Target hitting the bullseye on digital and delivery transformation

Profile picture for user slauchlan By Stuart Lauchlan August 16, 2017
Summary:
Target's digital progress is providing a glimmer of hope for the beleaguered US retail sector, although it's too early to call it a sustained recovery.

Target
Bullseye!

After some of the more downbeat messaging coming out of the US retail sector, finally some sign of a digital transformation drive that appears to be on target - and appropriately enough it’s at Target.

After four straight negative quarters, the retailer turned in an increase in comparable-store sales, driven in part by improved online traffic.

Lest anyone get too excited, e-commerces revenue still accounts for only 4.3% of total sales, but there has been a 32% increase year-on-year in comparable digital sales, up from 16% last year. That was enough for CEO Brian Cornell to be upbeat in his assessment of the transformation agenda’s progress:

Development and rollout of digital capabilities that will continue to drive Target’s digial sales growth in excess of the industry, completely transforming our supply chain from end-to-end creating a smart network of stores and distribution facilities that will allow fast reliable fulfillment regardless of how our guests use the shop.

Target’s digital sales grew much faster than industry in the second quarter, up 32% on top of 16% growth last year. If you do the compounding of these two growth rates, you will see that this represents more than a 50% growth rate compared with 2 years ago.

There’s another stat that Cornell is proud of - in 2017, guest contact center interactions per digital order are running 30% lower than last year. In other words, fewer problems, fewer complaints, higher satisfaction levels:

Importantly as a result of our comprehensive effort by our team to reduce friction and increase the reliability of our digital operations, we have seen meaningful declines in guest contact center activity related to digital. This is a tangible reflection of our work to create a stable digital platform and successful collaboration between our digital operations and merchandising teams to create a more cohesive experience for our guests.

But there’s still a lot to be done. Next up is a wider rollout of Target Restock, a next day delivery service that has been in pilot phase. Cornell adds:

Our efforts include the expansion of ship and store locations, in-store pickup capabilities and our work with third-party providers to speed up ship times from our stores and distribution facilities. In each of these efforts the team is moving quickly, more quickly than ever before to rollout, test and iterate and expand where we see positive results.

Delivery options

As noted yesterday across the wider retail sector, the Buy Online Pick Up in Store (BOPUS) trend is in place at Target. Chief Operating Officer John Mulligan is on the forefront of improving the firm’s capabilities in this respect:

We have offered in-store pick up of digital orders across all of our locations for years, but we continue to find opportunities to improve execution and we are seeing and continued momentum. Specifically through the first half of the year store pickup volume has grown more than 30% above last year and in July we saw more than 40% growth. As more and more of our guests respond to the convenience of order pickup, we are investing in system enhancements and store labor hours to continue to elevate the guest experience. These investments will be especially important in the fourth quarter holiday season when guests are particularly time pressured and rely on this fulfillment option even more frequently.

Another way we can enhance the pick up experience is to offer a drive up option, so guests don’t need to leave their cars. In the second quarter we launched the new test of the service, unlike the past when we partnered with third-party to offer this service this new test is being implemented with our own team members and internally developed technology. The offer applies to approximately 180,000 shelf stable items currently eligible for in-store pickup. And in the early stages, we are offering it only to team members in a handful of Twin City stores. However, based on our early results from the test, we expect to move to a guest facing pilot and select Twin Cities locations later in the fall.

But it’s not just pick up that Target customers want; some want their purchases delivered to the door a la Amazon. This too is a priority, says Mulligan:

While the capability for our stores to ship digital orders directly to guest homes was also launched 2 years ago, we are seeing even more rapid growth in this fulfillment mode. For the first half of the year ship from store sales are only about twice as high as last year, accounted for more than 40% of digital units shipped. Since the rollout of this capability we have added new ship from store locations every year. In this fall we plan to roll it out to another 350 stores in advance of the holiday season. This will bring the total number of ship from store locations to more than 1,400 stores. In addition, we are creating additional capacity by ramping up the order volume running through our mature ship from store locations. Because so many of our stores can now ship directly to guests, we have been able to increase delivery speed while still controlling costs and that in turn has allowed us to offer new fulfillment options, like Target Restock.

This service allows guest to order a shopping cart size box filled with items chosen from an assortment of more than 15,000 essential items like coffee and paper towels and have it shipped to their house for a fixed $4.99 delivery fee. Because these orders are fulfilled from a nearby store location, we can promise that any restock order placed before 2 PM will arrive at a guest home on the following weekday. We rapidly developed this capability the team member test in the first quarter and we moved to the next stage of the test in the second quarter rolling out to Twin Cities Red Card holders in late June. Operationally, this guest facing test has gone well and as a result we just rolled out restock to the Dallas and Denver markets and we plan to expand into another seven markets before the holidays. With Restock available in these 10 markets, we will already be reaching one quarter of the US market less than six months from the day we launched the test.

A sign of Target’s commitment to new delivery options can be seen in its acquisition of Grand Junction, a San Francisco based transportation technology company. This will provide a big boost, argues Mulligan:

Grand Junction has developed proprietary technology tools and has relationships with more than 700 carriers, allowing retailers to choose the most efficient option for last mile delivery on an individual order…[we] believe their model will help accelerate our progress in delivering speed, efficiency and a high level of service to Target’s last mile fulfillment. We worked with the Grand Junction team on the test of same day delivery in our Tribeca store which we launched in the second quarter. In this test, guests who check out can choose to have their purchased items delivered to their home on the same day in a delivery window of their choice.

The results of this pilot have been encouraging in terms of customer response and in terms of potential additional revenues, says Mulligan:

For example, the value of the average basket for these same day delivery orders is more than 6x the store average at the Tribeca store and contains nearly 4x the units compared with the stores typical basket. Also notable, home is the most common category in same day delivery transactions, ahead of essentials and food and beverage. And importantly net promoter scores for the same day delivery service have been higher than for the Tribeca store overall demonstrating the quality of execution so far. Based on these encouraging initial results, we plan to expand the same day delivery test to several other New York City locations in the fall.

My take

One swallow doesn’t make a summer, but given the current parlous state of the US retail sector, any sign of a digital transformation program that’s delivering any positivity is to be welcomed. It’ll be a few more quarters before it’s clear whether this is the start of a sustained turnaround, but it’s an upbeat performance at the halfway point in 2017.