Target considers partnerships to improve supplies of groceries

Target Corp. is seriously considering partnerships with outside companies to help shore up a creaky fresh-food supply chain that has led to chronic shortages on store shelves.

"There is an opportunity to use some partners who may be able to do things a little bit better," John Mulligan, the company's chief operating officer, said in an interview.

Minneapolis-based Target's supply chain evolved over time as it expanded its offerings, including more fresh food, he said, leading to a patchwork system. "I said to my team, 'This looks like Frankenstein. We have made this thing out of a bunch of parts.' "

Mulligan said Target has increased food sales by bringing its edible products more into line with the 'cheap chic' ethos of other store offerings, such as clothing and housewares. That strategy has meant a greater focus on such things as organics, fat-free yogurts and other healthy food trends.

But, he said, the company's supply chain for fresh food isn't fully reliable in many parts of the country.

The potential shift to relying on outside partners comes as Target pushes to revamp its food business with newer offerings and aims to get a bigger slice of online grocery sales, which will put new pressures on its food supply chain.

Target has lagged behind competitors such as Wal-Mart Stores Inc. and Amazon.com Inc. in e-commerce, but it is now stepping up its emphasis on such sales. Recently, the company signed a deal with online delivery service Instacart to pick up Target groceries and deliver them to customers in some cities.

Mulligan declined to detail the company's plans, but Burt Flickinger, managing director of retail consultancy Strategic Resource Group, said that depending on what Target has in mind, the partnerships could mean billions of dollars for wholesalers, food distributors, and food and grocery manufacturers who have existing infrastructure to store and ship food products to Target stores.

Target declined to provide a timeline for when it will make a decision about working with outside companies and would not provide names of likely partners in the event it moves forward.

But Flickinger and other analysts and consultants suggested that likely candidates might include Eden Prairie-based retail chain Supervalu Inc., which also acts as a wholesaler and distributor for independent retailers around the country; distributors such as North Carolina-based MDI; regional wholesale cooperatives like Affiliated Foods Midwest and URM Stores Inc. from Washington state.

Supervalu declined to comment and the other companies did not immediately respond to Reuters requests for comment.

Amy Koo, principal analyst at consultancy Kantar Retail said Target has long struggled to stand out with its food offerings and localize assortments in its stores. "It is good they are talking about getting help," she said.

"We will not be building $200 million fulfillment centers all over the country," Mulligan said.

Target stores nationwide have some 8 to 9 billion items on store floors, in transit or in warehouses at any given time, he said. The company has tripled the number of stores from which it ships online orders directly, but acknowledges that implementing the strategy isn't easy.

"The challenge of where you put inventory is going to be much more difficult in the future as we ship products from stores," Mulligan said.