Bullseye from Target as COVID-19 proof points stack up around retailer's digital transformation gambit

Given the wider trends in the market during the COVID-19 crisis, it was always certain, given its inventory and previous digital investment, that Target would be one retailer that would see a sharp uptick in business during lockdown. But what happened in April took everyone by surprise, including CEO Brian Cornell, as digital sales soared up $1.1 billion on the same period last year: 

On an average day in April, our operations were fulfilling many more items and orders than last year’s Cyber Monday, a day for which we had planned months ahead of time. In contrast, this unprecedented surge in volume was completely unexpected at the beginning of the quarter, and it ramped up from normal trends in a matter of weeks. 

It was Target’s decision some years back to redefine and redevelop its network of retail stores as digital fulfilment centers that has proved to be a particularly prescient move with that network of outlets fulfilling more than 80% of April’s online sales, some $950 million worth of business. It’s validation time for Target’s omni-channel strategy, argues Cornell: 

Over the last few years, we built a strategy and operating model that’s designed to generate strong performance in a wide variety of environments, and the first quarter demonstrated the strength of that model. Unprecedented volatility within the quarter presented the most extreme test of our business and operations that I could have imagined.

Some stats from the past three months to 2 May make his point: 

• In-store sales grew about 1%, while digital sales increased by 141% year-on-year across the whole of Q1.
• Digital sales accelerated every month in the quarter, from 33% year-on-year growth in February to 282% in April. 
• The percentage of orders shipped from store on time and the percent of pick-up and Drive-Up orders picked on time was approximately 95% in the quarter.
• Same day fulfilment via curbside pick-up, in-store pickup and Shipt delivery grew by 278% across the quarter. 
•  In April, sales on Drive-Up increased nearly 1,000% year-on-year. 
• Order volume for Shipt business independent of Target’s portion of that order volume was up two times and three times in April, with a 100,000 new sign-ups, a 60% growth in membership. 
• More than 5 million guests shopped on target.com for the first time.

On the downside, all of this shift in activity came with a price tag with an estimated $500 million in additional crisis-related expenses, ranging from hiring extra staff though to basic health-and-safety precautions. That may have eroded margins, but it doesn’t diminish Cornell’s clear enthusiasm that Target has not been found wanting at this time: 

Our strategy of using our stores as hubs and the ability of our team to quickly pivot to meet shifting demand. And while we incurred extra costs to accommodate this incredible surge in digital fulfillment, we expect to gain a long-term benefit in terms of guest loyalty.

Store as hub

As noted previously on diginomica, Target’s regeneration strategy for the past few years has hinged on the importance of fulfilment as a crucial part of omni-channel transformation. The firm has not fallen for the mistake that a flashy front end website is the priority, a website that then is of little use if the goods ordered on it don’t make it to the customer’s front door as expected.  Cornell reiterates: 

We have a unique digital strategy based on a curated assortment of the categories and items that our guests expect from us. We deliver this digital assortment through a comprehensive suite of fulfilment options, including our rapidly growing same-day services, in-store pick-up, Drive-Up and Shipt. In support of our digital strategy, we placed our stores at the center of fulfilment, which gives us both speed and efficiency. This structure also allows our teams to pivot seamlessly when our guests’ channel preferences change. We have teams at headquarters, stores and throughout the supply chain, who are relentlessly focused on our guests and who place a premium on agility and adaptability.

Leading that supply chain effort is Chief Operating Officer John Mulligan, for whom, despite all the planning that’s gone in over the years, the impact of the current crisis has thrown up some key learnings to shape future thinking: 

One thing we’ve observed about this crisis is that it’s causing an acceleration in consumer trial and adoption of digital shopping. The ability of our operations to handle this unexpected acceleration has given us even stronger conviction that we have the right model and we have ample capacity to handle continued change in the future. Specifically, as part of our long range plans at the beginning of 2020, our first quarter digital volumes weren’t anticipated [to occur] for another three years. But our operations accommodated that extra volume without any advanced planning.

Mulligan says the firm remains committed to upgrading its stores once the crisis has passed its peak: 

We continue to strongly believe that the future of US retail will be based on an omni-channel model, in which quality retailers will serve their customers through both physical and digital capabilities. That’s why we’ve consistently pursued a strategy based on investments to enhance both physical and digital shopping.

And while we have temporarily slowed down our plans for re-models and new stores because of the crisis, that doesn’t mean we have less enthusiasm for these projects…While it is too soon to lay out longer-term timelines for our re-model and new store programs, we look forward to resuming these projects when appropriate. 

Other omni-channel innovations have had to hit the pause button, he adds, citing the retailer’s pre-virus acquisition of Deliv, a provider of local route optimization technology. Mulligan is keen to get underway with initial pilots using this offering: 

Following encouraging results of recent tests of this new capability, we elected to purchase the technology and hired members of their team to assist with the integration into our existing systems and processes. We are excited about this new technology, because it offers the opportunity to add capacity to our fulfilment network, while also reducing the cost of last mile delivery. Given that last mile is the biggest cost driver within digital, the opportunity to control those costs will play an important role in our operating margins over time.

With the benefit of this new technology, we can begin testing the addition of sort centers downstream of our stores within our fulfilment network. These centers, which we expect to be smaller than our average store, will be placed downstream in select markets in which we have a high density of packages being sent to guests homes. By eliminating the need to sort packages in the individual stores, the throughput of packages from these locations would naturally increase and we can achieve lower average shipping costs through the scale and route optimization that these downstream centers will provide.

Work on automation analytics technology programs will also resume, he says: 

We’ve been developing analytics and technology across something we call Inventory, Planning and Control, IPC. We’re about a third of the way into that deployment. We paused much of that for this quarter. The teams are assessing right now what timeline we want to get back on to begin deploying that further across the chain. We feel really, really good about the opportunity for us to improve what we’re doing from an inventory placement with that technology and analytics.

We had analytics or automation pilot going on in Minneapolis, also at Perth. In Minneapolis, we actually deployed that automation to four more locations. We have not started that up yet, because that will require some travel and we will take the safety of our teams into account as we think about getting back into the travel game. But when we are able to do that, we’ll get that to four more locations this year and then continue to expand. Out of Perth, the teams have made great, great progress here, even while we haven’t been able to get into that building. And so when we do get into that building, we’ll do some final testing to scale it out and then begin to think about where we deploy that next, somewhere within our network and an existing facility.

Overall, as lockdown begins to lift in regions of the US, Cornell and his team are starting to look beyond the current crisis. While digital fulfilment continues to be the main driver of business for now, in-store sales have begun to rise since mid-April, just as the government stimulus checks started to be cashed. What happens over the next few months remains to be seen as the volatility in the macro-economic environment is too strong to read with confidence. But for now, Cornell believes that Target’s gamble on omni-channel reinvention has paid off at the time the retailer needed it most - and he thinks that customers get the message: 

I think we’ve accelerated our digital fulfilment awareness with guests and fulfilment capabilities by upwards of three years. And I think we’ll come out of this first quarter with a much greater awareness around the type of services Target provides, the trust that we’re building in same-day, the knowledge that guests have today that if they place an order with target.com, within two hours they can come to our stores and pick up. They can pull into one of our Drive-Up lanes and within two minutes, we’ll put it in their trunk. Or we’ll have a Shipt shopper, bring it to their home within two hours. So I think we are going to see a dramatic acceleration in awareness and utilization of those same-day fulfilment capabilities.

My take

Coming on the back of Walmart’s progress report earlier in the week, there’s a clear theme emerging here. Companies that made sound decisions about IT and digital investment several years ago are reaping the benefit in the current crisis. Other firms are learning that they need to make very quick course-adjustments to try to keep above water.

Target’s decision to focus on the store’s re-invented role at a time when ‘let’s be Amazon and just shove everything online’ was a prevailing mantra was a gambit that was well-taken.

That said, it’s not enough just to appreciate the store’s role in the omni-channel business model, as Kohl’s has found over the past few months. More on that here.