As more consumers wanted to avoid in-person shopping as the coronavirus pandemic heightened, Target's store-first policy allowed for a quick expansion of curbside pickups and deliveries.
Target's investment in stores — which paid off during pandemic — isn't over
The retailer has focused on store-centric fulfillment for years and it boosted growth during the pandemic.
February 28, 2021 at 8:00PM
Analysts and industry watchers have lauded Minneapolis-based Target's forward-looking pre-pandemic strategy of investing in brick-and-mortar stores as the key to its success in the last year as some other retailers had to pivot on the fly.
But back in 2017, when Target, facing sluggish sales, introduced the concept, the response was not widely applauded. But the company stayed firm that to compete with the likes of Amazon, the stores had to be built out to fulfill online orders at the same time they became more welcoming to in-person shoppers.
"We knew we had all of this capacity in our stores, and so we started to build it out, and that's what we have done over the past three or four years — improve our capabilities, improve our process, build technology, train our teams," said John Mulligan, Target's chief operating officer, in an interview last week.
The company is banking on those shoppers staying as the pandemic wanes.
"To me in many ways 2020 is just an accelerated set of chapters in a book we've been writing for a while," said Chief Financial Officer Michael Fiddelke in an interview.
More than 95% of Target's third-quarter sales were fulfilled by its stores. About the same percentage of sales were fulfilled by stores during the holidays.
Target already said in January that comparable sales in November and December rose 17.2%, with same-store sales increasing more than 4% and comparable digital sales jumping 102%. The retailer will release its fourth-quarter and full-year earnings on Tuesday.
Mulligan said it makes sense for stores to be fulfillment centers with 75% of customers in the United States living within 10 miles of a Target location.
To have store employees pick items from the aisles and prepare them for shipment is 40% cheaper than shipping from a distribution center. Order pickup or drive-up orders are similar in terms of costs to store sales and cost 90% less on average than if the orders were shipped from a warehouse.
Improvements and expansion of same-day pickup options, including drive-up or delivery by Target-owned Shipt, have paid off as well. In the third quarter, same-day services grew an outsized 217%.
Target executives are expected to talk about the next steps in same-day service during an earnings briefing on Tuesday.
"We designed our stores for ease, and that's why we had drive-up, that's why we had pickup, that's why we had Shipt … and we found a lot of those things we designed for ease were very applicable to safety," Mulligan said.
In the future, even after the pandemic, Target will further evaluate how safety and health can be improved in its next store redesigns, for example, finding ways to make checkout lanes less crowded, Mulligan said. People will want to feel safe in stores beyond COVID-19, he said.
Mulligan also sees more investments in robotics and automation to make Target's supply chain even more efficient.
In the Twin Cities, Target has tested a robotics system that helps sort items into boxes to get precise amounts that they need so excess products don't need to be stored in the backroom.
The system is expected to expand to possibly two other sites outside of the Twin Cities this coming year.
In the third quarter, Target also opened a small sorting center in northeast Minneapolis that helps collect online orders from stores and sort them into routes for carrier delivery. While Target is still researching that process, Mulligan said he could see it expanding to other large urban areas.
Order pickup is Target's longest-running same-day service, starting in 2013. The retailer in 2017 started to add "drive-up" service, its version of curbside pickup.
The service grew in 2018 and 2019, but saw an explosion in its popularity last year. Drive-up orders increased 500% in the third quarter.
Same with Shipt delivery, with third quarter orders growing nearly 280%.
Target has also increased the types of items available through same-day services. Last summer, it began to offer fresh and frozen groceries for pickup after it was first piloted in the Twin Cities.
Not only do many of these capabilities help the bottom line by increasing orders, it also helps Target build market share and customer loyalty, Fiddelke said.
For example, after customers become drive-up users, their overall spending at Target increases by about 30%, he said.
In November, Target reported more than $6 billion in market share gains in 2020.
"We are taking big strides to deepen the guest relationship," Fiddelke said.
Nicole Norfleet • 612-673-4495
Twitter: @nicolenorfleet
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