Target Enters the Small-Box Market

Hey, Wal-Mart, whatever you can do, Target can do better. Well … maybe.

Jul 23, 2014 at 1:45PM
Targetexpress From Site

Target (NYSE:TGT) has been paying attention to Wal-Mart Stores' (NYSE:WMT) small-box store strategy and success.

Wal-Mart's Neighborhood Market delivered a 5% comps sales increase year over year (representing 46 consecutive quarters of comps growth), on a 4% traffic comps increase. Neighborhood Market even performed well during severe winter weather, which is a good sign. Wal-Mart doesn't report numbers for its Walmart Express stores yet, but it has stated that pilot tests have been successful.

With all this small-box store success, what do you think Target has planned? Obviously it will soon open its own small-box store, which will go by the name TargetExpress. That's not very original, but fortunately, this isn't a creativity contest. It's about sales and profits. Is it possible that Target will one day be as aggressive with its small-box stores as Wal-Mart? If so, will it pay off?

First attempt
According to BizJournals, TargetExpress will launch in Dinkytown, MN, on July 23rd, just outside the University of Minnesota. However, according to investor relations when quried about the opening, they didn't know when the store would open, but that it would definitely open eventually.

When TargetExpress does open, it will cater toward urban shoppers. It will only be 20,000 square feet, and beauty, pharmaceutical, and grocery items will be placed in the front and center of the store. Pack sizes will be smaller, which will allow for instant consumption. There will also be a Fan Central section for the University of Minnesota branded clothing and accessories.

If you're thinking that TargetExpress will be similar to CityTarget, you would be mistaken. CityTarget store range between 80,000 and 125,000 square feet. This is smaller than SuperTarget stores at an average of 174,000 square feet, but still much larger than TargetExpress at 20,000 square feet. Smaller stores are a positive in today's retail world (if they can bring in sales) because they require less overhead, which can aid profitability.

With TargetExpress, Target is attempting to eliminate the pain points often seen at larger-format stores such as long lines, navigational challenges, and uninspiring offerings. Of course, Minneapolis is just a test store. However, should the store turn out to be a success don't be surprised if you see TargetExpress in bigger cities like New York and Los Angeles in the future.

Future landscape
Wal-Mart has already proven successful with its small-box stores. Wal-Mart was clearly more of a visionary with the small-box format, which is proof of more innovative management. However, this has allowed Target to learn what has and hasn't worked for Wal-Mart's small-box stores.

The most likely future scenario is that both Wal-Mart and Target are successful with their small-box stores, given the success already seen by Neighborhood Market and Walmart Express thanks to today's urban living preferences and more spontaneous Millennial shoppers. This will then likely lead to market share gains from the dollar stores. This might exclude Dollar Tree since it's actually a dollar store that charges $1 for every item. Wal-Mart and Target will not be able to compete with Dollar Tree on pricing.

If the story plays out this way, then Wal-Mart Supercenters and SuperTargets might act as fulfillment centers for their complementary small-box stores. This would reduce shipping costs and reduce overhead. When you add these developments to brand strength for Wal-Mart and Target and their e-commerce growth (both retailers delivered digital sales growth north of 26% in the first quarter year over year), you're likely going to see these giant retailers demonstrating staying power – despite recent headwinds for each of them.

The bottom line
Yes, Wal-Mart is dealing with a struggling target demographic and Target is dealing with the data breach impacts and Canadian expansion difficulties. In order to be a successful investor, though, you must look years down the road. Unlike other retailers, Wal-Mart and Target are innovating to stay ahead of consumer trends. It's difficult to see the rewards right away, but there will likely be rewards for patient investors.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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