Target Corporation: Grocery Outsourcing Essay.

Welcome Ms. Parks.  Brian Cornell, as you, has read David Robinson’s case Target Corporation: The Grocery Business in the Bull’s Eye, and he is looking forward to your recommendation on a solution.  Mr. Cornell thinks that Professor Robinson’s assessment of the situation is reasonable and was surprised to see these in the case write-up which reflected some of his own concerns and observations.

Mr. Cornell has one additional idea that should be considered along with the ones outlined in the case.  In addition to simply” outsourcing” the grocery as was done with Target’s pharmacy to CVS, he would entertain acquiring Sprouts Farmers Market.  This is assuming it could be justified financially and strategically.

Your background, Ms. Parks, with the appropriate balance of performance management, strategy, and finance will all come into play.  

Target’s recent acquisition of Shipt will improve the firm’s competitiveness in same-day shipping and work continues on improving the the firm’s on-line capabilities.  A solution to the challenges in the grocery business would be very helpful.

Understanding that it will take some time to analyze the options, we should plan to meet each week at this time to discuss any questions you have?  The Mr. Cornell is looking for your report in three weeks.  

Do you have any questions now?

Introduction and Recommendation

Target Corporation is one of the chain store retail giants of the United States. It has an annual sale of $73 billion and has ranked 38^th in the list of Fortune’s largest publicly traded companies of the United States (Fortune 500, 2015). Target has recently acquired Shipt with plans on improving the competitiveness of the firm in same-day shipments and to bring improvements in the company’s online capabilities. The grocery business of the company has been facing several challenges for which solutions are needed. The following analysis focuses on the main issues of Target Corporation and also takes into consideration the potential solutions which have help the grocery business of the firm.

There were several issues and problems that were being faced by Target. Target was lacking competitive advantage and scale. Its grocery section has been lagging behind and not much revenue is generated for this department. The work of the retailer’s supply chain is not up to the mark as the task of bringing fresher products to the store is not being done properly in some regions of the country. There is a great need to improve the supply chain and the grocery business. Outsourcing the grocery department and partnering with another firm would help the company in differentiating assortment in a better way by offering healthy, organic and unique items and products, and bringing their supply chain to order.

Target Corporation has been suffering from several problems, amongst which primarily come the issues of lagging behind of its grocery business and not being able to generate significant revenues. The other issues faced by the firm are lacking scale and competitive advantage. Target is in a great need of bringing improvements in its grocery section by using solutions such as outsourcing the department and partnering with another company. There are also some other issues that could arise despite outsourcing its grocery business.  Even though this approach is worthy and valuable, the profits that are to be shared are quite low in margin for the grocery section. Furthermore, the supermarket chains that are the most efficient, are unwilling and unenthusiastic regarding working with Target Corporation in certain areas where the company have their own stores. Additionally, this approach might not help in diminishing the less floor space that was available for the merchandise categories.

A distributor named Supervalu, which is based in Minneapolis and supplies grocery products to the first pantry sections, is reportedly the company which has been considered by Target Corporation to outsource its grocery business to. Other potential candidates for the outsourcing task are regional wholesale co-operatives like Washington state-based URM Stores, Affiliated Foods Midwest and Merchant Distributors Inc., as reported by Reuters. However, no formal timeline for potential outsourcing partnership decisions or third-party names were provided by Target Corporation itself. As announced by the company, in the second quarter of 2018, the financial statements and performance of the firm imply that the sales have grown by 6.5 per cent whereas the traffic has grown by 6.4 per cent (PRNewswire, 2018). The traffic and the sales growth of the company has been reported to be best in the last 13 years. The GAAP Earning per share (EPS) of the company stood to be $1.49 which were 22.7 per cent higher than that of the last year, whereas the adjusted EPS stood to be $1.47 which is 19.8 per cent higher than that of the last year (PRNewswire, 2018). The operating results revealed that there was a growth in overall sales by 7.0 per cent and in other revenue by 0.2 per cent, which was due to the increased total revenue, which hiked from $16.6 billion to $17.8 billion (PRNewswire, 2018).

Problem Formulation

The nature of the grocery business is highly competitive and is known for fetching only minute returns on investment. On taking recommendations and suggestions from stock market experts, it came into the knowledge of the company that it was time for them to exit from the grocery business or maybe to re-evaluate their strategies for the grocery line. There were several advantages of getting out of the grocery business. The store space needed for the high margin merchandise would be eliminated, the high-priced supply chain for perishable goods would be eliminated as well. The assortment of fresh foods has been increased by Target and the suppliers have been notified about the pairing of the SKUs of packaged products for increasing the mixture of the healthy goods. It was unveiled by the company that there is a P Fresh project under which they would be adding for freshly produced goods to their stores. Recently, the firm has partnered with Instacart for offering same-day delivery of household items and groceries. Investors were informed by Target that an estimated budget of $1 billion was planned to be spent on the improvement of its online sales technology and supply chain network (Medicine, 2010).

An alternative solution to fix the issues of Target Corporation could be abandoning the grocery department. It would help the company greatly to free up huge amounts of floor space needed for sales for the firm, which would be needed by them for strengthening their position in the market in the department of clothing and household goods. This approach would help the firm in reducing the competition level with other various food retail giants. However, there is a negative side to such an approach. This option could be expensive for the firm as it might require high costs of remodeling that can hike up to $3 million for each of the stores of Target (Thompson ONE, 2015). It would also cost write-off charges additionally for the supply chain and stocks contracts. If one-stop convenience is no longer provided to the loyal customers by the stores, they might leave the company entirely. Such strategical change might prove to be disruptive for the customers as well as the employees of the firm. Target would fail to receive any sorts of returns from the development of the brand equity by its line of products.

Target’s decision of outsourcing its pharmacy business to CVS Pharmacy turned out to be a huge success (Paul Zibo, 2015). Hence, the company should take a similar approach for the grocery business as well and also look for a partner for outsourcing. There are several advantages of outsourcing the grocery section, amongst which comes the privilege of no longer being liable of the uneasy biodegradable food supply chain, the section where Target was already lacking competitive advantage and scale. With this move, some of the developed brand names of the company can be continued and the customers who are loyal to the company might find that the grocery product of Target remaining to be unchanged and in case there are any changes, the products would be improved. The company would try to either make an agreement of sharing the profits with the partner company who would be responsible for supplying and running the grocery section of the business or charge rent for the stores that are within another store and run by another company. The statistics of the company reveal that outsourcing the grocery department of the business and partnering with other firms for the same is a viable and profitable approach.

References 

Thompson ONE, (2015). First Research, Grocery Industry.

Fortune 500, (2015). Fortune Magazine. Retrieved from: <https://fortune.com/fortune500/list/filtered?industry=General%20Merchandisers>

Paul Zibo, (2015). CVS to Buy Target’s Pharmacy Business for $1.9 Billion: Deal Includes about 1,700 Pharmacies within Target Stores. Retrieved from: <www.wsj.com/articles/cvs-to-buy-targets-pharmacy-business-for-1-9-billion-1434367874>

PRNewswire, (2018). Investors, Target Reports Second Quarter 2018 Earnings. Retrieved from: <https://investors.target.com/phoenix.zhtml?c=65828&p=irol-newsArticle&ID=2364409>

Medicine, S. (2010). Target Ups Groceries Eliminates Gardening: Several Other Changes Planned in $1 Billion Remodel of 340 Stores. Retrieved from: <www.knoxnews.com/business/target-ups-groceries-eliminates-gardening-ep-408143334-358650701.html>

The Economist, (2015). Why Target Lost Its Aim: A Discount-Store Chain Which Forgot Its Formula for Success. Retrieved from: <www.economist.com/news/business/21645218-discount-store-chain-which-forgot-its-formula-success-why-target-lost-its-aim?zid=293&ah=e50f636873b42369614615ba3c16df4a>