SN Retailer of the Year: Target's On a Run

In today’s omnichannel retail game, Target Corp. has center-shot the bullseye.

The Minneapolis-based retailer added more than $15 billion to its top line in fiscal 2020, exceeding combined sales growth over the past 11 years. E-commerce generated about two-thirds of that gain as same-day pickup and delivery sales soared 235%.

Sure, the online shopping boom triggered by the COVID-19 pandemic hoisted sales across the food, drug and mass retail sector. But there’s more to the story for Target — namely its “hub” strategy, which positions stores as showrooms and service centers as well as digital fulfillment sites.

Brick-and-mortar has spurred Target’s digital growth. Ninety percent of 2020 sales were fulfilled by stores, a rate that’s now nearly 97% and includes in-store and online “Target Run” shopping trips. Target aims to invest about $4 billion annually in its stores over the next few years, including fulfillment upgrades plus an enhanced shopping experience, remodels and new locations, the latter led by small formats.

E-commerce generated about two-thirds of Target's fiscal 2020 gain as same-day pickup and delivery sales soared 235%.

Chairman and CEO Brian Cornell reported that in fiscal 2020 Target gained “meaningful market share” across all of its core merchandising categories, to the tune of about $9 billion. That includes grocery, which saw its share of the company sales pie grow to 20% from 19% in 2019.

Related:Slideshow: Target right on the mark as SN Retailer of the Year

To put that in perspective, only seven traditional supermarket retailers — Kroger, Albertsons, Ahold Delhaize USA, Publix, Loblaw, H-E-B and Sobeys — had total sales above Target’s 2020 food and beverage sales of $18.5 billion, according to Supermarket News’ list of the top 25 supermarket operators. And that’s not including Target’s $24 billion in sales of beauty and household essentials, which would give the company total supermarket-related sales of $42.5 billion in 2020.

A catalyst in Target’s grocery business has been the fast-growing Good & Gather label, now its flagship consumables brand. Already, Good & Gather has become one of Target’s largest own brands, surpassing $2 billion in sales since its retail launch in September 2019.

This year, Target has managed to build on its 2020 gains while other retailers have seen flat or negative year-over-year comparisons after cycling the pandemic’s impact.

Fiscal 2020 sales swelled 19.8% to $92.4 billion, with comparable sales up 19.3% and digital comp sales rising 145%. As more customers visited stores, Target upheld its strong momentum through the fiscal 2021 first half. In the first quarter, overall sales climbed 23.3% (with 22.9% comp sales, 50% digital comp sales), while total second-quarter sales gained 9.4% (with 8.9% comp sales, 10% digital comp sales).

Related:Target eyes new era of sustainability with ‘Target Forward’

For its omnichannel and store innovations, robust grocery offering and outstanding financial performance, Target has been chosen as the 2021 Retailer of the Year by Supermarket News.

“The strength of Target’s unique, multi-category assortment is a key competitive advantage, and the investments we’ve made across food and beverage drove strong growth in the category, as we posted nearly $9 billion in market share gains across the breadth of our business in 2020,” Cornell said in a statement on Target’s selection as SN Retailer of the Year. “As guests continue to turn to Target for their food and beverage needs, our teams throughout Target’s stores, supply chain and headquarters are bringing our purpose and strategy to life, helping families discover the joy of food every day.”

Food & beverages drive trips & transactions

Grocery’s importance to Target’s multi-category shopping formula — spanning apparel and accessories, beauty and household staples, food and beverages, hardlines, and home furnishings and decor — cannot be understated. More than 70% of Target customers shop for consumables, and these guests shop more often and spend more money.

“Grocery plays a critical role for the company,” Rick Gomez, executive vice president and chief food and beverage officer at Target, said in an interview with SN. “This past year, grocery delivered incredible performance — double-digit growth — and gained market share and drove traffic to our stores, into our app and to our sites. So it plays a critical role in our multi-category business, no doubt. During the pandemic, our guests were looking for a place to shop that was safe and easy to get the products they needed most: food and beverages and essentials. And Target was able to be there for them when they needed us.”

Target’s grocery department houses a mix of own brands and a curated assortment of national brands and exclusive labels, as well as fresh produce.

Food and beverages tallied comp sales growth in the low to mid-single digits in the first quarter and low double-digits in the second quarter, building on big increases from customer stockpiling a year earlier. Target’s grocery department houses a mix of own brands and a curated assortment of national brands and exclusive labels, catering to regular food shoppers, customers stocking up their pantry and those seeking snacks, meal solutions or inspiring recipes.

“Our assortment is constantly evolving to make sure that we stay relevant and compelling with our guests,” said Gomez, who took over as food and beverage chief earlier this year. “We really want our guests to feel like we don’t just sell food, but that we actually celebrate food, that we’re passionate about food.”

Leading the way is Good & Gather. The two-year-old brand took less than a year to top $1 billion in sales and now includes over 2,000 products — most priced below $5 — across nearly every category in food and beverages. Good & Gather replaced existing private brands Archer Farms and Simply Balanced, as well as some products under the Market Pantry label, which remains as a budget-brand option.

Gomez noted that Good & Gather saw double-digit growth during the pandemic. “What makes Good & Gather resonate with our guests is that the product is affordable. It’s a great value. It’s great-tasting. It’s also nutritional; it’s good for you. So it’s sort of the trifecta in food and beverage,” he said. “We continue to innovate and bring new items underneath the Good & Gather banner.”

In fact, Good & Gather has grown into a brand family. In May, Target launched Good & Gather Plant Based, a new line of more than 30 products for breakfast, lunch, dinner and snacks. Items range from plant-based dips and spreads, oat milk, almond milk creamer and vegan salad dressing to meatless beef and chicken patties, pea-protein meatballs and Buffalo-style cauliflower wings. Most of the products are priced at less than $8.

Good & Gather’s debut also was followed up with Good & Gather Signature — a premium line of foods made with specialty ingredients and “hand-crafted quality and flavor” — and Good & Gather Seasonal, Good & Gather Organic and Good & Gather Kids. 

“Our approach to our own brands is to start with the guest. We do a lot of guest research, a lot of listening, to understand what’s important to our guests,” Gomez explained. “And we heard there was a need for an affordable, better-for-you, great-tasting line of products. That became the motivation to create Good & Gather. We launched it in a big way with a couple of thousand SKUs, and it has been a big hit.”

In May, Target launched Good & Gather Plant Based, a new line of more than 30 products for breakfast, lunch, dinner and snacks.

Another recent addition is Favorite Day. Aimed at customers looking to indulge, the brand offers premium flavor at affordable prices, with the entire assortment priced under $15, Target said. The line now has about 700 products, including bakery items, trail mix, premium ice cream, snacks, beverage mixers and “mocktails,” candy and cake decorating supplies.

“In food and beverage, we’re seeing tremendous growth in Good & Gather and encouraging results in our new brand, Favorite Day,” Chief Growth Officer Christina Hennington said in Target’s Q2 earnings call.

Target also differentiates its grocery mix through BIPOC (Black, indigenous and people of color)-owned brands — part of a company initiative to invest $2 billion in Black-owned businesses by 2025 — and partnerships with national brands. For example, Target teamed up with pasta sauce and Italian food brand Rao’s Homemade to debut new recipes on its shelves before other retailers and with Danone to launch an “ugly fruit” yogurt product, appealing to consumers concerned about sustainability.

“So our assortment is evolving in three different areas: our own brands, BIPOC-owned brands and national brands,” said Gomez.

Target has modernized the presentation of the grocery department as well. In new and remodeled stores, shoppers will see updated lighting, woodgrain fixtures, more grab-and-go foods and meal solutions, and an enlarged assortment of fresh produce. 

“If you want to be credible in food and beverage, you have to have a strong fresh department. So we have invested to make sure we have great quality at affordable prices,” Gomez said. “We also know that our guest is looking for convenient ways to get that product. One of the things that we did during the pandemic was expand our same-day services Order Pick Up and Drive Up to include fresh and frozen [foods]. That way, our guests could get the fresh and frozen products in a safe, easy way.”

“We don’t see our business as brick-and-mortar and then e-commerce. We think of Target as an omnichannel retailer, and our stores play a critical role in that strategy." — Rick Gomez, executive vice president and chief food and beverage officer at Target

The Drive Up assortment expansion helped Target post double-digit growth in fresh categories in the second quarter, Hennington reported. “In fact, nearly half of this year’s growth in our produce business has been driven by the growth in Drive Up orders,” she said.

More than 1,200 Target stores now offer adult beverages through click-and-collect, which is expected to expand chainwide by the holiday season. Adult beverages also are available for same-day delivery at over 600 stores.

“We don’t see our business as brick-and-mortar and then e-commerce. We think of Target as an omnichannel retailer, and our stores play a critical role in that strategy,” Gomez noted. “Our stores offer a clean, safe, easy, differentiated experience. But over 90% of our e-commerce orders are fulfilled by our stores. So our stores really serve as a hub for our e-commerce business. And I think that’s a unique approach, to leverage our stores in a way that creates a great in-store shopping experience but also a great digital experience.”

Omnichannel vision

The genesis of Target’s “stores as hubs” approach goes back about five years, when the convergence of brick-and-mortar and digital got the company’s leadership team “busy building the retail platform of tomorrow,” according to Cornell.

“As we designed our strategy and invested accordingly, we relentlessly asked ourselves what products and services those stores should offer, where they should be located, how their operations should be tailored to meet neighborhood needs and, ultimately, how to make our stores work together with all of our other assets as one shopping platform that would keep guests turning to Target however they want to shop,” Cornell told analysts in a conference call on fiscal 2020 results. “In answering those questions, we did two things at once. We placed the physical store more firmly at the center of our omnichannel platform, and we created a durable, sustainable and scalable business model that puts Target on a road of our own.”

To that end, Target set a goal to “offer the fastest and easiest digital fulfillment in retail” by leveraging the proximity of its approximately 1,900 stores, located within 10 miles of most Americans, Cornell said. “The capabilities we built to become America’s easiest place to shop also cracked the essential question of how to grow our digital sales exponentially while maintaining the overall profitability of our business,” he noted.

Target’s rationale proved prescient at the onset of COVID-19. The retailer’s “enormous investments” in supply chain, store operations and technology bore fruit as “2020 accelerated everything,” Cornell said.

“When we began this journey, we didn’t know we would be facing a global pandemic, mass quarantines, rapid unemployment and the need to limit the number of people in public spaces,” he explained. “And yet, when those threats emerged in 2020, we were ready. And without hesitation, millions of American families turned to Target like never before. That happened because of decisions we made four and five years ago.”

Fiscal 2020 sales for Drive Up curbside pickup skyrocketed 600%, with Order Pick Up in-store pickup rising 70% and Shipt delivery up 300%. And those fulfillment services didn’t squeeze Target’s bottom-line results, as reported and adjusted earnings per share increased over 35% and 47%, respectively.

“Standing at this meeting three or four years ago, it would have been hard for any of us or any of you to imagine digital penetration of 18% without a dramatic deterioration in our P&L. Yet today, we announced record-high full year adjusted EPS of $9.42,” Cornell said in the analysts’ call. “Far from being a fluke, this performance is further proof that we built a business model that is working as intended,” he added.

Target’s same-day services turned in sales growth of 90% and 55%, respectively, in the first and second quarters of 2021, showing that prior-year e-commerce gains were indeed no fluke. Combined, same-day services now account for well over half of digital sales, more than doubling their penetration since first-quarter 2019.

“Guests turn to Target because of our stores and our digital options, not one versus the other,” Cornell said when reporting first-quarter 2021 results. “For us, the distinction between a store sale and a digital sale is largely irrelevant.”

In his second-quarter report, Cornell underscored the booming growth of curbside pickup. “Drive Up has quickly grown to be the largest, accounting for more sales than Order Pick Up and Shipt combined,” he told analysts. “To put it in dollar terms, over the last two years, second-quarter sales through Drive Up alone have increased by nearly $1.4 billion, and for the spring season, it expanded by double that amount.”

Fiscal 2020 sales for Drive Up curbside pickup skyrocketed 600%, with Order Pick Up in-store pickup rising 70% and Shipt delivery up 300%.

Target also is testing a micro-fulfillment concept — called a “sortation center” — at a facility in Minneapolis. Under the model, which uses technology acquired from Grand Junction and Deliv, backroom store staff who process digital orders focus just on picking and packing. Orders then are brought to the sortation center for collating to various carriers for delivery.

Plans call for Target to open four more sortation sites in other urban markets, including two in October and two more after the holidays, according to Chief Operating Officer John Mulligan. Shipt drivers also are being brought into the fold to pick up batches of local orders from the sortation center for faster last-mile delivery to customers.

Stores will be adapted to better accommodate online orders as well. “There are emerging opportunities in high-volume locations to invest in capacity and efficiency in support of our same-day services,” Mulligan said in an analyst call on first-quarter 2021 results. “Specifically, in more than 100 locations this year, we’re investing in small projects to optimize the front ends of these buildings, freeing up additional capacity for continued same-day growth while making the layout more efficient and safer for the team.”

Target, too, is growing product assortments for all three same-day services, such as more perishables, meal kits and pet care items for click-and-collect and more general merchandise like apparel for Shipt delivery.

“And then with our same-day services, you can actually get it contactless,” Gomez told SN. “With Drive Up, you can put your order in, and it will be ready within two hours. When you drive up to the store, we’ll bring it out and put it in your trunk within two minutes. That’s an industry-leading experience.”

Step-up at stores

With public COVID-related restrictions easing, Target stores saw traffic gains of 17% in the first quarter and almost 13% in the second quarter. Same-store sales rose 18% and 8.7%, respectively. On a two-year stack, in-store sales were up more than 20% through the second quarter.

Store openings and upgrades have been rekindled in 2021 after the pandemic compelled Target to pause store projects last year. Proceeding with projects already under way, the retailer finished about 130 renovations and opened 30 stores (including 29 small-format locations) in 2020.

Store openings and upgrades have been rekindled in 2021 after the pandemic compelled Target to pause store projects last year.

This year, Target aims to complete about 140 remodels and raise that to “an even higher number” in 2022, Mulligan said. Besides e-commerce capabilities, enhancements to date have focused on food and beverages, beauty care, apparel, home decor, furniture and electronics. Remodels last year also included a pilot of a new front-of-store layout aimed at creating a “more welcoming first impression” to shoppers. Elements included fresh flower displays, a more curated product assortment, and lower walls and counters for easier customer service.

Likewise, the pace of new store openings is being accelerated to between 30 and 40 locations annually, again focusing on small formats and urban centers, college campuses and dense suburban areas, such as New York City, Los Angeles, Portland (Ore.) and Denver.

“The team has opened 19 new stores this year, spanning from three more stores in New York City to all the way across the country in Hollywood [Calif.],” Mulligan said in Target’s Q2 call. “We’re on track to open 12 more stores this fall, including a new location in Orlando adjacent to Disney World, a new site in Hawaii and a campus location in Madison, Wis.”

Real estate availability has helped shape Target’s approach to new stores. “We continue to find compelling opportunities in urban and dense suburban markets and on or near college campuses,” Mulligan explained in the Q1 call. “In recent years, these custom formats have been less than 50,000 square feet. However, given the local real-estate conditions in dense suburban markets, we’re also finding compelling opportunities to open somewhat bigger stores between 50,000 and 100,000 square feet, which weren’t available in the past. As a group, these new stores are generating higher-than-average sales productivity, above-average gross margin rates and strong financial returns, and we see a very long runway to open more of them over time.”

Target ended the second quarter with 1,909 stores overall, compared with 1,871 a year ago. In its brick-and-mortar base, 1,510 stores are 50,000 to 169,999 square feet, 273 locations are 170,000 square feet or more, and 126 stores are 49,999 square feet or less. Thirty-two of the 38 net-new locations were smaller stores, less than 50,000 square feet. Target also is exploring sites for micro-format stores of about 6,000 square feet for urban neighborhoods and colleges.

Small-format stores, such as this Target location in Manhattan, continue to be a key part of the retailer's strategy.

Designed for quick shopping trips, the college stores cater to students, university staff, and local professionals and residents, Target said. These outlets also provide a pickup site for online orders. The convenience-oriented assortments showcase Target own brands and are led by food, snacks and personal care, along with high-demand items such as dorm décor, apparel, school supplies and tech accessories.

Another way Target aims to reach in-store shoppers is through service. In 2021, the company is rolling out an enhanced service model in which store associates receive special training and tools to focus on welcoming customers and providing assistance. That includes “Food & Beverage Coordinators,” who work with the grocery team to optimize the assortment and serve customers.

“As a multi-category retailer, we want to ensure our guests can get everything on their list in one easy Target Run. When it comes to delivering that great guest experience, our team is our biggest asset,” Mark Schindele, executive vice president and chief stores officer, said in a statement to SN. “That’s why we’ve invested in specialized training and development to build a team of experts across the store — including in food and beverage — to ensure shopping at Target is easy, safe and convenient, whether guests shop in-store or online.”

Designed for quick shopping trips, Target college stores — such as this location at the University of California at San Diego — cater to students, university staff and local professionals and residents.

An expanding roster of eye-catching brands also remains a linchpin of the Target experience, led by 10 billion-dollar own brands. Activewear label All in Motion is the latest entrant to club, led by $2 billion-dollar brands Good & Gather, Up & Up (health and essentials), Cat & Jack (children’s clothing) and Threshold (home decor).

Meanwhile, high-profile partnerships have yielded dedicated displays and shops for brands like Levi’s, Disney and Apple. Plans call for Target to add to its 17 Apple shops this fall and open about 100 Ulta Beauty “store within a store” locations in 2021.

“We’ve built a model that’s different from the rest of retail by putting our stores at the center of everything we do,” said Schindele. “Target stores play an essential role in the lives of guests and local communities across the country, providing convenient, locally relevant shopping experiences — no matter how our guests choose to shop with us — building trust with them, while providing an experience they can count on. As a result, our stores continue to generate traffic and sales growth while also serving as fulfillment hubs for our growing digital business.”