Putting the store at the core of Target's digital fulfilment success story

Against a spotty landscape pockmarked with failure, Target’s digital transformation remains an ongoing success story. In 2019 so far, the retailer has seen digital sales soar year-on-year by 42%, a growth rate that some rivals can only look on with envy.

Half of those sales are coming from online shoppers who then collect their purchases at a store or who tap into the firm’s same-day home delivery service.  Target physical outlets handle more than 80% of digital volume, with orders shipped directly from stores to customer homes, making digital fulfilment a critical priority for the company.

Target Chief Operating Officer John Mulligan argues that the firm is benefiting from years of investment in infrastructure and can make a key boast:

Target now offers more digital fulfilment options across more of the country than anyone else in retail. Digital accounted for more than $5 billion of Target sales last year and our stores fulfilled about two-thirds of that volume. This year, given our digital growth trajectory and the rapid adoption of our same-day services, we are on track to grow Target’s digital sales by more than $1 billion in 2019 and fulfilling even higher percentages of this volume from our stores…We’re not talking about a theory. This is reality today and it’s a meaningful and growing part of our retail business.

The fastest growing options used by customers - or guests as Target terms them -  are Order/Pickup, Drive-Up and Shipt, he adds:

When guests are planning on being out their neighborhood, they can shop on their digital device and we hand them their order in an hour or two. We offer in-store pickup in every one of our 1,851 locations, and we walk the order out to the parking lot in more than 1,250 of them. There are no fees for either of the same-day options. And of course, guests more than 1,500 stores across more than 250 markets can order from Target through our Shipt personal shopping service, and have their order delivered to their front door, kitchen table, even their refrigerator if they want in only an hour or two.

Shipt is the online grocery delivery service provider that Target bought in 2017 for $550 million in a move that was seen at the time as a counter-Amazon move. While that definitely remains one of its functions, the purchase has proved its worth in a wider way:

Shipt offers unlimited free same-day delivery from Target and more than 50 other retailers across the country for $99 annual fee. There are nearly 100,000 Shipt shoppers delivering orders across the country today and it's still growing rapidly as we welcome new marketplace partners and expand in new markets. In dense urban areas, where we’re building small format stores, we offer a service in which guests who shop in-store can ask us to hold their basket at checkout and deliver to their front door later that same day in a time window of their choosing. For this service we charge a flat fee of $7 with no annual fee and our guests love it.

And guests show that love in a commercial way, he adds:

Once we solve the problem of carrying the order home, it frees them up to shop more, a lot more. Average basket size on these orders is more than five times bigger than the average for these locations, and they include a very strong mix of items from our Home category.

Keeping the cost of delivery options down is emerging as a new competitive differentiator across the retail sector and Target aims to keep ahead of the pack here, particularly when it comes to groceries. Mulligan expands:

When guests need to replenish their pantry, they can order our £45 shopping cart size box of essentials, and we’ll deliver it the next day. For this service, we charge an industry leading delivery fee of only $2.99 with no annual fee. And of course, guests can shop target.com on their desktop or mobile device, and we’ll deliver their order to their front door in two days or less. There is no annual fee, and we don’t charge a delivery fee, if you have a REDcard or meet the $35 order minimum.

Store core

At the heart of all this is the Target store itself. There are dedicated upstream fulfilment centers and these will continue to play a significant role, but it’s around the local store itself that the digital delivery capabilities are being built, says Mulligan:

Given our strategy assortment in the way our guest like to shop, the vast majority of our digital orders are already being handled by our store teams, whether that means shipping packages out of the back of the store, delivering orders in the front of the store or in the parking lot or having a Shipt shopper bring it to their front door.

Not everyone believes that this is the best approach, he admits, but insists that such sceptics are wrong:

Despite the success, we’re already seeing, we continue to hear questions about the long-term viability of keeping our stores at the center of fulfilment. Our answer is empathic, we are confident that this is the best long-term solution for Target Importantly, our analysis indicates that the new services like Drive-Up and Shipt are driving incremental trips for Target rather than simply replacing other forms of shopping.

Specifically, first quarter digital sales from in-store pickup increased more than 80% from a year ago even as Drive-Up and Shipt grew even faster. And let's not forget the conventional in-store shopping, which continues to account for the vast majority of our sales, continues to see increased traffic and comp sales as well.

This reflects a key aspect of our strategy, while we have quickly established ourselves as a leader in terms of convenience and digital fulfillment, we are equally focused on maintaining the leadership position of our in-store shopping experience. That’s why we’re remodelling 300 stores a year, keeping us on track to complete 1000 remodels by the end of next year.

My take

As noted at the top of the page, Target is a welcome success story in terms of retail transformation exemplars, but that success has come at a price, both financially and in terms of sticking true to a strategic long game. As CEO Brian Cornell notes:

To get to where we are today, we decided to make some bold changes over the last couple of years. But I want to emphasize something important about those decisions. When we made them, we explicitly focused on taking a different path than our competitors. We said, we would open stores when others were closing them. We said, we'd invest billions of dollars in our shopping experience and in our team when others were pulling back. We said we'd use our stores as digital hubs, because it delivers speed and convenience for our guests and it aligns with our digital strategy. We said we'd invest in differentiation, when others were simply looking for scale. And we said, we'd maintain our balanced multi category assortment, one that’s unique in US retail.

He adds:

When we get asked today, why aren’t you doing what others are doing? The answer always starts with the fact that, we’re not trying to be like everyone else. At Target, we perform best, when we’re pursuing our own path, not when we’re chasing someone else….What you are just seeing is you’re seeing the emergence of winners who have been investing in their business, that are adapting to this new omni-channel environment. And unfortunately those that are ceding share that have not been able to invest and evolved to the new consumer environment.

It really is hard to argue with any of that.