Target (NYSE:TGT), primarily known for its home products and clothing, is trying to expand its presence in the grocery segment with its new ad campaign and P-fresh program. The ad campaign tries to make groceries more appealing by featuring models interacting with grocery items and other home products and treating them like fashion accessories. Meanwhile, Target is also expanding its in-store food and grocery section, P-Fresh, that it started in 2009. 
While competitors such as Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) earn a majority of their revenues from groceries, the category accounts for just 20% of Target’s revenues.  However, the revenue contribution has increased slightly over the past few years. We think there is a significant opportunity for Target to grow by increasing its presence in groceries. This will also increase the retailer’s resistance against economic headwinds as grocery sales are less correlated to the state of the economy compared to other merchandise categories.
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What Is P-Fresh Store Format?
P-Fresh is an expanded fresh food layout within Target’s stores which displays frozen and dairy products, perishable items, snacks, beverages and other grocery items. This section is positioned in a highly visible location. With this layout, the grocery space in the store can increase substantially by about 130%. Additionally, there is an increase of 90% in the food category and 60% in the SKUs (specific kind of units) available at the stores. 
Target launched this program in 2009 and has seen decent success so far. In 2011, this format boosted Target’s comparable store sales growth and increased revenues from groceries.  Currently, about 1,100 Target stores have the P-Fresh food section and about 250 stores have a full line of grocery items. 
What Is The New Ad Campaign All About?
With expanded food assortments at most of its stores, Target decided to advertise its groceries in a non-conventional way. In its new ads, the retailer tries to garner customer attention towards its grocery items through fashion and glamor. For instance, one of the ads features a model standing besides cake mix boxes and blueberry muffins exploding in different colors.  Although this does not really help in demonstrating the product’s usefulness, it certainly catches the customer’s eye and may help Target in getting the best out of its efforts to improve grocery sales.
The campaign will include eight television ads, newspaper inserts, a digital short film for online channel and three different ads for radio.  It appears that Target does not want to leave any loose ends and is trying to target most of the media channels.
What’s The Value For Target?
As explained earlier, Target wants to increase its presence in the grocery market which has proved lucrative for other big retailers such as Wal-Mart and Costco. Not only can Target grow its profits through this approach, but can also reduce its business risk as grocery sales are less correlated to the swings in the economy. From an investor’s perspective, Target’s stock could become more attractive if its dependence on groceries increases notably.
However, to compete with retailers such as Wal-Mart and Costco, Target will need an appropriate pricing strategy as low price remains the key selling point. Target can do so by offering more private label brands (like Costco does), which have lower prices, higher margins and are of comparable quality to national brands.
Additionally, if Target can increase its grocery sales substantially, it will end up buying a much higher volume of grocery items. This will allow the retailer to better negotiate purchase prices with its vendors. This is one of the advantages that Wal-Mart currently enjoys.
Our price estimate for Target stands at $60, roughly in-line with the market price.Notes: