Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Is Target Really Profiting from Digital

Target (NYSE: TGT) just made a very surprising move in the grocery wars. The discounter’s home-delivery subsidiary Shipt will deliver groceries from a competing grocer, the German-owned Lidl.

Shipt will deliver orders from Lidl US in the Washington DC suburbs of Fredericksburg, Ashburn, Manassas, and Woodbridge, Virginia, Supermarket News reported. Lidl is a discount grocery store described as halfway between an Aldi and a Trader Joe’s. Lidl is well-known in Germany and the UK but only opened in the United States last year.

Even though Lidl owns Trader Joe’s that grocer apparently is not participating in the Shipt grocery experiment. Lidl and Shipt have been experimenting with grocery delivery in Hampton Roads and Richmond, Virginia, since January.

Supermarket News did not say whether Shipt will deliver both Target and Lidl orders but that would be a smart move. Lidl has joined with Target and Shipt, to head off Aldi which is offering Instacart delivery of groceries in Chicagoland.

Is Target Making Money?

Value investors will wonder if Target is a shrewd company capitalizing on new markets or desperately seeking new business. The shrewd management seems to be the better explanation because Target is doing well right now.

Target’s revenues grew by 10.03% in 1st Quarter 2018, Stockrow data indicates. Revenues shot up from $16.667 billion in October 2017, to $22.766 billion in January 2018. That indicates Target has reversed or avoided the trend of falling sales and revenues during the Christmas season that has been plaguing many retailers for the past few years.

The revenue growth was fueled by a 28% growth in digital sales at Target, Supermarket News concluded. Digital sales growth accounted for over the half the revenue boost. Same-store traffic was up by 3% and store traffic grew by 3.7%.

Target is making money from those sales it reported a net income of $1.01 billion, an operating income of $1.52 billion, and a gross profit of $5.971 billion for 1st Quarter 2018. Those numbers were fueled by a strong operating cash flow of $2.434 billion, and an impressive free cash flow of $1.954 billion.

That cash flow gave Target $2.643 billion in cash and equivalents at the end of 1st Quarter 2018. Target had total assets of $38.999 billion, liabilities of $27.290 billion, and debts of $11.597 billion on February 3, 2018.

Why is Target doing so well?

Such numbers lead to the intriguing question of why is Target doing so well in such a difficult retail environment?

My guess is that Target’s business model of a smaller footprint of strategically located stores is well-suited for today’s retail market. Target has fewer stores but they are located in more affluent urban and suburban areas. Target is less exposed to the rust belt and to decaying rural areas than Walmart (NYSE: WMT) and the dying Kmart are.

It is also better positioned for online retail with a strong brand and high name recognition. Target is already established as the anti-Walmart in the public mind, it might be in a good position to become the anti-Amazon.

How Target/Shipt can become the anti-Amazon

Teaming up with high-end grocers like Lidl and Trader Joe’s for Shipt delivery is a smart move for Target. Other logical moves will be to add brands like CVS, Walgreens, Home Depot, Lowe’s, Rite Aid, Albertsons, Nordstrom, Aldi, Trader Joes, Safeway, Publix, and Best Buy to the Shipt ecosystem.

Offering several different retailers through Shipt can allow Target to match Walmart and Amazon’s (NASDAQ: AMZN) vast inventory at a much lower cost. One advantage of adding other retailers is Target will not have to stock their products or build additional fulfillment centers.

Instead, all Target has to do is send an additional order to the other retailers and have the Shipt driver stop at their stores. The solution will provide one-stop or one-click shopping from a batch of choice retailers at a low price.

Another advantage to such a system will be to head off the growing Kroger (NYSE: KR)/Instacart juggernaut. Instacart is already working with America’s largest standalone grocer; Kroger, America’s favorite club store, Costco Wholesale (NASDAQ: COST), and Amazon subsidiary Whole Foods to name a few. That threatens Target by offering middle-class Generation X soccer moms, convenient one-click shopping for all their household needs.

Who Loses from the Grocery Delivery Wars

There will be losers from all this including consumer brands like Campbell’s Soup (NYSE: CPB), and Proctor & Gamble (NYSE: PG). Users of such online services will be far more likely to order the cheaper private label.

Much of the appeal of Aldi, Trader Joes, Whole Foods, and Lidl is high-quality, low-cost private label brands. Such brands are low price and unpretentious which appeals to Generation X.

Persons whose minds are not saturated by television advertising are much more likely to reach for private labels or order them through an app.  Around 47% of Generation X and Millennial viewers; those under 53, are among the “unreachables,” Hearts & Science reported. That means they do not watch cable or broadcast television and do not see TV ads and have little brand recognition.

Target recognizes this and is making a strong private push. It has launched some brands including Cat & Jack, Pillowfort, and Universal Thread, Promo Marketing reported.

All this makes Target a pretty good retail value investment. Its stock was cheap, trading at $72.76 on 30 May 2018. Target shareholders received a cash dividend of 62¢ on March 15, 2018, that was up from 60¢ on March 9, 2017.

More importantly, Target is well positioned to cash in on today’s retail environment and the transition from brick and mortar to delivery. If you want to profit from the growth of grocery delivery, Target is one of your best bets.