Delivering digital growth - how Target's store-as-hub strategy paid off

Profile picture for user slauchlan By Stuart Lauchlan March 5, 2019
Summary:
Target chose to invest in its physical stores rather than close them. COO John Mulligan explains why.

Target
Love the store

One of the prevailing trends in the omni-channel retail sector has been the introduction of multiple fulfilment channels. Target CEO Brain Cornell talks about a fictional working mom whose shopping and delivery options have transformed in just three years to the point that:

Whatever she wants, today we've got her covered.

In 2019, the goal is to expand on that success and it’s down to Target Chief Operating Officer John Mulligan to continue what he pitches as an evolving journey:

For most of Target’s history, guests have had one way to shop. They came into the store, walked through the sales shelves and essentially picked their own order and drive it home. In the late 1990s, when we had an online business, we begin shipping orders directly to the guest. At that time, that was a new and radical concept for Target, but today, it's a relatively mature fulfilment method for just about any retailer.

Then about five years ago we began offering in-store Pickup. This started to change the game from the two extremes of the guest shopping only in-stores and Target shipping only from warehouse. Guests like placing an order online and picking it up, not far from home that same day. Since then we've quickly grown the options we offer our guests. They want it next day, same day in their car or at the door - we have a way to deliver. Whether it's same-day delivery shop by Shipt or our newer service Drive-Up. Placing an order and waiting for it to be Shipt is something consumers already know how to do, but having an order popped in your trunk, just an hour after you order it, it is a pretty new concept.

It’s all about maximum customer choice and convenience, he adds:

Each of our fulfilment options satisfies a different need, it serves a different kind of shopping churn. As guests are learning about these services and experiencing how conveniently we are, they're choosing them more often. For example, we're seeing guests choose Pickup instead of shipping and we expect demand for our newer service to continue growing the fastest.

The store

At the heart of all this is the strategic decision to focus on the idea of using stores as hubs. That was a decision taken at a time when other retailers were embarked on Amazon envy fuelled strategies of closing stores and trying to get everything online. Target took a different tack, recalls Mulligan:

Using our more than 1,800 stores in neighborhoods across the country to handle online orders not far from the guest who bought them. Many retailers are just starting to talk about this concept, but we've been doing it. A few years ago, when others said stores didn't matter, we doubled down on ours. We shared our plans to use them for both in-store experiences and digital fulfilment, and because of the investments we've made to put our stores at the center, Target has a delivery option to meet just about any guest’s need for speed and to make shopping even easier.

Understanding how our stores make us faster is simple. They are already in city neighborhoods just miles from our guest doorsteps. So we can ship online orders at least a full day faster than we can ship from an upstream fulfilment center and we can deliver same-day orders within hours.

It’s also operationally more efficient for Target:

We’ve lowered our average unit cost of fulfilment by 20%, driven by our fastest growing fulfilment methods by Shipt from store and Drive-Up. By fulfilling closer to the store shelf, adding new delivery options and optimizing our operations, we saved hundreds of millions of dollars in fulfilment costs in 2018. Today, shipping is what guess know best, but our newer delivery services, like Drive-Up that have lower costs and are more profitable, are growing the fastest because once guests try them, they love them.

Schipt is a good example of the kind of investment Target has made. Acquired last year, the shopping and delivery service has now been scaled out to 1500 stores in more than 200 markets:

For $99 a year, guest can place an order through Shipt and have it delivered in an hour or two. Shipt earns additional revenue from that annual fee and its 80,000 shoppers across the country are shopping for a growing number of retailers on its marketplace.

Having such services on offer from the stores has enabled Target to cope with digital demand, adds Mulligan:

In the past two years, guests bought twice as many units from Target.com and all of that growth was fielded by stores - buildings we already own and where the lights were already on. Our stores have ‘Shipt’ four times the number of items out their back doors and they managed triple the demand for store Pickup services. This year, during our fourth quarter, stores fulfilled nearly three of every four orders, effectively doing the work of 14 fulfilment centers. That means we didn't have to spend nearly $3 billion on new warehouses over the past few years, to accommodate that growth, and with our store replenishment efforts that enables stores to fulfill a growing number of digital orders will continue to have capacity over the next few years.

It’s a complementary omni-channel mix, he argues:

It's also important to note that while our stores are fulfilling more digital orders it's not coming at the cost of in-store sales…our stores as hubs strategy isn't putting our core business at risk. It's simply helping us grow faster.

My take

A fulfilling success story by any measure and a validation of the ongoing importance of investing in the physical stores in a digital retail age.