Straggling Target needs to make a bold move behind Wal-Mart and Amazon

On Tuesday, Target took its biggest step toward challenging Amazon and Wal-Mart in grocery and digital, rolling out Target Restock, a next-day delivery service of household essentials and dry grocery items. The program is starting in Minnesota, the Star Tribune reported.

Target’s service costs $4.99, a dollar less than Amazon’s Prime Pantry. By encouraging shoppers to buy more items in one shipment, fitting everything in a 45-pound box, this service should also help Target cut costs.

But Brick said Target needs to respond to Amazon’s latest moves “quickly, or they’re going to be squeezed.” He suggested Target acquire Kroger or Sprouts Farmers Market in order to grow the retailer’s grocery business to represent 40 to 50 percent of sales, more in line with what Wal-Mart has been able to accomplish.

But it hasn’t been Target’s style to make big, bold acquisitions. Target recently looked to buy direct-to-consumer mattress maker Casper, according to Recode. Instead, Target took a stake in the company earlier this month.

This investment pales in comparison with Wal-Mart’s $3 billion acquisition of Jet.com last fall, as well as the slew of smaller deals it’s made since.

“[Target is] more internally focused. … They should be playing more aggressive, because Wal-Mart is beating them on the acquisition front,” Brick said.

Source: Target

Target likes to point out “bright spots” in its grocery business, such as its sales of alcoholic beverages, which were highlighted on a recent earnings call. But competition in the supermarket space is only intensifying, with less market share up for grabs.

On a call with analysts and investors in May, Target chief merchandising officer Mark Tritton pointed out that value and “everyday price perception” remain challenges in Target’s grocery aisles.

Trying to fix this, Target brought in Jeff Burt in April to lead the retailer’s food and beverage team. Burt came to Target from Kroger, with more than 30 years of experience in the grocery industry.

But now Burt has to tackle the competition that will come from a Whole Foods-Amazon combination head on.

“The Whole Foods-Amazon deal does nothing to help Target,” GlobalData managing director Neil Saunders told CNBC. “In fact, Target is much more at risk from [the deal] than Wal-Mart because it shares many more customers with both Whole Foods and Amazon than rivals.”

Target really just needs to decide what it wants to do on food, Saunders said. “It seems to lack a strategy.”

Take Target’s planned $7 billion capital investment program, spread across the company. It remains unclear how this strategy will advance its grocery business specifically. So, the question remains top of Wall Street’s mind.

“Food and beverage is a key category for Target, representing about 20 percent of our annual sales,” Target spokesman Josh Thomas said in a statement.

“As we’ve shared, we are on a journey to create a differentiated experience in food and beverage. While the work won’t be done overnight, we are committed to getting it right for the long term and are encouraged by the progress that we are making.”

In May, CMO Tritton said Target would be sharpening its price and value messaging in grocery in the coming months, making sure the brand is more “relevant to the guest and the competitive set.”

Some would argue these plans won’t work.

“Target has never been a very good grocer,” Bernstein analyst Brandon Fletcher told CNBC, saying the company was “late to the party” as other retailers swooped in and scooped up market share of grocery carts before Target even got a taste of the supermarket business.

Fletcher said he proposed, after Target signed a deal with CVS to open pharmaceutical stores within Target stores, that the company follow a similar path selling food. But any evidence of this sort of initiative panning out has yet to be seen, he said.

“The conversation [Target] should be having is that they’re making sure what they do in price considers the fact that Whole Foods will likely have a downward movement in its prices moving forward,” Fletcher said.

Wall Street should be much more cautious on Target now, given “food is a work in progress” still for the retailer, Cowen & Co. analyst Oliver Chen wrote in a recent note to clients.

“Grocery is already intensely competitive given new rock bottom pricing entrants Aldi/Lidl, WMT’s commitment to price investment, and intense digital innovation at WMT,” Chen wrote.

Putting the main grocery players in perspective, Wal-Mart has the biggest share of the market, with about 14.5 percent of all U.S. food and grocery sales, according to estimates and analysis from GlobalData Retail.

Kroger is next in line, with a 7.2 percent stake. And Target is smaller still, claiming 2.12 percent.