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Following the pandemic ecommerce boom, Target is a more digitally-oriented business. Yet the retailer is keeping stores at the center of its overall strategy.
In 2023, Target's growth plans involve boosting retail media, as well as delivery capabilities through new supply chain hubs, executives said on an earnings call this week. But the retailer continues to see stores as the center of the operations that move goods to customers, with the vast majority of orders being routed through the brick-and-mortar locations.
Target’s digital business nearly tripled in size over the last three years, as the retailer was among the big winners of the pandemic-era combination of demand for goods and increased digital adoption. With the return to in-person shopping, annual growth of digital comp sales slowed down to 1.5% for the 12 months ended January 2023, from 20.8% in 2021. Yet Target isn’t pulling back on expansion to existing digital capabilities and the introduction of new services that became a hallmark of the pandemic.
On the call, executives outlined a few of the ways the retailer is investing in the shopping experience and logistics:
Digital experience: Retail media and loyalty
For Target, digital sales now represent 19% of the business.
This is the result of concerted expansion over the last several years. More customers shifted to digital during the pandemic, and Target built up ecommerce capabilities to serve them.
“A strong digital shopping experience is every bit as important as the one we create in our stores,” said Chief Growth Officer Christina Hennington. “So, we've been investing to ensure that the experience is seamless across every channel, regardless of how our guests shop.”
Target has made upgrades to the digital shopping experience, boosting discovery capabilities as customers both search and browsing for new products. It is using data and insights from consumers to provide personalized content such as customized homepages and improved search.
This is powered by a group of key services within Target that are designed to be “greater than the sum of the parts,” Hennington said.
Target operates retail media through the company Roundel. The advertising business has grown 60% over the last two years, executives said. But boosting bookings isn't the only goal. The data made available through media is being harnessed to create a better shopping experience.
“To us, Roundel is more than a digital advertising platform or another revenue source on the P&L,” Hennington said. “The goal is for our guests to have a tailored, relevant experience while helping our vendors reach the guests who are most likely to be interested in their products. Said simply, Roundel makes us better merchants, more consistently serving our guests with the products they want. This is why our approach to digital advertising looks different than others.”
Target’s loyalty program, called Target Circle, is another key driver of the digital experience. It has more than 100 million members, and served three times more personalized offers in 2022 than the year prior. Members of the program spent three times more on average over the holiday season, as well.
Like Roundel, the data and insights from Target Circle are also being put to work to help the retailer improve personalization. This shows up not only in the offers through the program, but also homepages and search noted above.
“Roundel makes for a more deeply engaged guests and partners,” said Target CEO Brian Cornell. “And because it gives us a better understanding of our guests' preferences, it makes us an even better and more profitable retailer. So, we intend to place additional emphasis and advancement toward Circle and Roundel in 2023 given the growth potential they'll unlock."
For Target, the store and ecommerce are operationally linked. That’s most evident in the company’s approach to fulfillment. Following a “stores as hubs” strategy, Cornell said 95% of Target orders – whether digital or in-store – are fulfilled by stores.
So the services that the retailer creates to improve the digital experience have space at the store.
Target had some news on this front Wednesday: It is now offering drive-up returns, enabling guests to drop off an item they want to return, just as they would pick up a purchase. The service started as a pilot, and is now going into wide use.
“Not only is this a huge win for our guests who can now do even more drive-up, but it brings more efficiency to our returns process with more resale opportunities and fewer expenses for mail and returns,” said COO John Mulligan. “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.”
It underscores the importance of same-day services for Target, which provide customers with the ability to order online and receive an item later that day. These services grew 7% in 2022, and now represent over half of digital sales. They account for 10% of Target’s total sales. Along with curbside, Target also offers same-day delivery through its company Shipt, as well as in-store pickup.
Behind the scenes, Target is also making improvements designed to bring down the cost of packing and delivering digital orders. The average fulfillment cost per unit decreased 40% over the past four years, even as same-day services grew.
Target is expanding its supply chain network beyond stores to realize new efficiency. Earlier this month, it announced plans to invest $100 million to build new sortation centers, which are key to two-day and same-day shipping. It currently has nine such centers, and is planning to have 15 in place by 2026.
It’s a move to invest in future growth that will likely lead to more cities realizing faster service.
“If you look forward..we think there's hundreds of million dollars to continue to unlock with our investment in sortation centers,” said Mike O’Neill, Target’s SVP of financial planning and analysis. “That's a capability that's been our on roadmap for a few years now, but requires scale and density at the market level to unlock, and given the growth over the last three years, we now have that. And so, we think there's opportunity in dozens of metro markets.”
Trending in Retail Channels
Labor disputes on the West Coast could cause further disruption heading into peak season.
When the first half of 2023 is complete, imports are expected to dip 22% below last year.
That’s according to new data from the Global Port Tracker, which is compiled monthly by the National Retail Federation and Hackett Associates.
The decline has been building over the entire year, as imports dipped in the winter. With the spring, volume started to rebound. In April, the major ports handled 1.78 million Twenty-Foot Equivalent Units. That was an increase of 9.6% from March. Still it was a decline of 21.3% year over year – reflecting the record cargo hauled in over the spike in consumer demand of 2021 and the inventory glut 2022.
In 2023, consumer spending is remaining resilient with in a strong job market, despite the collision of inflation and interest rates. The economy remains different from pre-pandemic days, but shipping volumes are beginning to once again resemble the time before COVID-19.
“Economists and shipping lines increasingly wonder why the decline in container import demand is so much at odds with continuous growth in consumer demand,” said Hackett Associates Founder Ben Hackett, in a statement. “Import container shipments have returned the pre-pandemic levels seen in 2019 and appear likely to stay there for a while.”
Retailers and logistics professionals alike are looking to the second half of the year for a potential upswing. Peak shipping season occurs in the summer, which is in preparation for peak shopping season over the holidays.
Yet disruption could occur on the West Coast if labor issues can’t be settled. This week, ports from Los Angeles to Seattle reported closures and slowdowns as ongoing union disputes boil over, CNBC reported. NRF called on the Biden administration to intervene.
“Cargo volume is lower than last year but retailers are entering the busiest shipping season of the year bringing in holiday merchandise. The last thing retailers and other shippers need is ongoing disruption at the ports,” aid NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said. “If labor and management can’t reach agreement and operate smoothly and efficiently, retailers will have no choice but to continue to take their cargo to East Coast and Gulf Coast gateways. We continue to urge the administration to step in and help the parties reach an agreement and end the disruptions so operations can return to normal. We’ve had enough unavoidable supply chain issues the past two years. This is not the time for one that can be avoided.”