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For Target, almost a bull’s-eye

Target's grocery selection does not yet impress. But its pricing is sharp enough to win customers

TargetCanada-grocery

In early March, Target Canada president Tony Fisher was finishing a slow walk around his Guelph, Ont. store with a group of reporters, when he paused beneath three hanging symbols–Target’s bright red bull’s-eye logo, a heart and a maple leaf.

“One of the things that surprised me in [the Canadian] marketplace is there are some great retailers here, but you do have to go to multiple stores to be able to get what you’re looking for,” he said. “It really reinforced the fact that we do have a great position here.”

Sure, but what if you’re looking for fresh bell peppers?

On March 5, when Target’s first three Canadian stores opened in Ontario, customers could buy Kashi cereal with a pair of strappy sandals; milk with a high-definition television; and Heinz ketchup with a tennis racquet. But if they were hoping to complete a full grocery run, they were out of luck.

As many industry watchers predicted, Target Canada does not offer fresh meat or produce. That’s part of the reason why experts say the chain isn’t a major threat to Canadian grocers.

But it could be, in time. Target’s grocery prices, so far, are competitive, as is its five-per-cent off RedCard rewards program. And Target says its grocery assortment will evolve in response to consumer expectations, so fresh could become part of its offer.

“Grocery is critical to our business,” Fisher said. “So we need to be relevant to our customers.”

Target officially opened for business in Canada on April 5, following a four-week “soft launch.” Predictably, the stores looked nothing like the Zellers shops that were once there.

According to John Mulligan, Target’s chief financial officer, the Zellers stores were “in very poor physical condition” when the company first acquired them in early 2011.

So the retailer injected $10 to $11 million into each location, tearing out the floors, replacing the ceilings, and expanding 40 stores to create an extra 600,000 square feet of retail space. The result? “The [Milton, Ont.] store was sharp, clean, strongly lit and well organized,” wrote Perry Caicco, managing director of CIBC World Markets, in a report.

Target’s grocery departments are modelled after the company’s P-Fresh grocery departments, which average about 10,000 square feet.

The retailer’s Milton location, just west of Toronto, has about 14 aisles of dry groceries, and more than 60 doors of frozen and refrigerated food. The refrigerated section, which greets customers as they enter the food department, carries eggs, yogurt, milk, juice and select baked goods.

But unlike the American P-Fresh sections, where a limited selection of fresh produce and meat is available, this store’s fresh offer includes only packaged mini-carrots and precut lettuce.

It’s exactly what Ed Strapagiel, a long-time retail consultant, expected.

“Fresh is a lot more expensive and difficult to handle, and some of it depends on the amount of available space,” he says. On average, Canadian Target stores are about 18 per cent smaller than U.S. stores. “Fresh is hard to do on a small scale.”

According to Amy Koo, a senior analyst at Kantar Retail, fresh meat and produce are also difficult to do in Canada’s tough retail climate.

“[Target] knew they had strong competitive pressure in Canada in the fresh area,” she says. “So they probably said, ‘Our strongest brand proposition in the minds of Canadians are discretionary clothes and housewares.’” Apparel is no doubt the dominant category at Target’s Milton store, occupying about 40 per cent of floor space, and boasting exclusive, sought-after lines by Roots and Kate Young.

The household and beauty sections, which also carry exclusive brands such as Sonia Kashuk and Up & Up, will also attract shoppers, says Strapagiel. “Target could certainly make inroads there,” he notes. “When people are at Target for that, they could pick up some products in the grocery department” while in the store.

That’s part of the reasoning behind BMO analyst Peter Sklar’s argument in a recent report that “the leakage of grocery market share” from current players will be limited to “partial” grocery runs or “top ups.”

In other words, customers may toss a few grocery items in their carts while hunting for clothes. But because Target doesn’t offer fresh meat or veggies, shoppers are unlikely to drive to a store and brave the packed parking lot for the sole purpose of buying food.

Target spent most of March setting and then tweaking its regular grocery prices. And according to some industry watchers, they didn’t always get it right.

In his report, Caicco describes finding two different brands of flour, both 2.5 kg, which were just a penny apart. It was “confusing,” he wrote.

But the experts appear to be forgiving: Target is new to the Canadian market, they point out, so it shouldn’t have been expected to have hit the mark with all of its prices as soon as it swung open its doors.

Last month, after walking through Target’s Milton store, Caicco predicted that Target’s regular prices will be “even with, or no more than, a few per cent above local discount competitors.”

But he added that “as usual in Canada, the real pricing action will be promotional and that has yet to begin in any meaningful way.” To that end, Target distributed its first weekly flyer in early April to accompany its official launch.

A price comparison by Canadian Grocer of stores in Milton suggests Walmart Supercentre and Target’s prices were about on par on staple goods. For instance, three bags of two per cent milk sold for $4.23 at the Walmart, one cent cheaper than the Target store. The Walmart was also one cent cheaper on a dozen large eggs, and two cents cheaper on sliced white bread.

But the Walmart was noticeably sharper on price on other often-purchased items. Twelve cans of Coca-Cola cost $4.48 at Walmart and $4.99 at Target. A 400g box of Cheerios was $3.47 at Walmart and $4.49 at Target.

BMO’s Sklar found close prices as well. In his 45-item grocery list, 19 products were priced within three cents of Walmart’s; 14 items were cheaper; and 12 were pricier.

Sklar then argued that thanks to Target’s Red Card program, the company’s prices are actually more aggressive than those of its competitors. The Red Card offers an instant five per cent discount on all grocery purchases using the retailer’s debit or credit card.

According to Strapagiel, that’s “pretty darn attractive” to Canadian consumers who are used to rewards programs that offer a measly half-to two-per-cent discount.

He’s right: 44,000 customers have signed up so far. Factoring in Target’s five per cent discount, one item on Sklar’s grocery list cost the same at Walmart Supercentre; 34 products were priced lower at Target; and only 20 items were more expensive.

“This is significant,” Sklar wrote. “We believe that at these price points, the Target consumer would be encouraged to add grocery into their basket.”

By the end of this year, Target will have opened a total 124 stores across Canada. And it continues to stir excitement–the company recently released its first-ever Canadian ad campaign, which announced they “can’t wait to meet you, neighbour.” Consumers responded in kind, flooding Target’s Facebook page with comments and “likes.”

But for most grocers, the chain’s neighbourly message invites more anxiety than excitement. Maybe it shouldn’t.

In Sklar’s report, he concludes that Walmart “remains the primary threat” to Canadian food retailers. Why? Walmart’s bargain-basement prices, compounded by Target’s run-of-the-mill assortment.

Then again, it’s still early days for Target, something Fisher, the company president, alluded to during a media tour of his Guelph store. “This is a competitive retail environment and we have a lot to learn. We’ll have a lot of wins, but some misses as well.”

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