising and grocery and a 26-year Target veteran, said Market Pantry sales are especially strong in staples such as milk, sugar and flour. The brand's cheese makes up more than half of all cheese sales, he said.

"People are loyal to their brands, but they're becoming a lot less loyal," Duppler said. "National brands are still an enormous piece of our business, but they're certainly not growing as fast."

Target aims to increase sales of in-house brands 2 to 3 percent annually.

Duppler is the kind of guy who keeps a box of Archer Farms' blueberry-flax granola on his desk for six months -- chomping on handfuls of it at a time to see whether the plastic box top Target invented keeps the cereal crunchy over time.

It took Target 19 months to come up with the top, after hearing from consumers who complained that traditional box tops made their cereal go stale. Whether it was the new top or the jazzy flavor, Duppler said that the blueberry granola has been a big hit -- tripling projected sales.

"We're trying to have great, fun flavors that are a little bit out there, a little bit trendy, but not so weird that no one will try them," he said.

Duppler is well aware that putting the Target name on food carries a hefty amount of risk to go with potential bottom-line rewards. Recalls over foodborne illnesses are every grocer's nightmare.

That's where the test kitchens come in.

Before the products even hit the shelf, workers on the fourth-floor lab follow recipes to make sure they're easy to read. They bake them in ovens most likely used by homeowners or zap them in microwaves with power ranges from 700 to 1,300 watts. Recording every aspect, the workers check to see that food isn't undercooked, and thus a health hazard, or overcooked, and thus a taste disaster.

Like a wine sommelier, employees analyze the taste and texture of everything from candy to artichoke dip. They go so far as to count the pepperonis on the pizza, to make sure the vendor isn't scrimping in quality.

The process gets repeated for years, even after food arrives in stores

"That's our goal. Consistency. The exact results every single time," he said, snapping his fingers for emphasis.

Jackie Crosby • 612-673-7335