MINNEAPOLIS (Reuters) - Target Corp (TGT.N) is seriously considering partnerships with outside companies to help shore up a creaky fresh food supply chain that has led to chronic shortages on store shelves.
“There is an opportunity to use some partners who may be able to do things a little bit better,” Chief Operating Officer John Mulligan said in a recent interview.
Target’s supply chain evolved over time as it expanded its offerings, including more fresh food, he said, leading to a patchwork system. “I said to my team this looks like Frankenstein. We have made this thing out of a bunch of parts.”
Mulligan said Target has increased food sales by bringing its edible products more into line with the ‘cheap chic’ ethos of other store offerings, such as clothing and housewares. That strategy has meant a greater focus on such things as organics, fat-free yogurts and other healthy food trends.
But, he said, the company’s supply chain for fresh food isn’t fully reliable in many parts of the country.
The potential shift to relying on outside partners comes as Target pushes to revamp its food business with newer offerings and aims to get a bigger slice of online grocery sales, which will put new pressures on its food supply chain.
Target has lagged behind competitors such as Walmart Stores Inc(WMT.N) and Amazon.com(AMZN.O) in e-commerce, but is now stepping up its emphasis on such sales. Recently, the company signed a deal with online delivery service Instacart to pick up Target groceries and deliver them to customers in some cities.
In March, the Minneapolis-based chain told investors it intended to spend $1 billion to improve its supply network and online sales technology. In August, it promoted then-CFO Mulligan to the new position of chief operating officer to oversee the efforts.
Mulligan declined to detail the company’s plans, but Burt Flickinger, managing director of retail consultancy Strategic Resource Group, said that depending on what Target has in mind, the partnerships could mean billions of dollars for wholesalers, food distributors, and food and grocery manufacturers who have existing infrastructure to store and ship food products to Target stores.
Target declined to provide a timeline for when it will make a decision about working with outside companies and would not provide names of likely partners in the event it moves forward.
But Flickinger and other analysts and consultants suggested that likely candidates might include Minneapolis-based retail chain SuperValu IncSVU.N, which also acts as a wholesaler and distributor for independent retailers around the country; distributors such as North Carolina-based MDI; regional wholesale co-operatives like Affiliated Foods Midwest and URM Stores Inc from Washington state.
SuperValu declined comment and the other companies did not immediately respond to Reuters requests for comment.
Amy Koo, principal analyst at consultancy Kantar Retail said Target has long struggled to stand out with its food offerings and localize assortments in its stores. “It is good they are talking about getting help.”
Mulligan said his hope is to ultimately make Target competitive with rivals like Wal-Mart Stores Inc (WMT.N) and Amazon.com Inc (AMZN.O) without following their capital-intensive strategy of rolling out multiple warehouses and distribution centers. “We will not be building $200 million fulfillment centers all over the country,” Mulligan said. Target stores nationwide have some 8 to 9 billion items on store floors, in transit or in warehouses at any given time, he said. The company has tripled the number of stores from which it ships online orders directly, but acknowledges that implementing the strategy isn’t easy.
“The challenge of where you put inventory is going to be much more difficult in the future as we ship products from stores,” Mulligan said.
Reporting By Nandita Bose in Minneapolis, editing by Peter Henderson and Sue Horton