Target Challenges Ackman, Wal-Mart on Food

Target’s management is feeling feisty and declaring itself willing to take on all comers whether Bill Ackman or Wal-Mart.

The retailer got another boost going into the final phase of its proxy fight with Pershing Square honcho Ackman as its earnings beat analyst estimates and its credit card business registered a profit.

Target CEO Gregg Steinhafel took time early in the company’s first quarter conference call today to refute Pershing Square arguments supporting its proxy challenge, including criticism of Target’s slow adoption of food operations compared with Wal-Mart.

This blog will address other points of contention between Target management and Ackman tomorrow, including credit card operations, but food deserves special consideration as Target currently is investing heavily in the category. Steinhafel insisted that Pershing Square’s criticism of Target’s food expansion pace versus Wal-Mart “misses the point.” It’s to Target’s advantage, he said, to develop a differentiated food assortment to support the retailer’s brand position as the most sophisticated discounter in town, and if has taken time, so be it.

Indeed, Target has spent years experimenting with private label and exclusive brands in food and consumables. The food presentation has stabilized recently around two major labels, Archer Farms and Market Pantry.

And, now Target is tweaking consumables. Kathryn Tesija, executive vice president, merchandising, said the company had just relaunched its Target brand as up&up. The new label covers consumables including health & beauty products and household essentials ranging from dish soap to diapers and even baby food, although that’s the only edibles category touched. Consumables are frequent purchases, which aligns up&up with Target’s food brands in driving more frequent customer store visits.

The relaunch at this juncture is interesting, in that consumers associate the lowest price with traditional store brands. Target is, in essence, dropping its store brand and adopting a private label that will carry a low price but also an enhanced image. The name, itself, up&up suggests the brand is for people who might be purchasing bargains but who are going places.

Of course, establishing a new label requires a significant investment but Target seems to have its reasons. Tesija noted much of the business the retailer has lost in the recession can be traced to its most affluent customers spending less on discretionary purchases. Target’s initiatives in frequently purchased items such as food and consumables are, in part, efforts to encourage its better-off customers to think of it as a destination for less discretionary items, and that’s another reason to take the time to developed private labels that appeal to cultivated customers.

Target saw non-discretionary categories, including food, health & beauty aids, home essentials, and over the counter and prescription drugs, post positive comparable store sales in the first quarter and drive traffic into the stores, more evidence that their expansion can broaden its appeal to existing shoppers and perhaps new customers.

Food drives the strategy. While it only represents 15% of sales today, food is growing at a faster rate then general merchandise and the new food-dense discount store prototype Target is testing – which includes limited meat and produce operations – has experienced increased traffic and incremental discretionary product sales. More than 100 should be in operation by years end and, if things go well, they will become Target’s standard for new stores and reconstructions.

To maximize their impact, Target will establish itself as a price leader through circular promotions, and, when enough new prototype stores are operating in a market to make it economically feasible, broadcast, as well.

Target seems to be looking ahead to winning consumers back from Wal-Mart even if, as some predict, they will be more frugal after their recessionary experience. And it will establish itself as an everyday provider, Steinhafel said, ensuring that, “day in day out our food prices are equal to or better than our primary competitor, which is Wal-Mart.”