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Tesco vs. Target

Jim Prevor’s Perishable Pundit, March 1, 2007

We’ve been running a series analyzing a Credit Suisse report on Tesco’s new American venture. We started out with Tesco’s Success Course Far From Easy, and then ran a piece entitled, Tesco In America: Foodservice vs. Prepared Foods. Yesterday we looked at Tesco vs. Costco, and today we look at what the report had to say about Target:

Approximately 11% of Target’s store base overlaps with Tesco’s planned U.S. markets — Southern California, Phoenix and Las Vegas. On a state wide basis, Target operates 19% of its stores in California, Arizona and Nevada. With an estimated 1,500 locations yet to build, management feels no urgency to seriously explore new formats at this time. Depending on Tesco’s success and the development of the U.S. retail landscape.

Whether or not partially in response to Tesco’s U.S. entrance, we believe Target is increasingly focusing on driving incremental traffic by adding more food and consumables to its mix. The company remains committed to its core discount store format, but Super Target (which includes a full grocery assortment) will make up a larger percentage of new/relocated stores in the future.

In addition, TGT is dedicating more square footage to food in existing discount stores. The company just announced the construction of its first food distribution center in Lake City, Florida. We foresee more company-owned food distribution centers being added in the future.

Target hopes to grow private label food, now 15% of sales, to 25% over the next 5 years. In our view, Target’s Archer Farms is already “Tesco-like” in terms of quality and recognition and could eventually become the centerpiece of a food-only store.

We’ve always felt that the Archer Farms branding was suitable for a spin-off. Indeed Target’s slow roll-out of Super Centers often made us doubt its commitment to food. And the separate branding would have made it easy to do a spin-off to shareholders of the food section.

Now, with Target’s investment in a food distribution facility, which we talked about here, its commitment seems stronger. However, Target continues to have problems figuring out how to apply their “cheap chic” concept to food.

We think the Credit Suisse folks are straining on this one. We doubt Target has done anything because of Tesco and, even if Tesco is successful, Target’s dilemma would be the same as Wal-Mart’s dilemma on Neighborhood Market’s: Why spend money to build successful stores such as Neighborhood Markets when it can get a higher return on investment building supercenters.

Among the things Tesco needs to worry about, Target’s new concepts should be way down on their list.

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