TARGET CORPORTAION: THE GROCERY BUSEINSS IN THE BULLS EYE

Read the Target Corp. case and answer the following questions. 60 points.

Background: In May 2016, Target was one of United States largest chain retailers, with nearly 2,000 well-located general merchandise stores and a reputation for being stylish and chic. However, in the wake of the 2008 financial recession, profitability had weakened as a result of allocating more space to low-margin groceries in an attempt to continue to drive traffic. Now that the recession is over, should Target reduce or even eliminate the grocery category to offer a broader selection of clothing and household goods?

At the heart of the case is the question: Do groceries drive a trip and lead to incidental add-on purchases, or are they crowding out higher-margin inventory?

As you know by now, the grocery industry has changed significantly in a relatively short amount of time. The biggest changes have come in the nature of competition. #1 Wal-Mart is now the dominant grocery retailer in the Unites States, followed by #2 Kroger, #3 Alberstons/Safeway, #4 Costco and #5 Sams Club. Whats notable is that super stores (Wal-mart) and warehouse stores (Costco and Sams Club), which now account for the 3 of the top 5 retailers in terms of market share of U.S. food and beverage purchases, are a fairly recent competitive threat to conventional supermarkets (both Costco and Sams Club were founded in 1983).

Also, as you may know, the grocery category is not only highly competitive, but yields just pennies of profit for each dollar of sales. Typical margins range from 2 to 3%! With this in mind, deeply consider each of the 4 options presented at the end of the case, in order to determine which strategy you would choose.

PLEASE ANSWER THE FOLLOWING QUESTIONS.

1. Imagine that you were working as an intern for Targets head office. What internal information would you want to analyze to inform the decisions about how to proceed with grocery merchandise?

In the past, the decisions to expand the floor space and the product range of the grocery categories were:

• Grocery drives a trip to Target, and
• While shopping for groceries, customers will pick up additional, higher-margin merchandise.

Now remember, Target has access to an enormous amount of data not only through its POS inventory systems, but also individual customer data through its Target credit and debit cards.

So, what information, would you want to have or know, when making grocery merchandise decisions?

2. The following sections of this question are designed to answer the question of whether expanding the grocery category helped or hurt Target and what type of competitor Target is in the grocery business. To determine this, answer the following questions:

a. Look at Targets top line, merchandise sales (Exhibit 3). Calculate year-over-year sales growth from 2011-2015 by filling in the table below. What does this tell you? Has year-over-year sales growth been good?

	2015	2014	2013	2012	2011	2010
Merchandise sales						65,786*
Growth percentage

*Not included in the case, but obtained from Target website

b. Next, Look at Gross margin. Decent or not, what do you think?

c. What is profit before taxes in 2015? How does this compare with profit before taxes in the early 2000s? (this is in the text of the case). Do you think this decrease is significant? (note, when answering this, think about the impact on profit. What would the 2015 profit have been had the company achieved the 2015 profit percentage?

d. What percentage of Targets merchandising mix is groceries? Complete the table below to figure that out.

Target Corporation Segment Information as a Percent of Sales

	2015	2014	2013	2012	2011	2010	2009	2008	2007	2006	2005
Household essentials									-	-	-
Food & pet supplies									-	-	-
Consumables (add the 2 rows for 2008-2015)									34%	32%	32%

e. Is Target a significant competitor in the grocery business? Complete the table below to help you determine this. (Numbers can be obtained in the body of the case)

Comparative Grocery Sales

	Sales ($ billions)	%	Grocery sales ($ billions)	Number of Stores	Sales/Store ($ millions)
Target
Walmart
Kroger
Costco

Now, based on your above analyses, answer the following questions

(a) Did expanding the grocery category help or hurt Targets results?

(b) Is Target a significant competitor in the grocery business?

3. Of the four strategies outlined in the case, what are the advantages and disadvantage of each way forward?

In each of the options, there are two types of data to consider: the hard facts (the financial considerations) and soft factors (our guess at the likely preferences of the firms managers, and consumer preferences and reactions).

a. Option 1: Do Nothing

Some points which may be useful to consider:

• How do groceries add to Targets positioning? In other words, what is the position Target aims to create (the image in consumers minds, when they think of Target)? Do groceries help to uphold that position?
• Are increased capital expenditures needed?
• Is it realistic to think that sales might grow by 1-2% per year, and why?
• Is it realistic to think that Target could improve their operational efficiency and perhaps increase the before-tax profit margin from 6.7% to 7%?
• How important do you think Target is to the food brands they carry? In other words, how much negotiating power do you think they have to decrease their costs?
• How might elimination of grocery affect Targets customers?

b. Option 2: Cut back on Groceries

Here, Target would no longer attempt to run small supermarkets within each general merchandise store, but would reduce the selling floor space allocated to grocers and go back to selling convenience items and staples.

• What would be the financial impact of this option?
• How would if affect Targets customers?

c. Option 3: Outsource Groceries

Under this option, Target would find a partner to run its grocery business as a store-within-a store.

• How much of Targets sales floor is currently taken up by grocery?
• How do you think outsourcing store space would affect Targets bottom line?

d. Option 4: Abandon Groceries

Under this option, Target would stop selling groceries and remodel its stores to accommodate larger collections of clothing, sheets, towels and home dcor.

• What would the total capital expenditure be?
• Would it be worth such an expense?
• What would sales need to grow by to make this worthwhile?

4. Based on your above analysis, which option would you choose?