Target’s eCommerce Strategy, Why it’s Outperforming

Photo of a Target store
 

By Tricia McKinnon

Target is one of several retailers that experienced unprecedented growth during the height of the COVID-19 pandemic. Its eCommerce sales were up 20.8% in 2021 on top of 144.7% growth in 2020. Then last year growth slowed to perhaps a more realistic rate of 1.5%. eCommerce now represents about 20% of Target’s sales. For such a large retailer that is a remarkable growth streak but is that success all due to the pandemic spurring more eCommerce sales or was it several years in the making? 

No one is an overnight success. For several years Target has made investments in its digital business. Those investments are now paying dividends. Back in 2017 Target purchased grocery delivery startup Shipt for $550 million which allowed customers to have their groceries and other household items delivered on the same day they placed an order. “With Shipt’s network of local shoppers and their current market penetration, we will move from days to hours, dramatically accelerating our ability to bring affordable same-day delivery to guests across the country,” said John Mulligan, Target’s chief operating officer, in 2017 following the purchase of Shipt.

Investing in same day delivery is just one of the moves Target has made to set it up for success. Its business model which is centred around one stop shopping as well as its omni-channel offerings are just a few of the areas Target has excelled in. Take a look at what Target has been up to and see why it is leading in eCommerce. 

1. One stop shopping. It is not a coincidence that many of the strongest retailers offer one stop shopping. From Walmart to Target to Costco customers are seeking refuge in retailers where they can get what they are looking for in one trip. Why buy your grocery and household items online from several different retailers when you can save time by getting everything you need from a single retailer like Target. 

Shopping with fewer retailers also means you pay less in delivery fees. One stop shopping is an area Amazon has dominated for a very long time. Part of the reason people shop at Amazon is because it’s the “everything store”. You can find almost anything on Amazon from books to kitchen appliances to groceries. Having everything in one place simply makes shopping easier. And with more dual income households people have less time for shopping and would rather consolidate their trips, not only now but in the future. 

One stop shopping is not new. Think about the days when Sears was the largest retailer in the world. Consumers would spend their Saturday afternoons at the mall getting everything they needed in one trip. The fall of Sears and other department stores has only served to usher in a new kind of department store, the big box store. It has a different name but in many respects it serves the same function. Consumers can shop at a Walmart or a Target and get most of their weekly needs fulfilled without having to shop at multiple stores. With the near obsession that companies have with competing with Amazon what many miss is the rise of big box retailers like Target and Walmart who are doing an increasingly good job of serving the needs of customers in fewer shopping trips.

2. An omni-channel offering. The vast amount of retail sales still take place in stores in the United States, even during the pandemic which created the greatest barriers to shopping in person that have ever existed. In the fourth quarter of 2021 eCommerce only represented 14.6% of total retail sales in the United States. That means stores aren’t going anywhere anytime soon. But to be a great retailer you have to figure out how to meet your customers where they are. That could be in-store, that could be at home or that could be in their car as they drive up to pick up an order. The retailers that are the best at meeting these needs are having the greatest success. 

At the beginning of the pandemic, in the first quarter of 2020 more orders were picked up from Target stores than in all of 2019. “The highlight and takeaway is stores are vitally important and stores will continue to play a really important role to America as we go forward," said Target’s CEO Brian Cornell.  

“Target definitely smashed it out of the park…with triple-digit numbers in e-commerce [in the first quarter of 2020] and it’s very evident that today more than ever [a] good omnichannel strategy is key for any retailer to survive. It’s not just about selling key essentials but really investing in the omnichannel experience -- something that Target did five years ago” said Michael Lasser, broadline and hardline retail analyst at UBS speaking about Target in 2020. 

With 75% of the United States population living within 10 miles of a Target store, Target is able to leverage its store network to provide a desired service in a way that Amazon can’t. For example, Target provides a Drive Up service which allows customers to pull into a Target parking lot at nearly 2,000 stores one to two hours after making a purchase and have Target employees bring their purchase directly to their car. This service has grown quickly with drive up sales up more than 70% in 2021 on top of 600% growth in 2020.

Target’s success with pickup demonstrates how much people like picking up their eCommerce orders. Having more customers pick up their purchases also works in Target’s favour since Target does not have to pay for delivery costs which even though customers pay a fee typically does not cover all of a retailer’s costs. Providing customers with the option of serving their needs through multiple channels is also good business. “Our most recent data indicates that a multichannel guest spends four times as much as a store-only guest and 10 times as much as a digital-only guest, says John Hulbert, Target’s vice president of investor relations. 

As most retailers know, eCommerce sales can be a blessing and a curse. Top line growth is always desirable but eCommerce orders aren’t always profitable. But as Target increased its online sales it has reigned in costs. “As a store's Drive Up order volume increases, more and more of the time, our team is able to pick multiple orders together, gaining efficiency in the pick process. In addition, we realized a similar benefit in the parking lot where our teams are increasingly delivering multiple orders at a time, reducing the cost per order of that delivery trip to the parking lot. And finally, as we've seen meaningful trip consolidation this year, we realize a benefit as fixed order costs are spread across more items. Aggregating all of these benefits, our second-quarter average unit costs for digital fulfillment was approximately 30% lower than a year ago [in 2019]. This provided a significant offset to the cost pressure we would otherwise be seeing from our unusually high rate of digital sales growth,” says Hulbert. Overall store pickup at Target is 90% less costly than when a customer order is delivered from a warehouse.

Do you like this content? If you do subscribe to our retail trends newsletter to get the latest retail insights & trends delivered to your inbox

3. Same day services. The less friction while shopping online the better. If you aren’t shopping in-store then you want your purchase as fast as possible and that’s whether you are having it delivered or if you are picking it up in person. One of the keys to Target’s eCommerce success is its investment in same day delivery. Target went down this path several years ago when in 2017 it purchased Shipt which provides same day delivery. 

Customers can also place an order at Target and either pick it up in-store within a few hours or elect for curbside pickup. Same day services (in-store pickup, Drive Up, and Shipt) have been a large driver of growth for Target with same day services up 45% in 2021 on top of 235% growth in 2020. Then in the fourth quarter of 2022 same day services were up by 4.3%. This behaviour is indicative of our desire to have control over our time. Many people don’t want to wait a week to receive something they just ordered. 

Several years ago when Amazon made the push towards same day delivery it may have seemed excessive. But perhaps Amazon understood a key principle of consumer behaviour, the desire for instant gratification. We want to have the things we desire now and are impatient when we don’t have them. If I just purchased something and I have the choice of receiving it today instead of tomorrow in many instances I will elect to receive it today. Why should I wait when I don’t have to? 

4. The right assortment. When looking at the reasons behind eCommerce success it is easy to get lost in a discussion of shipping times and delivery options. But without the right assortment no retailer is going to succeed. lululemon’s eCommerce sales were up by 17% in fourth quarter of 2021 on top of 94% growth in 2020. It would be easy to attribute that growth to the athleisure category in general which is on trend right now. But if lululemon didn’t pioneer the athleisure sector over 20 years ago or have a track record of innovation lululemon would not be able to rise to the occasion and capitalize on a sector that is growing quickly during the pandemic. 

Target also has a great assortment and of the keys to its success is a portfolio of successful private brands. In the early 2000s Target was known for its cheap chic clothing but by the time the recession hit in 2008 and 2009 Target had lost its way. Once popular private brands like Merona and Mossimo began to look dated. Repositioning a brand can be difficult so instead of updating those brands Target decided to discontinue them. Target did something that is difficult for most companies to do, it took the risk of losing the existing sales from those brands in order to create something new. Over the last few years Target has introduced over 20 new private brands. Target’s Cat & Jack private label kids clothing line, for example, became a $2 billion brand within only one year after it launched in 2016.  

In addition to the right private brands Target has also expanded its same day online offerings to include perishable grocery items. This may seem like a minor move but selling frequently purchased items is key to the success of any eCommerce retailer. We all think of Walmart as a grocery retailer now but when Walmart opened its first store in the 1960s it didn’t sell groceries. Expanding into groceries is largely credited with turning Walmart into the retail giant it is today. Selling groceries increases frequency of visits since most consumers shop for groceries on a weekly basis. After a consumer shops for groceries they will often browse and then purchase other items. By making groceries available as part of its same day services Target also increased the number of customers willing to shop with it online. This proves that your assortment matters.

Tricia McKinnonStrategy & Growth, eCommerce2 Comments