Target Corp. is heading into its investors’ meeting in New York this week with many analysts wanting answers about how it plans to avoid another year like 2016.
At the top of the list for many: how to fix Target’s grocery woes.
Food accounts for about one-fifth of Target’s overall sales, making it roughly on par with its apparel and accessories business. But sales in the segment have been falling for the past few quarters, one of the major factors in Target’s nine-month slide in traffic and comparable sales.
“Grocery doesn’t work for Target like it should,” said Neil Saunders, managing director of GlobalData Retail. “They’ve toyed around with some concepts and ideas. I’d like to now see a clear sense of direction of how they’re going to make grocery work for them.”
At the Minneapolis-based company’s investors meeting two years ago, Target executives acknowledged the retailer didn’t have a clear positioning in groceries. They unveiled a road map to improve offerings that included providing more meal and entertaining solutions, adding more organic and better-for-you options and doubling down on categories such as yogurt, coffee and craft beer.
The retailer has enacted many of those changes. Last spring, it added 1,000 new items to its shelves. It has been going through the supply chain to improve its fresh produce item by item.
It also has been sprucing up the grocery layout in markets like Los Angeles and Dallas, adding enhanced lighting, flooring and produce bins.
“Clearly we have more work to do,” CEO Brian Cornell told investors in November. “But we feel like we’re making very good progress.”
He said he’s working with Mark Tritton, Target’s chief merchant, on the next phase of the grocery evolution and would have more to share about it at the investors meeting on Tuesday.
To be sure, grocery is not an easy market to compete in. Wal-Mart, for whom groceries are a much bigger part of its business, has been lowering prices. A host of new or expanding players such as Fresh Thyme Farmers Market and Hy-Vee have been bringing added competition. On top of that, food deflation has been a challenge.
Now Target is searching for a new grocery chief to replace Anne Dament, who filled the role for 18 months until abruptly leaving in November as sales continued to sag.
While Target’s move to add more organic and healthier items was a smart move given growth in that part of the industry, it may have gone too far too quickly, said Amy Koo, an analyst with Kantar Retail. The changes may have taken some customers by surprise, especially if some products they were used to buying there were no longer on the shelf.
Target now seems to be backtracking a bit to rebalance the assortment, she said.
“When you take out some core items and insert some more ‘niche-y’ brands, you’re cutting down on the familiarity” for customers, she said.
Sean Naughton, an analyst with Piper Jaffray, thinks Target needs to work harder on improving its fresh produce.
“That’s what drives people to grocery stores now,” he said. “Most of the growth happening inside of grocery is happening in the perimeter of the store” in areas like fresh produce and prepared meals.
It’s concerning that sales continue to lag in this area even though Target has been focusing on it, he added.
“I think they’re having trouble building the case that they can win in that particular segment,” Naughton said.
Target entered 2016 riding a wave of steady momentum from the year before. But by the time spring rolled around, it started going backward.
Executives hoped for a rebound during the holidays. Instead, the company warned last month that comparable sales in November and December were down 1.3 percent, lower than expected during the important season. The slowdown may not be as severe as that facing department stores such as Macy’s and Kohl’s, but it was still a disappointing end to a year in which Target initially hoped to grow sales as much as 2.5 percent.
Grocery has not been Target’s only challenge. It’s also grappled with sliding electronics sales and disruption in its pharmacy business related to the transition to CVS. On top of that, it found itself in the midst of the culture wars last spring after announcing transgender customers could use the bathroom of their choice. That led to a boycott by some conservative groups, though Target executives have said it has not contributed to a material drop in sales.
Still, there were some bright spots for Target in 2016. It launched two well-received private-label kids brands — Pillowfort, a home decor line, and Cat & Jack, a major new clothing offering. Digital sales have been growing at a fast pace, rising more than 30 percent during the holidays. And while its website failed during some big sales events in 2015, it didn’t have any major hiccups in 2016 after the company invested resources in hiring more software engineers and other tech talent to shore up its site.
Target has been focusing time and resources on reducing out of stocks, a frequent complaint from shoppers. It has also been trying to highlight its value and promotions more through circulars and store displays.
At the same time, it’s confronting competition not just from the Amazon but also from longtime rival Wal-Mart, which has been picking up some speed. Wal-Mart recently reported a 1.8 percent increase in same-store sales during the holidays, driven by another uptick in traffic to its stores.
Target will report its full fourth-quarter results on Tuesday, the same day as the investors meeting in New York.
While Target and Wal-Mart shoppers don’t tend to overlap a lot, analysts suspect Wal-Mart likely took some business away from Target, especially during the holidays.
Saunders noted that Wal-Mart also has been stepping on the gas when it comes to e-commerce by adding thousands more items to its website, lowering its free shipping threshold (prompting Amazon to do the same), and acquiring Jet.com and Moosejaw, an online outdoors goods retailer.
“Target has done quite well [with its digital growth], but it’s not on the fast track that Wal-Mart is on,” he said.
Beyond online sales, analysts are curious about Target’s long-term plans for growth, especially after shutting down its Canadian stores two years ago.
One avenue is the smaller-format stores Target has been building in urban areas and near college campuses. It is ramping up on that front, already announcing 29 new stores to open this year, up from 15 new stores last year.
“But it takes a lot of those small stores to make up for one of the big stores,” said Naughton. “They’re not a needle-moving category yet.”
In the past couple of years, Target has fueled much of its cash into share buybacks and increasing its dividend to help keep investors happy.
Some analysts are now wondering if they should invest more of that into some key areas to drive long-term growth. Wal-Mart has been making big investments in e-commerce, and Wall Street has been willing to stomach some lower returns in the meantime, said Naughton. So perhaps Target should do the same.
“There are occasions where you need to invest in some initiatives,” he said. “The market has shown it’s willing to look past that.”