Target Bets Big on its Digital Business

It was a rough second quarter for Target, which dealt with the fallout from its push to offload lots of excess inventory, taking a major margin hit that led to an 87% decrease in operating income.

But the Minneapolis-based retailer is seeing lots of opportunity in its digital business, which grew 9% during the quarter.

That’s not as high as the nearly 10% growth Target saw during the same period last year, but that’s to be expected a bit as pandemic conditions normalize and some shoppers return to stores.

Target’s same-day offerings of order pickup, drive-up and its Shipt delivery platform grew more than 11% this year, led by curbside pickup, which saw growth in the mid-teens, the company said Wednesday.

The retailer’s digital business has grown from about 7% of total sales in 2019 to more than 10% of total sales today, with digital penetration up to almost 18%, more than doubling in three years, Target said.

During that time, Target’s food and beverage business has grown more than 50%, or $1.8 billion, the chain said.

In recent years, Target has invested in building out its digital distribution system, a network it created to reduce strain on local stores.

“The strength of our business allows us to continue funding these long-term investments even in the face of the challenging external backdrop we’re facing today,” COO John Mulligan told industry analysts Wednesday.

Last month, the retailer said it would open three new sortation centers, two in the greater Chicago area and one in Denver, to bolster its six existing centers around the country. Target said it plans to add five more of the facilities by early next year.

The sortation centers, the next phase in Target’s stores-as-hubs strategy, sort orders that have been packed in local stores, batch them and ready them for delivery.

“These small facilities expand ship-from-store capacity in the locations they serve while significantly reducing last-mile delivery costs, particularly as we integrate our Shipt drivers into the process,” Mulligan said. “Given the package delivery density we’ve achieved across many markets over the last few years, we see continued opportunities to add more sortation centers over the next few years, which adds speed and significantly reduces last-mile costs in markets where they operate.”

Target opened two upstream distribution centers near the end of last year, with plans to add six upstream facilities over the next several years. Two are slated to open in 2023.

Building out a digital ecosystem is expensive. Target on Wednesday said digital fulfillment and supply chain put about 1.5 points of pressure on its bottom line because of the increased cost of paying distribution center employees, as well as higher last-mile shipping costs.

In addition to the sortation centers, Target is in the midst of hundreds of “fulfillment remodels,” in which stores are reconfigured to boost the efficiency, safety and capacity of drive-up, in-store pickup and ship-from-store services.

“While we are all mindful of the near-term volatility in the environment, it’s times like these that often present the biggest opportunity to gain long-term market share as others face the distraction of trying to stay afloat while we continue to invest and improve our operations,” Mulligan said.