Target CEO sees an omni-channel retail 'new normal' on the horizon, but there are tough times ahead
- Better times ahead, but for now the retail sector remains in turbulent times and Target's not escaping that.
Standing here today, my sense is that a new normal is on the horizon.
Those are words by which Target CEO Brain Cornell is likely to find himself, and the US retailer he leads, measured in the coming months.
Last year both Walmart and Target, each a retail sector bellweather, sent Wall Street into a panic as the omni-channel realities of the Vaccine Economy kicked in and digital growth slowed down.
Late last month Walmart appeared to have pulled off the necessary course correction to calm things down, so there was a lot riding on how Target would perform this week. The answer to that? A decidedly mixed bag that saw offline sales up 1.9% year-on-year, but digital sales decline by 3.6%.
That said, overall Q4 revenue beat expectations at $31.4 billion, but operating income was $1.2 billion, down a hefty 44.7% year-on-year. For the full year, revenue grew 2.8% to $107.6 billion, while operating income was down 57% to $3.8 billion.
A lot has changed in a year, said CEO Brian Cornell, who recalled that at this time last year Target had just become a $106 billion company:
The path between last year's Time Center [investors] meeting and this one was anything but predictable. When we last gathered here, New York was still under a mask mandate, and though although consumers had started moving towards post-pandemic behaviors, with families returning to travel and restaurants and shifting some dollars out of retail, we are just beginning to see how volatile and uncertain 2022 would become.
As spiraling inflation forced families to put discretionary purchases on hold and focus most of their spending on necessities and there was a rapid escalation to the most expensive operating environment we've seen in decades, all of which was made worse by the spike in fuel prices caused by Russia's war on Ukraine. Those variables and many others continue to have a profound effect on the retail landscape.
With that said, Cornell was keen to emphasize a focus on Target’s long term strategic plans, building on what was announced pre-COVID and tapping into his comment above about the new normal in retail:
The 2019 strategy puts stores at the center of everything because when we remodeled or added a store and improved the guest experience, comps grew. At the same time, turning stores into fulfillment hubs was - and still is - the most efficient and least costly way to grow omni-channel sales. We're not standing still on our store re-model and expansion plans or investments in a bigger supply chain or ongoing improvements in digital. It's no surprise that 100% of our store sales are fulfilled by stores, but in our case, more than 95% of all sales, including digital, are too.
Since 2019, our store base has only grown slightly, but total sales grew nearly 40% in that timeframe. Our digital business nearly tripled in size and our sales per square foot increased by 37% and fulfilling substantially all that growth through essentially the same asset base was nothing short of incredible on the part of our team. So, as we hold on to those gains and look to put growth on top of them, we'll continue to invest, in stores, in supply chain, in digital, through our stores as hubs model.
One ongoing success story of Q4 was Target’s execution of same-day services - in-store pick-up, Drive Up, and Shipt - which represent more than ten percent of total sales, and which increased 4.3% in the quarter. Chief Operating Officer John Mulligan recalled:
You can trace the origins of Drive-Up to the launch of our store pick-up service a decade ago. It took a few years to get store pick-up where we wanted. And when we did, we were able to take it one step further with Drive-Up. We launched Drive-Up as a test in our Minneapolis market in 2017. By the following year, the service was available in more than 1,000 stores around the country, and it reached all 50 states in 2019.
With the foundation in place and operating at scale, we started to explore new capabilities. In 2020, we made fresh and frozen groceries available. In 2021, we added adult beverage and expanded our app to give guests a more customized experience. Last year, we began testing Starbucks at Drive-Up.
Now comes the next phase of Drive-Up in the form of Drive-Up Returns, piloted last year and now being rolled out to the entire chain over the summer. Mulligan explained:
Not only is this a huge one for our guests, who can now do even more at Drive-Up, but it brings more efficiency to our returns process, with more re-sale opportunities and fewer expenses for mail and returns. We're combining the strength of our digital self-service returns process with our industry-leading Drive-Up experience to meet our guests where they are.
This is what it means to be a truly omni-channel retailer, giving our guests the flexibility, ease and convenience to shop the way that works best for them and scaling capabilities across every facet of our business. Online, in-store, Drive-Up, it doesn't matter how they choose to shop with us, we're here to make their Target run better than ever.
Because we own our same-day capabilities, pick-up and Drive-Up are much more economical and flexible than other forms of digital fulfillment. In fact, our average fulfillment cost-per-unit has come down 40% over the past four years as our same-day services have grown to account for over half of our digital sales.
This new returns initiative is the latest way to engage with guests, Target’s terminology for its customers, Mulligan said:
The best guest set for Target are the ones that interact with all of our various ways of interacting with them. And so this provides them another opportunity to create ease. You've got your kid in the back. I need some milk and I got to return this whatever at Target. I put that in my trunk. I show up. They bring the milk, they take that away, and I'm off on my day again. And then on Saturday, we'll come in and do the stock-up trip, and that will be great. So our approach is just to continue to lean into where they want us to go.
It’s all been based on feedback from Drive-Up users, he concluded:
Top two feedback things on Drive-Up - why can't I get a Starbucks and why can't I return something? We're still working on the Starbucks, but we're ready for returns. And again, if we listen to the guests, they'll engage with us.
Mulligan probably put it best when he said:
If you had told me in late 2020, during the height of the pandemic, that 2022 would be the most challenging operating environment in my career, well, I would have assumed you were joking!
It's tough out there in retail. But, overall, the message from Cornell and his team is essentially that of ‘keep calm and carry on’:
There have been some fundamental changes at Target over the last three years. We're more than $30 billion bigger. We set the omni-channel standard, which stores as hubs. We'll continue to build and innovate in that realm.
Target had a more robust omni-channel execution that most retailers did and at an earlier stage. It now remains to be seen whether Cornell’s vision of that new normal is correct and as close at hand as he thinks.