Target Corp.’s same-day delivery options for online orders are driving incremental sales and reducing the cost of fulfilling web orders, the retailer said today as it reported financial results for the fourth quarter and fiscal year.
Digital sales increased 20% in the fourth quarter over the prior year, and 29% for the fiscal year ended Feb. 2. Plus, Target said more online shoppers are choosing from its three options for same-day delivery—in-store pickup, curbside pickup and delivery by its paid Shipt service—reducing the cost of fulfilling web orders versus shipping packages from distribution centers.
“Same-day service growth is healthy for our profits,” said John Mulligan, executive vice president and chief operating officer, on a call with investment analysts today. “Compared to shipping a box a long distance, same-day services are way closer to the economics of an in-store sale.”
In fact, Target says in-store pickup and curbside delivery are 90% less expensive for Target than shipping an online order to a customer’s home. The growing adoption of same-day services decreased Target’s cost-per-unit of fulfilling an online order by 25% last year, Mulligan said.
Customers used all three same-day options more often last year, CEO Brian Cornell said. He said Shipt, which Target acquired in late 2017, delivered 2.5 times more orders in the 2019 fiscal year than it had the previous year. Meanwhile, he said, in-store pickup increased by 50% and drive-up delivery—which was expanded to some 1,750 of the nearly 1,900 Target stores last year—increased by 500%.
Overall, stores fulfilled 80% of Target.com’s orders when adding in packages shipped from Target locations to the same-day pickup totals. About 12-15% of web orders are shipped from Target’s distribution centers and the remainder are fulfilled directly by product suppliers.
Target is No. 16 in the 2019 Top 1000 in the annual ranking of North American retailers by online sales from Digital Commerce 360.
Same-day leads to more sales
Like Mulligan, Cornell noted that the same-day fulfillment options are more profitable for Target than when it has to ship packages from its warehouses to consumers’ homes. That’s because consumers pay for Shipt—the subscription fee is $99 per year or $14 per month and subscribers must order $35 worth of goods to get free delivery—and Target doesn’t have to pay a delivery service when a shopper picks up her item in a store or in the parking lot. The retailer’s stores, however, do absorb additional costs to pick orders and hand them to customers.
Cornell said online shoppers buy more from Target once they try curbside pickup. After their first such pickup, three-quarters of online shoppers try it again within three months, and their spending with Target increases by nearly 25%—with online purchases going up 50% and store purchases by 9%.
“Engagement leads to higher sales in all channels,” Cornell said. As a result of the positive customer response to the same-day options and the lower cost to Target of those delivery services, Cornell said, “you’ll continue to see us lean into our same-day fulfillment options in 2020 and beyond.”
One way Target plans to enhance its curbside pickup is by offering to deliver to shoppers’ vehicles a limited selection of fresh grocery items and alcoholic beverages, for example, “a gallon of milk and a six-pack,” Cornell said. Until now, only nonperishable items were eligible for curbside pickup. By the end of the year, curbside pickup of fresh items will be available in about half of Target’s stores and of alcoholic beverages at most locations, he said.
Mulligan noted that adding fresh items to the selection for curbside pickup was the No. 1 request it received from customers and that many Target shoppers also asked that “adult beverages” be available for drive-up delivery.
Smaller stores provide more pickup locations
Cornell also said that Target plans to open even more compact stores than the 100 small-format locations it’s introduced in recent years to expand its presence in cities and on college campuses. While the existing smaller-format stores average 12,000 square feet, Target will test stores about half that size, making them about the size of convenience stores. He noted those stores would provide additional locations where shoppers could pick up online orders. He said a third of customers who come into stores to pick up online orders make additional purchases.
The retailer also would carefully add additional sellers to its third-party online marketplace, Target +, which it launched early in 2019, Cornell said. About 100 brands now sell on Target +, offering some 250,000 SKUs.
He said that that initiative allows Target to offer a deeper selection in some categories, such as enabling online shoppers to buy baseball bats and gloves from sporting goods brand Mizuno. But he emphasized the marketplace would remain invitation-only and that Target would continue to vet sellers to ensure good-quality merchandise and service.
Analysts comment on Target earnings
While Target’s online sales shot up in Q4 and for the full year, total sales were only up 1.5% during the fourth quarter, largely the result of weakness in sales of consumer electronics and toys. For the year, total sales increased 3.6%, with comparable-store sales (excluding new stores) up 3.4%.
“Target’s results continue to show a business in an upward trajectory with a solid full-year comp of 3.4% to follow last year’s stellar 5.0%, with the growth driven mostly by traffic, including online,” observed investment analyst Michael Baker of Nomura Securities in a note to clients. “This shows [Target] has figured out how to compete in the new retail world.”
Kelly Lynch, Retail Solutions Manager at ActiveViam, a provider of data analytics for retailers and financial services companies, applauded Target’s digital and same-day initiatives while pointing out it still faces challenges in other areas.
“Target is leading the way in showcasing how a company can expand its ecommerce capabilities and get ‘same-day services’ right,” Lynch says. “However, while investment in ‘same-day’ and store experience seem to be paying dividends, Target needs to figure out what has been going wrong in key product verticals such as electronics and toys, which continue to be a pain point for the brand and where other companies—such as Amazon—are strong.” Amazon.com Inc. is No. 1 in the Digital Commerce 360 Top 1000.
For the fourth quarter ended Feb. 2, Target reported:
- Sales increased 1.8% to $23.133 billion from $22.734 billion in the same period a year earlier.
- Digitally originated sales increased to 12.3% of total sales from 10.4%. That suggests an increase to $2.845 billion in sales initiated online versus $2.364 billion.
- Comparable-store sales increased 1.5%, with digital contributing 2.2 percentage point to that increase and stores reducing comp-store gains by 0.7 percentage points.
- Operating income of $1.198 billion, up 7.3% from $1.117 billion, and net income of $834 million, an increase of 4.4% from $799 million.
For the fiscal year ended Feb. 2, Target reported:
- Sales of $77.130 billion versus $74.433 billion the prior year, an increase of 3.6%.
- Digitally originated purchases accounted for 8.8% of sales versus 7.1%. That suggested online sales totaled $6.787 billion versus $5.285 billion.
- Comparable-store sales increased 3.4%, with stores contributing 1.4 percentage points and digital sales 1.9 percentage points to that growth.
- Operating income grew 13.3% to $4.658 billion from $4.110 billion, while net earnings increased 11.7% to $3.281 billion from $2.937 billion.
Target hasn’t seen a big impact on its business from the Coronavirus outbreak but has a team meeting daily to monitor developments, company executives said. Target’s leaders had planned to travel from the company’s Minneapolis headquarters to New York City to meet in person today with investment analysts but switched to a conference call and webcast because of the virus.