'Loving the store' puts digital transformation at Target aiming for a CyberMonday bullseye this year

Stuart Lauchlan Profile picture for user slauchlan March 6, 2018
Target gets the message about the important new role of the physical store in digital retail. Now it's time to really scale up...

There is a couple of themes that we’ve seen in our ongoing coverage of digital transformation in the retail sector. One is the idea of ‘learning to love the store again’ instead of blindly trying to be Amazon; the other is the importance of delivery as a fulfilment channel.

As a perfect example of both, look no further than US retail bastion Target, whose digital transformation initiatives we’ve followed closely and where CEO Brian Cornell talks enthusiastically about:

creating a more inspiring and connected shopping experience, re-imagining our supply chain and fulfilment capabilities, by positioning our stores at the heart of our network.

The reason for this is simple - digital revenues have grown by more than 25% year-on-year for the past four years, growth that Cornell attributes to the network of physical stores which fulfil more than half of the total digital volume. That’s a percentage that he wants to see increase:

Not only are we creating better showrooms at our stores, we are also using these buildings in a profoundly different way. They should be hubs for commerce and community, and given the fact that we are nearly 10 miles from every doorstep in America, we see a huge advantage in leveraging that proximity. We just needed to realign our network.

A few years ago, we started shipping digital orders from our back rooms. We started small and we worked out the kinks. We focused on getting orders to our guests with greater efficiency, reducing inventory across our network and dramatically accelerating delivery times. But that was just the start.

To support its ambitions, Target made a couple of strategic acquisitions in 2017. August saw the purchase of Grand Junction, a technology platform that connects third-party carriers and provide same-day delivery service. This was followed in December by the the acquisition of Shipt, a technology platform which Target plans to close the last mile delivery gap “from days to minutes”. These are now being rolled out across Target's business.

Love the store

On the front line of achieving this is Chief Operations Officer John Mulligan, who eloquently articulates the importance of the physical store in a digital retail market:

Here is the question I get all the time - in today’s digital world, why invest in stores? For us the business case is simple. When a digital order comes in, we basically have two choices - fulfil it from one of a few fulfilment centers across the country or ship it out the back at the local store.

We are fortunate to have more than 1,800 stores in really great locations, prime real estate, just down the street from our guests. So we can deliver it faster, nearly two days faster than if we send it from a regional fulfilment center. Plus the inventory is already there, because our stores feature a curated assortment we know our guests want.  Naturally it’s the same merchandise they buy most often online. And when one stores of an item we have other stores nearby that can help fill the order.

Mulligan also cites the flexibility of the stores network to ramp up when there is an uptick in demand. He points to last year’s CyberMonday:

Our stores shipped millions of orders out their back doors. Without that capacity we would need a twice as many fulfilment centers as we have today. When that peak was over, the stores wrapped right back down. So we avoid spending all that capital on new facilities [that] we would really only need a few weeks out of the year.

And that cost saving is what Mulligan calls “the real kicker” for Target:

Shipping from a store is the best way to lower the total cost of digital fulfilment. We hear a lot about optimizing, picking and packing, which can help make fulfiling an online order more efficient. But step back and look at the total cost of fulfilment. There are fixed and variable costs required to run and staff the fulfilment center, but no question shipping is by far the largest chunk.

Going after the variable costs while really important, only gets you so far. To lower the total cost, you can’t ignore the ‘big dog’. Shipping from a local store optimizes the most dominant standalone cost by dollars per order. Because we haven’t sunk capital into a massive fulfilment center, our overhead and other fixed costs essentially go away.

The whole supply-chain

To make all this work though, the entire supply-chain process needs to work, notes Mulligan:

With everything we are asking a store to do, they need more product than ever before, we are replenishing the shelves and fulfilling digital orders, all in one building from the same pool of inventory. So product has to come fast and often. But there’s already so much happening in a store. So the trick is to send them only the right amount of product at the right time and quickly.

What this means for Target is putting in place a new operating model for supply chain that allows more flexibility around how product is shipped. As an example, Mulligan says:

That might mean sending a truck with bottles of shampoo next to cases of catch-up and pallets of water. We send the store precisely what it needs to restock the shelf. It keeps product from clogging up the back room and makes it easier for our teams to manage the inventory. It’s a model we have been testing with a distribution center (DC) in the North East and it’s working. The stores supported by that DC have reduced their backroom inventory by more than a third and cut hub stocks to half of what we see across the rest of the chain.

And with better management of inventory in the back of the stores, more time can be dedicated to digital fulfilment of orders. This has been another recent highlight, argues Mulligan:

This past holiday season we tested a new design at the back room, complete with more pack stations and dedicated space to sort orders for delivery and capacity shot up. It was incredible as orders came pouring in on Cyber Monday, the teams were picking, packing and sorting boxes, just like a fulfilment center. With enhanced layout and process, they did up to six times the volume of the year before.

Best of all, guest got their packages faster. Nearly every order that came into those stores that day was picked, packed and ready to ship in 24 hours. This year to keep up with digital demand that continues to far outpaced the industry, we are introducing this new back room design to more than 150 stores and we are re-engineering the operation in more than 1,000 others. With this additional capacity, our stores plan to ship nearly double the number of packages for CyberMonday 2018 compared to last year.

The Shipt acquisition will help meet that target, says Mulligan, giving the retailer the ability to get products out to customers in hours or even minutes:

It’s a company built on speed but focused on service, which means working the Shipt we could jump years ahead in our fulfilment plans, without sacrificing the guest’s experience, staying true to how we’ve grown for more than 50 years.

Just eight weeks after our announcement we began offering millions of guests the ability to shop online for more than 50,000 items across groceries, essentials, electronics, baby and more, and have those products delivered that same day…we are rolling [this] into new markets almost every week. By the Holiday season, we will be the first retailer to offer same-day delivery in nearly every major market.

There are three main priorities for Shipt that are being delivered upon, he adds:

One is, scale Target nationally on the Shipt app and Shipt.com and we are well down that path. We are in 455 stores. We are adding markets every single week. The second was bring Shipt to Target.com. [We] are working hard on that to provide that option for guests who come to us directly through Target.com [that[] we will provide same-day delivery service for our entire assortment.

The third is to create an ecosystem of partner retailers, with firms like Meyer and CostCo already users of the app. This has great potential for all, suggests Mulligan:

We know consumers have different reasons they go to different retailers. Often they come to Target. We really like that. Sometimes they go other places. But bringing all of those retailers together on one marketplace is incredibly powerful to bring consumers into the Shipt app.

My take

A program that’s on target. The senior management at this retail institution has put in the hours on addressing legacy issues, not least in terms of updating the look and feel of the physical stores - something that was long overdue. The strategic intent to integrate the physical and digital experience is something we touched on last week with Nordstrom and it’s clearly a mantra at Target as well. In the increasingly tough battle against Amazon and Walmart, this is one retailer that seems to be saying and doing the right things.

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