Target (NYSE: TGT) has reached a new milestone. It's cracking a coveted market by opening its first store in Manhattan's East Harlem, reflecting big-box retailers' desire to more fully break into populous urban markets.
Getting a foothold in cities isn't always easy for big-box retailers such as Target, Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST), and Best Buy (NYSE: BBY). First off, there's the obvious problem of finding space for "big-box stores" in such congested environments. It's easier to secure large parcels of real estate in rural or suburban settings.
Alternatively, you could buy your way into the market -- the approach Walgreen (NYSE: WAG) recently took. To jump-start its move into New York City, the pharmacy decided to buy Duane Reade, a Big Apple drugstore chain with more than 250 locations in the immediate area, compared to Walgreen's 13 or so locations in Manhattan. Of course, Walgreen doesn't have the same space requirements as a big-box store.
Even when major retailers can find a home in the big city, some urban dwellers tend to fight off big companies' advances. I'd imagine Target would have an easier time than Wal-Mart, which has often experienced quite a bit of pushback from activists. Consider Wal-Mart's recent struggles with labor unions in the Chicago market. Perhaps in an effort to win over its new neighbors, Target's new East Harlem store reflects its prospective clientele, carrying a lot of merchandise to cater to local Latin American customers.
Target's tried several interesting initiatives, including temporary pop-up shops, which hinted at its desire expand beyond the company's 150 existing urban stores. Here-today-gone-tomorrow shops can help gauge demand in urban areas while building buzz for the brand. Last spring, Wal-Mart revealed plans to grow by shrinking (the size of its stores, that is). For urban encroachment, smaller is better.
Venturing into the Manhattan market could be a major potential contributor to Target's fortunes. The company expects the East Harlem store to rake in $90 million in sales in its first year, which would make it one of the company's top five sales generators. Its usual suburban store does about $25 million by its first anniversary.
And while some city dwellers might bemoan the danger to mom-and-pop stores, and rue the day a big-box store like Target or Wal-Mart came to town, a USA Today article on the topic noted that many customers want stores like Target close by. One local woman pointed out that at Target, she can buy milk at half the price charged by existing privately owned stores.
It sounds like Target will probably hit a real bulls-eye with this new store. Shareholders should be happy about the urban renewal of the retailer's growth strategy.
