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Target Makes Home A Margin Priority

In the face of a soft economy and a hard competitor in Walmart, Target plans to boost its business by improving sales while maintaining operating margins. Home is critical to the margin part of the plan.
Doug Scovanner, CFO at Target, told the Goldman Sachs Global Retail Conference this week that the retailer’s P-Fresh store conversions— which entail adding limited meat and produce operations to an already expanded pantry department— are helping improve sales. In fact, he told the conference that at P-Fresh conversions, “on average, the sales lift is in the range of six to seven percentage points from baseline sales the moment the remodels are complete.”
Margins at remodeled stores are another matter. Scovanner explained that products Target carries tend to fall into two groups as regards margins. One group, including most of the products that it offers in common with Walmart, carry margins that fall in a range from the high teens to lower 20s. The other, including most of the products that don’t overlap with Walmart, falls into a range from the high 30s to mid-40s. Target has relatively few products that overlap with Walmart’s assortment in home, making the department one in which it can maintain a better level of profitability.
Certainly, high margins in housewares and related furnishings, which are about 20% of the retailer’s business, factor into Target’s expansion of home departments in recent store remodels. Although he didn’t give exact expansion details, Scovanner said the retailer is assigning more space to four departments in new stores and remodels— food, shoes, video games and home— and they are “taking down a huge portion of the available capacity” that retail fixture manufacturers have in current operation.
Target wants to ensure that shoppers who are drawn by expanded food get a good look at the home offering. “We’re putting in home fixtures with better sight lines,” Scovanner noted, “that appear to be less densely merchandised but have shown in our tests to have a pretty significant benefit from a sales standpoint.”
Evidence so far is that most of the additional sales at P-Fresh stores are, as might be expected, in food and related consumable sections. But Scovanner said Target is beginning to see growth in other departments including home and apparel. As such, the retailer will continue to do all it can to coax customers to cross-shop.



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