Target is making a bigger bet on baby

• Target is expanding its in-house brand Cloud Island to include essential baby items like diapers, wipes and toiletries.
• The launch of about 30 new items happens Sunday.
• Target says most goods will be competitively priced under $10.

Source: Target

Diapers and wipes from Target's Cloud Island brand.

Without Babies R Us, Target sees an opportunity to double down on its own baby business.

The retailer is expanding its in-house brand Cloud Island, which currently sells items like crib sheets, stuffed animals and baby bath toys, to include essential items like diapers, wipes, toiletries, utensils and bowls. The launch of about 30 new items happens Sunday. Target says most goods will be priced under $10 — 30 to 40 percent less expensive than comparable national premium brands.

When Toys R Us liquidated its business last year and shuttered its Babies R Us stores, many retailers saw an opportunity to flood a suddenly underserved market. Walmart rolled out a revamped landing page on its website for baby items. Amazon quietly started selling a new diapers branded Earth + Eden.

Target had already started to remodel the spaces in its stores where it was selling things like cribs and strollers, putting more of those bulkier items on display and rearranging them so that they were near kids clothing and other overlapping categories. It started letting parents test out more items like car seats in stores before they buy them. And Target says those revamps are leading to sales increases.

"There is a mom out there that's registered with Babies R Us, and all the sudden she's lost," Chief Merchandising Officer Mark Tritton told CNBC. "We've all known how valuable the baby guest is to [Target], how they shop across the total business. ... It's one of our most important guests."

Target has said there's significant crossover with the former Babies R Us and current Target shoppers. The company added, however, that this has always been a core customer group — even before Babies R Us' struggles — that shops and spends more at Target annually than those people without kids at home.

Even singer Beyonce, also a mom, was spotted in the baby aisles at Target earlier this month, next to the diapers.

In deciding to grow Cloud Island, Tritton explained, "We like to see what customers buy, ... what they come back with frequency on. As they buy x, they buy y." He said many moms and dads come to Target to buy clothes or groceries, and they leave with a pack of wipes or baby formula. Target is then able to leverage those insights on shopper behavior to decide how it wants to invest back into its own private labels.

Still, some customers will always want a national diapers brand, like Pampers, and Target will continue to offer them that, Tritton said. "We think there is a place for special brands, premium brands. ... We know we are not going to dominate" the baby category, he said.

Getting into the private-label diaper business, though, Target could have an edge over consumer goods behemoth Procter & Gamble, which announced plans last year to hike the price of Pampers diapers and other household goods as its profits were being squeezed.

Diapers alone make up a $44 billion category globally, or $6 billion in the U.S., according to UBS. The investment bank said Pampers is still the dominant brand, ahead of Kimberly-Clark (which owns Huggies) and other private labels. UBS expects price increases from P&G and Kimberly-Clark will show up on shelves early this year.

Families looking for a better bargain could start to pivot to cheaper options.

Target said the price for Cloud Island wipes will range from $2.99 for 80 to $16.99 for 800. (An 800-count box of sensitive Pampers wipes retails for $21.99 on Buybuybaby.com.) Cloud Island diapers will range from $7.99 for a "jumbo" pack of newborn diapers to $21.99 for a "super" pack of diapers in size seven. (A jumbo pack of Pampers diapers for newborns retails for $8.99 on Target.com.)

When it reported holiday sales earlier this month, Target called out the baby category as one of its strongest performers in November and December. Target also has its own baby registry business, and the company told CNBC sign-ups grew by a double-digit percentage in 2018.

Speaking at the National Retail Federation's Big Show earlier this week in New York, CEO Brian Cornell explained how Target's private-label business "started to sputter" a few years ago because the company wasn't investing in the right ways. Merchandising was off, he said.

Now, the company is seen as getting back to its "cheap chic" roots with trendy brands selling everything from home goods to apparel for teens. It's one of Target's weapons, arguably, against other retailers like Walmart and Kohl's. Some of Target's in-house brands including apparel brands Cat & Jack and A New Day have already surpassed $1 billion in sales.

Despite some fear that consumers might start tightening their wallets in 2019 because of economic uncertainty and an ongoing government shutdown, Cornell said, "Consumer confidence is still quite high. ... It's still a healthy retail environment."