Retail Channels

At Target, stores are the center of ecommerce

The retailer is growing sortation centers and delivery capabilities, but it all starts at the store.

red and white target logo

When it comes to where people choose to do their shopping, 2022 has been marked by a return to brick-and-mortar stores and the pullback of ecommerce to more steady, pre-pandemic growth levels. Often, this is presented as a binary choice for shoppers, with the data being released offering fodder to compare which side is up and which is down.

But it’s worth remembering that both modes are methods to complete a singular activity: Shopping.

That’s how Target has approached its digital evolution.

The Minneapolis-based retailer was long built around brick-and-mortar stores that struck a balance between wide selection of goods, price and quality. With ecommerce making up a growing share of its overall sales, Target is building out more infrastructure to fulfill and deliver online orders.

But even with this growth, Target isn’t abandoning its focus on store. In fact, it is making the big box locations the center of its digital strategy. When ecommerce became a leading option in the pandemic, stores were key elements of the equation for getting orders to customers. The company has shared that its contactless pickup service, called Drive Up, grew 70% in 2021, and 600% in 2020.

Alongside in-store pickup and same-day delivery, these services that mix digital and in-person are known at Target as same-day fulfillment. This area grew nearly 400% from 2019-2021, the company said.

So ecommerce is not growing in isolation. Rather, it is growing as a part of Target’s entire offering, all centered around the same place where shoppers visit if they want to pick up an item off the shelf themselves.

In all, the company said that 95% of its total sales in 2021, whether in-store or online, were fulfilled by its stores.

This was the result of a strategic decision that was made well before the pandemic. Looking out at the growth of ecommerce in the middle part of the 2010s, Target could have chosen to build a network of fulfillment centers. But it turned out that they already had large spaces for holding goods that could serve as hubs for preparing orders and shipping them out. At Shoptalk in 2017, CEO Brian Cornell talked about how the company viewed the two realms as being intertwined. From Retail Dive:

Despite concerns that Target’s online growth is cannibalizing its brick-and-mortar store sales, Chairman and CEO Brian Cornell contends that physical and digital activity are in fact working in tandem to drive the next phase of the retailer’s evolution.

“Our stores are driving digital growth,” Cornell said during a Monday keynote at the Shoptalk 2017 conference, noting that Target stores now fulfill close to 55% of all online orders. “About 50% of Americans live less than four miles of a Target store. That’s a huge competitive advantage. We’re turning our stores into fulfillment centers — we can ship twice as fast, and dramatically reduce costs compared to traditional [distribution centers].”

To be sure, Target made investment in ecommerce at the time. The same year that Cornell made that statement, Target acquired Shipt for $500 million to grow the same-day delivery service and Grand Junction to make delivery more efficient. It also started outfitting backrooms as fulfillment zones for online orders. It would later acquire same-day delivery technology from the startup Deliv in 2020.

But with each of these additions, the start of the process remained at the store.

There was real incentive for the company to keep it there. After all, plenty of shoppers walk into a Target with a few items on their list and leave with a $100 purchase.

There was also an advantage when it came to footprint and proximity. According to the company’s current data, 75% of the U.S. population lives within 10 miles of a Target store. That offers convenience not only to shoppers who want to come in and browse, but also creates distinct operational advantages that could lead to easier pickup and delivery. So, even as the company upped digital capabilities, it also invested in building more stores.

At the time, the move was seen as going against the grain. As charted by Amazon and others, the path to growing ecommerce was seen as building out supply chain capabilities apart from the place where consumer interactions were held, or working with a third-party service like Instacart to fulfill orders directly from shelves. It wasn’t clear to some that online and offline could take place under the same roof.

The pandemic changed that view. At Target and beyond, consumers who were used to shopping in-store opted for contactless pickup to first and foremost stay safe. In doing so, many also found it was a convenient way to shop. Increasingly comfortable in a digital mode, they were more willing to make ordering online a bigger part of the shopping experience. Target had the foundation in place, and the growth detailed above followed.

This not only vindicated Target’s strategy, but set the stage for it to continue as shoppers shift back to more in-person shopping. This week, the company shared details about the growth of fulfillment capabilities. It is adding three new sortation centers in the Chicago area and Denver, bringing its total to nine.

At these sortation centers, orders are prepared for delivery. But the process still begins at the store. That’s where the items are picked and packed in backrooms. From there, they are placed on a pallet and transported to the sortation centers. Sorting of orders and batching them for delivery takes place at the centers, replacing a step that previously took place in backrooms. Deliveries can then be completed by Shipt drivers, who are independent contractors.

It’s adding efficiency to the process, not reinventing it. In Minneapolis, where the company already has this process up and running, Shipt is also piloting the use of larger-capacity delivery vehicles that hold eight-times more than typical cars.

Target’s goal is to speed up deliveries for customers. As CNBC reports, logistics improvements can also help to grow profits. From CNBC:

Mulligan said Target is still trying to pin down how much sortation centers reduce shipping costs. In March, he said Target had already brought down the average per unit digital fulfillment cost by more than 50% over the past three years.

Ultimately, he said the company wants to shorten the distance packages travel by having desired items at stores near the customer.

This is happening alongside investment in brick-and-mortar. In fact, at the same time it is growing sortation centers, the company is also planning to open about 30 new stores and renovate about 200 others in 2022, according to plans released in March.

At a time of continued flux for brands and retailers, it’s worth considering Target’s approach. That's not to say that combining brick-and-mortar with ecommerce is the answer for everyone. The point is more that it was the right strategy for Target, given what it had. Big shifts in consumer behavior and the economy can lead to an impulse to rip up the playbook. But sometimes the springboard for expansion can lie in harnessing areas where you’re already strong. Leveraging existing assets also often brings advantages in cost and time to market.

In 2019, Cornell talked on an earnings call about how same-day fulfillment services were taking hold with customers, who were spending five times more per order than average at a given store. At the time, the company was facing questions about the long-term viability of the strategy.

“So when we get asked today, ‘why aren't you doing what others are doing?’” he said. “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. And our first quarter performance is a clear example of the benefits of that approach.”

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