Retail apocalypse has been the rage for a few years. The competition from Amazon is said to be the main reason why many retailers closed shops permanently. The truth is that Amazon serves just another change in the competition to which failure to react will doom any business. Retailers are no exception. As Amazon is the master in eCommerce, retailers likely will not match the Seattle-based company on the digital front. What retailers can do is to find their competitive advantages and exploit them while being at least competitive digitally. I think Target can serve as a good example of a retailer that successfully transformed itself to stay competitive.
Remodeling stores and building digital & shipping capabilities
In 2017, Target announced an ambitious plan to invest $7 billion in remodeling existing stores, opening new ones, launching private labels and building out digital infrastructure. In March 2020, Target revealed that the company completed 700 remodels over the past 3 years and aimed at finishing 1,000 in 2020. Since the announcement of the turnaround strategy, Target has launched 20 private labels. With regard to shoring up its shipping and digital capabilities, Target made a strategic decision to take the task of building out its website internally, instead of farming it out to Amazon like they did before 2013. Crucially, Target’s CIO McNamara reduced the IT headcount from 10,000 to 4,000 engineers. Not only did Target strengthen its core capability organically, but they also brought in external expertise by acquiring two same-day delivery startups in Shipt and Grand Junction. Due to the new acquired capabilities, Target introduced pickup, Drive-Up and Shipt services to most of its stores. Now, customers can order online and receive the goods via:
- Delivery at home in one-two days
- Pickup at a local Target store
- Drive up to a Target store to pick up the goods
- Have the goods delivered within the same day
Results of those initiatives?
2019 total revenue, gross margin rate and operating income margin rate increased compared to 2018. Walmart’s YoY increase in the latest year’s revenue is 1.9%, lower than what Target posted. Considering the cut-throat competition that Target is in, that increase in the top line and margin should be a positive sign.
For the improved financial performance, Target credited its increased efficiency and customer engagement through both its stores and digital channels. he company revealed that 80% of online orders were fulfilled by its stores. Additionally, “during 2019, over 70% of our comparable digital sales growth was driven by same-day fulfillment options: Order Pickup, Drive Up, and delivery via our wholly-owned subsidiary, Shipt”. In its latest business update amid Covid-19, Target said that digital sales grew more than 100% YoY. The growing importance of digital channels to Target’s business can be seen in the below graph which shows digital sales made up an increasing share of Target’s overall sales in the last 5 years.
In February 2019, Fast Company reported that six of Target’s private labels generated more than $1 billion each in revenue a year. In 2019, 1/3 of Target’s revenue came from its own private labels.
Other initiatives & opportunities
In September 2019, Target launched a loyalty program called Target Circle. The program was introduced after racketing 2 million subscribers in 18-month trial. In March 2020, the number of Target Circle subscribers hit 50 million, from 35 million reported in November 2019. According to Target in Q3 investor call, Circle members spend 2-5% more than non-members. The program has no membership fee, but comes with only a modest of 1% back on purchases. Hence, it’s quite encouraging to see the membership base.
Target has branded debit cards and credit cards issued by TD. According to the quarterly filings, the cards were responsible for around 10% of the purchase volume at Target
Target-branded cards not only allow the retailer to gather so much data on consumers, but also provides a healthy boost of revenue. For the past 3 years, Target has received $680 million of credit card profit sharing from TD. I am not familiar with the agreement between Target and TD, but I think that if more folks sign up for the branded credit cards and spend more using the cards, Target will get more revenue from its issuing partner.
In my opinion, the turnaround strategy by Target has been a fair success so far. However, Amazon and Walmart haven’t stood still either. They also push and innovate every day. If Target wants to avoid the fate the likes of Sears did, they will have to continuously push and innovate as well. But they can serve as a case study against any generalizing claim that anyone not named Amazon is facing retail apocalypse.
Minh Quang Duong 