Behind the Scenes of Target's Digital Growth

Advances in online fulfillment are driving growth and saving money for Target Corp., company officials said in an earnings call this week.

The retailer posted its best comparable growth in more than a decade, rising 5.3% year over year with a hefty increase of 31% for digital. 

The Minneapolis-based retailer’s “stores as hubs” strategy has dramatically increased its efficiency and driven profits, which allows online orders to be fulfilled close to where the customers lives, John Mulligan, EVP and COO for Target, said during a call with investors. “Many retailers are just starting to talk about this concept, but we've been doing it."

The concept allows the retailer to not only ship orders more quickly, but is also more than 40% cheaper per unit on average than upstream shipping, while programs such as pickup and drive-up cost nearly 90% less on average than fulfilling from a warehouse, according to Mulligan. These investments, he noted, have allowed Target to lower its average cost of fulfillment by 20%, driven by Shipt, which the retailer acquired last winter, and drive-up.

One of the shining stars for the national retailer has been drive-up, which saw almost 2 million transactions last year taking an average of less than two minutes each to complete.

Adding revenue is another upside of online fulfillment options, with next day delivery of essentials having a $2.99 fee per order and delivery from store, which brings in baskets five times higher on average than in-store purchases, costing $7. Additionally, Shipt users pay a $99 per year membership fee.

Across the board, Target has implemented serious technology alongside investments in equipment and automation to power its delivery methods to make them faster and more efficient, Mulligan said. However, “This operation could be anywhere—a warehouse in Phoenix, Colorado or Virginia—but it's a local store in Minnesota doing the work of our fulfillment center just behind the sales floor.”

In order to keep these processes running smoothly, Mulligan pointed to Target’s goal of streamlining its supply chain, which includes sending stores only the inventory that they need and moving demanding operational work, such as unpacking boxes and storing product. This is where upstream supply modernization, such as automation, comes in, said Mulligan, who also shared that Target is building a custom automation solution similar to its Perth Amboy facility right outside of New York City.

“This is the future,” he added, going on to explain that one warehouse does work such as picking and sorting for a whole group of store backrooms, while warehouse staff simply organize carts, stock them with only what store needs and sort them onto a truck.

Once the items arrive at the store, team members only have to grab the carts and move them to the sales floor, where they can fill shelves in minutes. “It's a far cry from the trucks we packed like a game of Tetris that takes hours, if not a full shift, to unload,” he quipped.

The new system allows team members to spend more time on the sales floor helping guests. It also gives store the precise amount of product it needs with deliveries occurring sometimes several times a day, improving out-of-stocks and reducing work capital since less product is “just sitting around in the back.”

Mulligan indicated it will take a while before the system is implemented across the country, with the top priorities being in Northeast hubs such as New York and Boston, where its “small-format growth depends on it.”

“What we're doing in supply chain is the reason we're able to grow in dense urban areas, where we can serve new guest, but it also makes it possible for our full-size stores to access efficient local fulfillment hubs,” Mulligan said.