Target's Rural Expansion Plan - Experts Call It a "Strategic Disaster" That Shouldn't Have Happened

Summary

Omni Talk Retail Podcast Summary

Episode: Target's Rural Expansion Plan - Experts Call It a "Strategic Disaster" That Shouldn't Have Happened
Release Date: May 23, 2025
Host: Omni Talk Retail
Guests: Chris Walton, Anne Mezzenga

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Introduction

In this episode of Omni Talk Retail, the focus is on Target's recent strategic shift towards expanding its store footprint in rural communities. Host Omni delves into the implications of this move, inviting industry experts Chris Walton and Michael Mezzenga to analyze the potential outcomes and challenges of Target's new strategy.

Target's New Rural Expansion Strategy

Target has announced a significant pivot in its expansion approach, as reported by Modern Retail. The Minnesota-based retailer is transitioning from predominantly small-format urban stores to full-size locations in smaller, rural markets. Unlike their previous focus from 2016 to 2021, Target's new strategy involves opening stores that exceed 100,000 square feet, aligning with their "fulfillment hubs" strategy central to their omnichannel operations since 2017.

Key Points:

• Target plans to open approximately 300 new full-size stores over the next decade.
• In 2024, Target opened 23 locations and has 20 more scheduled for 2025.
• Current reach covers 75% of Americans within a 10-mile radius, trailing behind Walmart's 90% (as noted by CEO Michael Fidelke in March).

Expert Opinions

Chris Walton's Perspective

Chris Walton expresses skepticism about the profitability and scalability of Target's rural expansion.

"It really, for me, is location specific. Does a Target store fill the need for a consumer in that market or is it another Choice to Walmart, etc."
— Chris Walton [01:15]

He highlights that while specific markets (e.g., affluent rural areas like the Hamptons) might support larger Target stores, such successes are not easily replicable nationwide.

"If you're going to build 300 of these, there just aren't that many locations that are going to pencil."
— Chris Walton [06:17]

Walton emphasizes the low performance of past rural stores, noting that some have achieved only 50% of the average Target store volume.

Michael Mezzenga's Assessment

Michael Mezzenga is more critical, labeling the expansion as a strategic misstep.

"It probably should have never made it out of the C level strategic planning meetings and or approve approval for the spend by the board."
— Michael Mezzenga [02:39]

He draws parallels to the unsuccessful expansion attempts of Dollar Tree in similar markets and warns that Target is venturing into head-to-head competition with Walmart—a domain where Walmart excels.

"If they're looking to expand and ... we're going more head to head with Walmart. I think that's a strategic error."
— Michael Mezzenga [02:56]

Michael argues that Target should focus on enhancing its core strengths rather than diluting its strategy by mimicking Walmart's approach.

"What do these markets really need a Target for? ... Let's stop like these bright, shiny object things. What do we need to do to be the best that we can be..."
— Michael Mezzenga [09:45]

Challenges and Criticisms

The discussion underscores several challenges facing Target's rural expansion:

1. Market Saturation and Competition: Walmart and Amazon have a strong presence in rural areas, making it difficult for Target to gain a foothold.

   "Walmart's already there. Walmart's better than it's ever been. ... there's no way Target can beat Walmart on price."
   — Omni Host [04:36]

2. Store Performance: Historical data suggests that rural stores underperform, leading to financial strain and questions about sustainability.

   "Number one, that's, that's doa. ... Dollar General has these markets figured out they are growing their grocery business as well."
   — Michael Mezzenga [09:36]

3. Strategic Alignment: Experts argue that Target's move may be a diversion from its proven strengths, potentially leading to strategic dilution.

   "This is just another sign of just how lost strategically target is right now."
   — Chris Walton [07:30]

4. Capital Allocation: The aggressive plan to open 300 stores may strain Target's financial resources without guaranteeing returns.

   "They can win this battle? You know that will return the capital that Wall street requires..."
   — Chris Walton [07:10]

Conclusion

The episode concludes with a consensus among the experts that Target's rural expansion strategy is fraught with risks and is unlikely to yield the desired growth. Chris Walton and Michael Mezzenga both emphasize the need for Target to reassess its strategy, focusing on leveraging its existing strengths rather than overextending into competitive and uncertain markets.

"Honestly, you can't do. No, I don't think anyone could do a worse job."
— Chris Walton [10:02]

The discussion hints at potential internal shifts within Target, referencing the "acceleration team" mentioned in the latest earnings call, yet skepticism remains about whether these efforts will rectify the strategic missteps.

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Key Takeaway:
Target's ambitious plan to expand into rural markets with large-format stores is met with significant criticism from industry experts, who label it a potential strategic disaster. The challenges of competition, market saturation, and financial prudence suggest that Target may need to reconsider its approach to sustainable growth.

Transcript

[Host]

Wrap this show up. It's already been so great. Target has unveiled a new small town store expansion strategy. According to Modern Retail, the Minneapolis based company is increasingly focusing on full size store development in smaller markets in rural communities, a departure from its previous emphasis on small format urban locations that dominated its expansion narrative from 2016 to 2021. Almost all of Target's plan stores are set to exceed 100,000 square feet, supporting the company's quote stores as hubs quote fulfillment strategy that has become central to its omnichannel operations since 2017. Target's growth ambitions remain robust with plans to open approximately 300 new, predominantly full size stores over the next decade. The retailer opened 23 locations in 2024 and has scheduled about 20 new openings for 2025, according to its most recent annual report. Well, Target already reaches roughly 75% of Americans within a 10 mile radius. As CEO Michael Fidelke noted in March, this still trails Walmart's impressive 90% proximity metric. Christisa, we're going to go to you first on this. Do you agree that Target will find profitable growth by expanding into rural markets? I know you have a hot take on this one yourself.

[Chris]

So as bullish as I was about target 360, I think the jury's out for me on this one. I think a couple things that I've been thinking about. One is, you know, when you think about, you know, store expansion, you know, specifically Target in rural markets, it really for me is location specific. Does a Target store fill the need for a consumer in that market or is it another Choice to Walmart, etc. Now if they're looking at it to say, okay, this is going to be a superstore and we can pull inventory and speed up our fulfillment in some of these markets because we all know that fulfillment times are lower or they're slower, I should say, for some of these customers, then that could be a really good thing. But again, it really comes down to each market, each specific market and what is the real need. You know, funny story, you know, Kmart, I don't know if you guys know this. One of the last stores was in the Hamptons, you know, at the eastern end of Long Island. And now Target is actually filling the space. So while affluent, it is also, it is also rural. So as I think about, you know, yacht rock and white pants, et cetera, going into Memorial Day, I know a bunch of people out there are very in rose. I know a bunch of folks and consumers are super excited that Target is coming to fulfill that need. But again, that is a market specific opportunity that may not translate across the country.

[Host]

Okay. Michael, what about you?

[Michael]

Yeah, I think this is another one that I, it probably didn't come up in the innovation lab Target but it probably should have never made it out of the C level strategic planning meetings and or approve approval for the spend by the board.

[Host]

Give us your reasons.

[Michael]

Yeah, the challenge I have with this is I like, I like Chris's example of a Target going in near the Hamptons but clearly that's not very rural. The rural markets are a challenge and all you got to do for the template of the challenge is look at Dollar Tree. Right. I mean that story has been written, the outcome is written and it's not successful. I also think Target is best when they are sort of the antidote to Walmart. Like when Target is Walmart need Target, you have Walmart and Walmart is fantastic at it. Target has always been a step, maybe two, maybe three above Walmart. It's still sort of similar but it's always been going back to the ads in the, the early 2000s. Target, not target. So it was a great access point but it provided a different experience in my opinion than Walmart. So if they're looking to expand and if you read between the lines that's basically what they're saying is we want to go more head to head with Walmart. I think that's a strategic error. They need to really separate themselves, do what they do best and is putting a Target in a rural market and I think of a place where we go on vacation sometimes in the summer up in rural Maine there's a dollar general. Are they going to put a Target near there? That's never going to work. So I think it's really, it's interesting but without a well thought out plan and to Chris's point, very strategic placement in demographic areas that can support it. It's not going to work.

[Host]

Yeah, I would agree with you Michael. If we were talking old Target, I think now you have to look at current Target and when you put it up against a Walmart I don't think it provides the same like Walmart's come so far and improved. It's especially the new locations of Walmarts that they're going to be building as well in these rural communities like their, their store formats I think are comparable and if not better than Target. Plus I think you hit a lower price point. It gets back to what we talked about in the first headline of you know, you're going to get the everyday low price at Walmart. And, and there's no way Target can beat Walmart on price. And so what, what are you left with for the shopping experience? And I tried to even go to like, to the, yes, maybe they could just build store fulfillment centers or something in these areas to just hit on faster delivery. But, but you have Amazon coming in and doing rural delivery too and everybody knows Amazon already too. So I think, I think Target's in a, in a tough space here. And I also wonder if this isn't a bit of a PR play as well, like if they're going to these based on all of the, the footfall drop that they saw from a lot of the DEI initiatives. I also wonder if this isn't saying, okay, we're going to go and try to penetrate a new market here, but Chris, Chris Disa, you got something to throw in?

[Chris]

I will say they're, they're adding, their desire is to add 300 stores, which is a 15% increase. If we were talking 50 stores in select locations that, you know, services in need, all four, but you know, 300 stores is quite bullish in my opinion.

[Host]

Totally agree. Chris Walton, close us up. What's the, what's your thought here?

[Chris Walton]

Yeah, I've been on my edge of my seat waiting to chime in on this. I think I actually have, I think I actually have firsthand experience that's pretty applicable for sure to this discussion. You know, you know, I, and the reason I say this, I ran, I actually was in charge of the stores in Scotts Bluff, Nebraska and Casper, Wyoming, and they were some of the lowest volume stores at Target. And so to Chris's point, if you're going to build 300 of these, there just aren't that many locations that are going to pencil. And I can tell you without giving anything away, the volume of those stores is like 50% of what an average target, at least 50% less than what an average Target store is going to be. And, and to your point, I think everyone nailed this. Like, you know, Walmart's already there. Walmart's better than it's ever been. Amazon is going there too. And so for delivery, like if that's why you're building these, why would you build stores just for delivery hubs like that Seems like a really expensive proposition. Target Tractor Supply is also there. So how does Target win this, how does Target win this battle? You know, that will return the capital that Wall street requires, given the historical performance of Target at a time when the cost of capital is also more expensive than it has been in years past. So I absolutely don't get this. It's, it's just another sign of just how lost strategically target is right now. Which Michael said right at the outset, like this is a discussion. This is just a pivot that should never have gone past anyone. Like. And yeah, the city targets didn't work. No, no. Crap. We all knew that going into. Because you can't build enough of those at a, at a rate that's going to have meaningful comp growth either. There just aren't that many locations in the US where that's going to play out either. But they were, they were lined up on that strategy for five or six, you know, 10 years almost. Cornell's been there since 2014. So. So when do they get some really concrete growth strategies here? And I mean I've been ran on this for the hopefully this pulpit forever. Like, come on, this is not it.

[Host]

Hopefully the acceleration team, that's that they talked about in the earnings call this morning. It's all down to the acceleration team, Chris. Acceleration move forward.

[Chris Walton]

Right.

[Host]

Man.

[Chris Walton]

I feel, and I feel, I feel vindicated by that too. And because that I've been saying that this was going to happen for a year and a half now when we had the annual Review show in 2023 with the a and M folks and, and it has happened. But I can tell you like, you know, before you announce this, go into the store in Scott's Bluff and see if you want to, you know, replicate that model throughout the country. Like get off, get out of the corporate boardroom and see if that's the model that you think is really going to work. I don't know.

[Michael]

But yeah, I mean, look, retail 101 that is like really, really proven is that these X O market stores or smaller stores struggle. So every major retailer expands and then spends years trying to get out of the leases to shut the not profitable doors. They're now saying we want to open 300 of these types of stores. So number one, that's, that's doa. Number two, the other one that we didn't talk about is Dollar General. Dollar General has these markets figured out they are growing their grocery business as well. Now that's much to the not, you know, whatever. They're just growing their grocery business. So like what do these markets really need a Target for? And I, I think the last thing that Target absolutely needs to do and if we were working with them or if I was the CEO, I would say let's focus on ourselves. Let's stop like these bright, shiny object things. What do we need to do to be the best that we can be in our own four walls with what we have today and what we can control? And because it doesn't feel like they're doing that, and I think that's a huge miss on their part.

[Host]

Oh, you guys.

[Chris Walton]

You would get my vote. Michael.

[Host]

Yes.

[Chris Walton]

Honestly, you can't do. No, I don't think anyone could do a worse job, quite honestly, but you would get my vote.