business

As a top executive at Target Corp., Kathee Tesija already had analyzed the data, crunched the numbers and fine-tuned the details on a new plan to add a small grocery area to Target's general merchandise stores. But the concept didn't truly pass muster until Tesija pushed her own cart through a test store, her family's shopping list in hand.

"For two teenage boys and a busy family, I could get all the basics, and certainly enough to make dinner," said Tesija, executive vice president of merchandising for the Minneapolis-based retailer. "Maybe we don't have 10 choices, but we've got two or three."

For the company that wowed boom-time consumers with fashionable and trendy items at an affordable price, Target's recessionary focus is now on something more basic: food. With penny-pinching consumers more interested in buying bananas than blouses, groceries have been one of Target's few bright spots in the past year.

The retailer won't say how much it's investing in this effort to expand fresh groceries at its regular-size discount stores, but the goal is to get the sales draw of a SuperTarget for a fraction of the expense.

The first mini-grocery went into Target's downtown Minneapolis store without fanfare in October, and the company has since added fresh meat, chicken and produce to 14 general merchandise stores around the country. Other Twin Cities test stores are at Ridgedale and Medina. The concept will expand to 100 stores by year's end.

The stores offer about 90 percent of the food categories of SuperTargets (which have full-scale supermarkets) and about half of the assortment. So, shoppers will find apples, bananas and pineapple, but likely will need to go elsewhere for papaya or pomegranates.

Early results look encouraging.

"With these test stores, the day we set it up, the results popped and stayed up," Tesija said. "It was instantaneous.''

Not only that, Tesija said, but sales lifted storewide, even in categories that lost floor space to make room for the grocery area. If trends continue, she said, the company will add fresh food to as many as 1,000 of its general merchandise stores.

The new mini-grocery seems to have hit the sweet spot for downtown resident Vicki Ridgway, who said she was at the Minneapolis Target the day it opened and now shops the store three to four times a week.

"This is pretty much where we get all of our groceries now," she said. "They've got hamburger -- their shrimp is the best I've ever had -- and we always buy their frozen fillets."

Target has struggled in the past year as consumers flocked to Wal-Mart and Costco for no-frills bargains. The company's first-quarter profit fell 13.4 percent compared with a year ago. Target also has taken deeper blows than other discounters during the slogging economy. Discretionary items make up 60 percent of a store's merchandise and the retailer has struggled to convince shoppers that Target can be both trendy and thrifty.

Back to basics

Food, while low in profit margin, has been a reliable draw as 401(k)s fall and unemployment rises.

"Target's core customer is showing a willingness to direct more of their food dollars in a Target store, so it's an opportunity to expand wallet share," said retail analyst Jeff Klinefelter of Piper Jaffray in Minneapolis. "It could be a much shorter-term driver of comps and profit improvement as opposed to embarking on some acceleration of SuperTarget growth across the country."

Target has been slowly expanding its food business since opening the first SuperTarget in 1995. Some investors and analysts have criticized the retailer for being late to the grocery business, which is more complicated than selling skirts and throw pillows. But the company now owns and operates a food distribution center in Cedar Falls, Iowa, and partners with Supervalu on three others. It has continued to invest in its Archer Farms and Market Pantry private labels, which make up about 20 percent of food sales.

While Wal-Mart has added supermarkets to the bulk of its new and remodeled stores over the past five years, Target has added SuperTargets more cautiously.

Last year, Wal-Mart added 300 SuperCenters to its U.S. rolls through discount-store conversions and new construction. The Bentonville, Ark.-based discounter opened just seven general merchandise stores.

In contrast, Target had a mix of 245 SuperTargets and 1,453 general merchandise stores at the end of last year. Wal-Mart gets almost half its business from grocery, compared with 37 percent for Target.

Loss of 'mindshare'?

A recent analysis by Citigroup showed that Target's market share of food is slipping for the first time since 2004, when Citi began tracking supermarket trends.

Citigroup analyst Deborah Weinswig, who has a sell rating on Target stock, applauded the expanded fresh-food concept but doesn't think it'll be enough to turn the tide.

The "significant market-share loss highlights our concern that Target has lost mindshare as a grocery destination," she wrote in a report last week, "and that driving traffic and sales in the current environment could prove difficult."

Weinswig said Target's food customers spend eight times more than non-grocery customers, and that they shop more than four times more often per year than merchandise-only customers.

Target disagreed that SuperTargets have lost market share, saying data from IRI Nielsen and its own analysis show its grocery business is on firm footing, though it declined to provide specifics.

The mini-groceries aren't meant to replace SuperTargets, Tesija said. But as communities become more resistant to giving up land to national chains, and unions push to organize workers, it's not hard to see why Target would prefer to scale back floor space on low-producing categories such as music, automotive, sporting goods and home improvement to make way for fresh food. The areas can be up and running in less than a month.

The average SuperTarget is about 175,000 square feet, and an average discount store is around 120,000. A new discount store with the mini-grocery will fall in the middle, about 135,000 square feet.

Target may find that as American consumers adjust to a "new-normal" mindset of making do with less, the megastore shopping experience may become less appealing, while its smaller discount-plus-grocery stores gain popularity.

Home Depot CEO Frank Blake admits that the home supply company continued to build stores even when the market was saturated and paid a price for expansion. The company now is trying to build revenue at existing stores.

While it's too soon to say whether Target's beefed-up fresh food shelves will be a company-wide recipe for success, busy mothers like Nicole Melancon say one-stop shopping is essential.

"It's very convenient," she said, as Sophia, 2, and Max, 4, squirmed in the cart. "I can get the kids' stuff -- milk, cereal and diapers -- and also food."

Jackie Crosby • 612-673-7335