When Target’s CEO Brian Cornell announced the company would spend $7 billion for capital improvements and $1 billion more per year for operating costs to modernize operations for the digital age, investors weren’t sold. “I had people shaking their heads,” Cornell said. “You could see it.” Target’s stock price plummeted the day the announcement was made.
Looking back now, Cornell knows the company made the right decision.
Target, one of the largest retailers in the United States, has spent billions on its stores and technology infrastructure. The company reimagined its stores, built new, smaller stores in urban areas, and invested in technology and fulfillment capabilities. According to the CEO, the investment is paying off. All of these elements have worked together to drive growth, increase market share, and boost in-store and online traffic.
One of the most important initiatives was focused on remodeling existing stores and opening new small-format stores. In Target’s smaller stores, the company reduced the amount of inventory and adopted a just-in-time approach to inventory management. The goal was simple: Deliver what the stores need, when they need it.
Target also invested in its supply chain in order to meet the needs of the “new” Target. For example, the company now utilizes artificial intelligence and robotics to support its warehouse teams. And, Target invested in creating backroom shipping and packaging centers in retail stores that act as distribution centers for online orders. Using its own retail stores as distribution centers gives it a significant advantage over Amazon. In-store and curbside pickup, for example, cost 90 percent less on average than fulfilling orders from a warehouse and then delivering the merchandise.
Target’s $550 million acquisition of Shipt has also paid off.
Shipt—a company known for offering same-day and nextday delivery—enables Target to go head-to-head against Amazon and other e-commerce retailers. It also acquired technology assets from Deliv—a same day delivery startup in California. Target is even testing the use of sort centers in areas with high delivery volume. The centers will be smaller and less expensive than Target’s usual retail footprint and will be closer to customers. Target hopes that the use of sort centers will eliminate the need to sort packages at the store level and reduce its overall shipping costs.
These and other improvements have helped Target support in-store pickup, curbside delivery, and home delivery of online orders. In fact, it is now possible for “guests,”
as Target often calls its customers, throughout the United States and other countries to shop for all major product categories available from Target 24 hours a day, seven days a week. As an added bonus, technology has reduced the number of out-of-stock items and ultimately improved the customer’s overall shopping experience.
Target’s investments were well-timed. As a result of the COVID-19 pandemic and stay-at home mandates, Target’s online business surged as shoppers turned to e-commerce to make purchases. In the first quarter of 2020, Target fulfilled more curbside deliveries than it did in the entire year of 2019.
The company has also found that when customers shop online and use more of its delivery options, they ultimately spend more both online and in-store.
By investing in these new distribution strategies, Target is now able to compete against some big e-commerce companies. Although Target is now one of the top ten e-commerce businesses in the United States, the company has a long way to go to capture more market share. Amazon controls nearly 40 percent of U.S. retail e-commerce sales.
Target, which has 1.2 percent market share, lags behind not only Amazon, but also Walmart, eBay, Apple, Home Depot, Wayfair, and Best Buy. While Target has taken some giant steps to increase sales online and in its brick-andmortar stores, there’s still room for growth as more and more customers shop online. Looking forward, Target executives will need to remember the old phrase—Where there’s a will, there’s a way.
Questions
1. Why do you think Target’s plan to spend $7 billion for capital improvements and an additional $1 billion more per year for operating costs initially worried investors?
What do you believe investors think now?
2. Although many people think of Target as a big discount store that competes with Walmart, it has opened new, smaller stores that carry less inventory. What do you think is the driving force behind Target’s smaller store concept?
3. Much of the information in this case describes Target’s efforts to improve its supply chain. In your own words describe what the term “supply chain” means. How important is a firm’s supply chain for a retailer like Target that has both in-store and online sales?