Target Switches Gears in the Grocery Aisle

Target Corp (NYSE: TGT) quietly but dramatically reshuffled its food marketing strategy earlier this year, The Wall Street Journal is reporting. The nation’s fourth largest retailer called several representatives from large food suppliers, including Campbell Soup (NYSE: CPB), Kraft Foods Group (NASDAQ: KRFT) and General Mills (NYSE: GIS), to its Minneapolis headquarters and told them that their products will be “deemphasized.”

Deemphasized means that Target will reduce the shelf space, promotion and advertising devoted to those products. Especially singled out were sugary cereals and canned soup. The Journal speculated that the change was spurred on by the public’s growing demand for healthy and organic foods.

That’s a logical deduction because organics is a growing area of business; Kroger’s (NYSE: KR) organic brand, Simple Truth, racked up $1 billion in sales in its first year on the shelves. Kroger is also aggressively competing with Target in general discounting by opening huge marketplace stores that offer almost everything you can find at Target as well as a larger grocery selection.

Target’s Changes Go Deeper Than Healthy Eating

That is certainly possible, but I think there is more to it. This seems like a major shift in strategy to adopt to new retail industry norms. Two other strong motivations for the change in grocery strategy include:

• Target wants to devote more of its space and promotions on store brands like its Archer Farms private label. That gives Target more control over pricing and promotion and increases its ability to offer special discounts or promotions to loyal customers; for example, lower prices to those who use its popular shopping apps and credit cards. This strategy has worked well for Kroger, which often undercuts Walmart Stores Inc.’s (NYSE: WMT) prices with its house brands. A similar strategy has worked well for Costco Wholesale Inc. (NASDAQ: COST), which heavily pushes its store brands.

• Both Kroger and Costco have seen significant revenue growth in recent years, while Target has not. Kroger’s TTM revenue grew by $10.09 billion between January 2014 and January 2015, rising from $98.38 billion to $108.47 billion. Between February 2014 and February 2015, Costco’s revenue grew by $7.75 billion, rising from $107.89 to $115.64 billion. During the same period, Target’s revenue grew at a snail’s pace, rising by $1.34 billion from $71.28 billion in January 2014 to $72.62 billion in January 2015, a dismal performance in a period widely hailed as a “retail recovery.”

• Target is trying to attract or lure back more middle or upper middle class customers. This is something that some observers have missed; Target is effectively deemphasizing or throwing out brands with a strong working class appeal, such as Campbell’s Soup and Captain Crunch. One reason for this could be that such brands are selling poorly because the working class simply lacks the money to buy them.

Target could be adding more organics and higher end products to attract more higher-end customers or win them back from Costco, Amazon.com and Whole Foods Market (NYSE: WFM). Income inequality could be driving Target’s new strategy; the chain can no longer make money selling to the working class. That should scare the death out of Americans that care about their country’s future. One wonders how long a modern economy can be maintained if large portions of the population are having a hard time affording items like breakfast cereal.

One thing is certain: Target needs to make some dramatic changes, and fast, if it wants to avoid a trip down the death spiral. The epic decline of Sears Holdings (NYSE: SHLD) and its Kmart subsidiary shows how fast even a retail legend can stagnate and decline in today’s savage discount environment.

Disclosure: The Blogger holds a position in Kroger and does retail sales through Amazon.com.