Limited food offering not a negative

A year ago, Target’s detractors pointed to the company’s limited exposure to food as one of its weak spots heading into a recession where consumers would be foregoing discretionary products in favor of necessities. Consumers are still being pretty stingy when it comes to spending money on apparel and home goods, but Target’s limited offering of food has turned out to be not such a bad thing, as rapid deflation of many fresh food categories has hindered sales growth at retailers with heavy exposure to those categories. And more food inflation could be on the way; at least that is a possibility put forth by JP Morgan analyst Charles Grom. He notes that July Producer Price Index data deteriorated significantly, especially a component of the index known as the “finished processed foods,” which recorded its largest drop (3.2%) since November 1976.

Dairy, product and meat led the decline, according to Grom, but even lower retail prices are expected to reach consumers in the coming months, as the reduced wholesale prices are passed through. Target’s limited, for now anyway, food offering causes it to miss out on some traffic generating benefits, but the upside of the downturn in food prices is that it is avoiding the additional sales pressure.