Digital growth slows, but Target stays on target for ongoing omni-channel transformation

It’s become the norm to cite Target as a shining exemplar of omni-channel retail transformation, so the revelation yesterday that its online sales growth has slowed down causes some eyebrow raising. 

For the firm’s Q4, which includes the all-important Holiday season, digital sales rose 20%  year-on-year. Clearly that’s not to be sniffed at and is a growth rate that many other retailers would be more than pleased with. But it’s down sharply on the 31% growth rate that was being reported a year earlier. 

While the firm provided cautious guidance for the coming year, for CEO Brian Cornell, the Target transformation story is entering its next phase. He pointed out that three years ago the firm committed to spending $7 billion to overhaul its supply-chain, invest in digital and reinvent the in-store experience:

We had every reason to believe this would work, because we’ve been doing our homework; testing these bets and listening to our guests. And for them, stores were dead. They were just boring and uninspiring. Our guests still loved our brand. They just wanted us to do more. 

There were big questions that needed to be answered, he recalled: 

What would it take to combine the hallmarks of the physical experience, discovery, inspiration and service with the ease, convenience and personalization made possible through digital? In an age of AI and robotics, where do people fit in? When everyone's talking endless aisles, what's the role of curation? In an on-demand world, could digital ever become more than a drag on the P&L?

There were lots of theories, but nobody had the answers. And there certainly wasn’t a playbook. So, we started writing our own. We set off on a different path. We used our purpose as a guide and the rest is now history. Today, nobody's doing what Target is doing, nobody. Target is a category of one.

The 'Target run'

Cornell is particularly proud of the changes that have been wrought to the ‘Target run’, the process that occurs when shoppers engage with the brand: 

Perhaps the most game-changing element of our store-centric strategy is our approach to fulfillment. It wasn't that long ago that a ‘Target run’ involved a handwritten shopping list and a sunny afternoon with a shopping cart. And spoiler alert, millions and millions of guests who still really, really like to do that when they have time. But sometimes they don't. That's why we’ve built the most comprehensive suite of same-day services in the marketplace. Now you can put tens of thousands of items in your basket, in your trunk or on your kitchen table within a couple of hours max. It's really that simple.

Same day shopping is changing consumer behavior, he added: 

Same-day shoppers are making more trips, spending more money and putting Target first in their consideration set. You could call it our very own operations-based loyalty program. Today, our guests are letting our team pick the bulky stuff, like bottled water and paper towels, and then they're coming in to shop the categories that are just a lot more fun. Once a guest tries a service, three out of four times they’ll do it again within three months. In fact, our adoption rates are continuing to outpace expectations. In 2019, pick-up was up almost 50%; drive-up more than 500%. And today, we have more than 100,000 Shipt shoppers delivering orders for Target in almost 100 other retail brands.

Cornell makes an interesting comparison between Target and another digital transformation champion, Starbucks:

They are investing to create great experiences based on occasion. Sometimes you’re on the run; order in the app, skip the line, grab the drink. Sometimes you’re on the road. You got time to kill. Starbucks is a pretty great place to hang out…you have to design your experience to fit either occasion. At Target, we see the world exactly the same way. It's our job to create the kind of experiences that inspire our guests to spend a couple of hours or a couple of seconds and that's exactly what we're doing.

He cited the example of a family whose kid is heading off to college out of state: 

Let's say your daughter got accepted at Emory; great school, right outside of Atlanta. Now you can either hit a Target in North Jersey, pack up the SUV and drive south or you can order literally everything on target.com and have it delivered to campus. Or you can order a six-month supply of essentials, pick them up at our store near campus then spend moving weekend shopping for dorm room décor. A couple weeks later, you can send her anything she needs via Shipt. Whatever you need, we have you covered. These physical stores and digital platforms are seamlessly working together. Three years ago, we set out to become America's easiest place to shop. And today, we are.

Here come the robots

In large part, that comes down to the network of Target stores, according to Chief Operating Officer John Mulligan:

We said physical was the answer to digital and knew it wouldn’t be easy for others to imagine….Using our stores as local hubs continues to be the right strategy for us…our stores today are handling about 80% of our online volume, and for Target that's the sweet spot. As our digital business keeps growing at a rapid pace, our stores still have a very long runway of capacity.

Overhauling those stores has been a $4 billion spend over the past three years - and the work goes on: 

Our store investments will never be done, but the remodel itself is only part of our strategy. In a digital age, we need to give guests a compelling reason to come into a store and shop. For us, it's wrapping store design, compelling product and guest service together to create an experience that you can't get online. 

He added: 

By leaning into our stores, we've emerged as an omni-channel leader with competitive fulfillment options and a differentiated store experience. This year, we’ll take it to the next level and use our foundational capabilities rooted in our stores to serve guests in new ways. We’ll get closer to new guests, continue to elevate the store experience and redefine ease and convenience to serve guests in ways no one else can.

The next phase is a wider rollout of small format stores, the first of which launched as an experiment as far back as 2014, but which will now be opened at a more regular rate of around 30 a year.  And with Target’s focus on same day shipping and order fulfilment, there will be other tech investments ahead: 

While we’re adding capacity to support replenishment, we’ll continue to improve the end to end supply chain operation. We’re using machine learning to predict what product we’ll need and where we’ll need it. It applies automation to an age-old inventory problem, having the right product in the right place at the right time.

In 2019, we used it to position about 30% of our essentials merchandise. We saw out-of-stocks and our backroom inventory drop by more than a third, which is a win for the guests and our operation. We’ll keep adding new categories to the system and learn how this improves the guest experience.

The automation story doesn’t end there: 

For several years we’ve been talking about the robotic capabilities we’re building to support the work of our warehouse team and make our supply chain even faster and more efficient. We spent time testing and learning and this year we’re ready to start scaling.

The robotic solution we’ve been building in a Minneapolis market over the past few years is designed to sort and organize millions of individual units. It fills boxes with the exact amount of product we need in a store, so we keep the shelf full and the backroom clean. Each box is organized by aisle, so it’s literally minutes for our team to unload and restock.

The robots will be teamed up with systems that automate the organization of boxes, sorting them according to store and lining them up for delivery: 

When those two solutions work together, we’ll revolutionize how our store teams receive inventory and get the products our guests want on the shelf as quickly as possible. By summer, we’ll use the robotics to send pre-sorted units to hundreds of our stores and we’ll take the box sorting sequence operation to another facility where the two systems can work together in service of our stores, before we expand it further across our network.

My take

As we’ve noted time and again in our retail sector coverage, getting the omni-channel mix between offline and online right is the balance that eludes so many. While other brands have started to learn to love their stores again, for Target the attraction never faded. The Q4 slowdown in digital growth was undoubtedly disappointing, but needs to be seen in context. There’s no reason to assume that Target is going to lose its status as an omni-channel retail exemplar of best practice anytime soon.