Analyzing Grocery Strategy: Target Corporation's Outsourcing Options

This case study analyzes Target Corporation's challenges in its grocery business, particularly its lagging performance, lack of competitive advantage, and supply chain issues. The analysis considers potential solutions, primarily focusing on outsourcing the grocery department, as well as the alternative of acquiring Sprouts Farmers Market. The case examines the potential benefits of outsourcing, such as eliminating the burdensome perishable food supply chain and leveraging a partner's expertise, while also acknowledging potential drawbacks like shared profits and reluctance from efficient supermarket chains. The analysis also explores the alternative of abandoning the grocery department altogether, weighing the benefits of freeing up floor space against the potential costs of remodeling and customer disruption. Ultimately, the case study recommends that Target pursue an outsourcing strategy, drawing parallels with the successful outsourcing of its pharmacy business to CVS Pharmacy, suggesting that partnering with another firm can revitalize the grocery business and improve overall profitability.

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Target Corporation: Grocery Outsourcing

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Table of Contents
Introduction and Recommendation............................................................................................3
Problem Formulation.................................................................................................................3
Information and Evidence Evaluation........................................................................................4
Analysis......................................................................................................................................5
Alternative Solution...................................................................................................................5
Recommendations......................................................................................................................6
References..................................................................................................................................7

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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 38th 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.
Problem Formulation
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

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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.
Information and Evidence Evaluation
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).

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Analysis
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).
Alternative Solution
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

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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.
Recommendations
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.

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References
Thompson ONE, (2015). First Research, Grocery Industry.
Fortune 500, (2015). Fortune Magazine. Retrieved from:
<http://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: <http://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>