The Current, delivered daily.
Welcome to Opportunity Fulfilled. This week, The Current is digging into the logistics transformation taking place at major retailers in 2023, and offering commentary on what these developments mean for the future of ecommerce.
Like many retailers, Target undertook a massive digital buildout during the pandemic as ecommerce demand spiked.
The new capabilities proved to be the launchpad for impressive growth. In 2020, store pickup grew 600%. Same-day fulfillment grew 400% from 2019 to 2021. By 2022, the company was ready to double down on digital. It announced plans to invest up to $5 billion to scale operations, with store-based fulfillment capabilities among the big areas that would receive a boost.
It was an example of how the pandemic’s digital shift left a lasting imprint that would change a retailer’s footprint well into the future. But it’s worth remembering that Target already had the strategy that shaped this operational transformation in place well before COVID-19 arrived.
In the mid-2010s, Target adopted a stores-as-hubs strategy that put brick-and-mortar at the center of all operations, including digital. This meant that ecommerce orders would run through the store, just like in-person shopping. This has remained in place, and only grown. In the first quarter of 2023, more than 97% of sales were fulfilled by stores.
Stores-as-hubs was a radical approach at the time it was introduced. CEO Brian Cornell faced criticism that the two channels would cannibalize each other, and was out-of-step with the massive warehouse-based fulfillment network that Amazon was building. But in the end, Cornell was vindicated. The strategy put Target not only in position to capitalize on the pandemic’s digital shift, but to continue to see its stores be a destination when consumers returned to in-person shopping when restrictions were lifted.
At this point, Target’s nearly 2,000 stores are cemented as the center of ecommerce operations. But as it seeks to gain efficiency and speed in delivery, the retailer is bringing additional facilities into the network.
Now, Target sees opportunity to build ecommerce from the inside out.
Scaling with sortation centers
This year, evidence is emerging in the form of Target’s sortation centers. Positioned downstream of stores, these facilities combine technology and process logic to triage packages for last-mile delivery by the Target-owned service Shipt. Orders are still picked and packed at the store, but the sortation centers serve as the staging grounds that get packages out the door for delivery.
On the company’s first-quarter earnings call with investors, Target COO John Mulligan stressed that these centers are not highly automated.
“In fact, it's because of the relative simplicity in the design of these buildings and the efforts of an incredibly innovative and energetic team that we've been able to scale the number of these buildings so quickly,” Mulligan said.
Target is placing a big bet on these facilities. In February, it announced plans for a further investment in the supply chain of $100 million, focused on the sortation centers. It is enabling rapid growth. In 2022, the company had three centers, and now has nine. By 2026, it expects to have 15 centers in place.
These facilities are also serving as testing grounds as Target seeks to scale the delivery network.
A new facility in the Atlanta area is serving as an extension of the sortation center that has enabled Target to reach 3 million customers with next-day delivery.
“With this new facility, online orders that have been packed by Atlanta area stores continue to flow to the sortation center, where they're sorted and delivered via our national carrier partners or a ship driver,” Mulligan said. “However, a portion of local orders falling outside the sortation center's last-mile delivery area can now be transferred to the Smyrna extension, where Shipt drivers can pick them up and serve additional neighborhoods.”
Target and Shipt are also refining the path that packages take to reach customers. Shipt vehicles are being shifted to high-capacity models such as SUVs and minivans. These were used in 65% of last-mile deliveries in the first quarter, compared with zero a year ago. The vans service nearly five times as many packages, and enable route optimization that increases the number of packages delivered per hour.
It all adds up to reduced service costs for Target, and the company is continuing to build and refine processes at the sortation centers.
“Based on the success of these efforts, we're developing plans to begin testing high capacity vans at a larger scale,” Mulligan said. “In addition, we're developing a standardized faster way to load those vans, enabling package containerization and easy identification of the correct packages at delivery. In addition to simplifying the load process for the drivers, this new process will enable us to safely move a larger number of Shipt drivers in and out of our sort centers in a given amount of time, expanding our last-mile delivery capacity in these markets.”
Improving the ecommerce experience
To expand this last-mile capability, Target won’t be building massive fulfillment centers like Amazon. It already has large stores that offer proximity to large swaths of the population. Those can be outfitted to serve the same functions as large warehouses, and sortation centers help to expand them. Add in a delivery network via Shipt, and the pieces are in place to continue expanding and optimizing capabilities.
A scaled logistics network on the backend could also improve Target’s ecommerce experience on the frontend. For instance, increasing fast delivery could also open up more opportunities to deliver items with a shorter shelf life such as groceries, which is an area where Target is looking to expand. As Amazon has shown, consumers are also more likely to buy if they receive items in a convenient manner. Target’s stores have long benefitted from customers associating the shopping experience with their affinity for a retailer, just as much as they do the products they buy. Through fulfillment and delivery, it can extend the Tarjay cachet online, as well.
Ecommerce has always held the promise of being able to bring the store home. Target’s logistics strategy is putting that idea into action in a very literal way.
- Chewy opens third automated fulfillment center as shipping capacity grows | Supply Chain Dive ›
- Ikea's $2.2B US store expansion isn't just about in-person shopping ›
- Micro fulfillment shortens the last mile ›
- Target plans to expand retail media, delivery hubs in 2023 ›
- At Target, stores are the center of ecommerce ›
Trending in Operations
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.