Target’s pickup and same-day delivery offerings are propelling its digital sales (TGT)

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The retailer saw its comparable sales grow 3.4% year-over-year (YoY) in its fiscal Q2 2019 (ended August 3, 2019). Its digital channel contributed 1.8 percentage points of this figure while its stores’ sales added 1.5 percentage points, even though digitally originated sales accounted for just 7.3% of Target’s total sales for the quarter.

The digital channel continues to grow in importance for the retailer — it made up only 5.6% of its sales in its fiscal Q2 2018 (ended August 4, 2018) — with its sales totaling approximately $1.3 billion this quarter, rising 34% annually.

Target’s faster fulfillment options for digital orders were responsible for most of the retailer’s digital growth. These options include Target’s Order Pickup, Drive Up, and delivery through its subsidiary Shipt, and they contributed almost 1.5 percentage points to Target’s overall comparable sales growth, nearly matching its stores’ total contribution.

The services are quickly becoming the core of Target’s digital offerings as their sales more than doubled in the past year, leading to them accounting for over 33% of Target’s digital sales in Q2, COO John Mulligan said on the company’s earnings call. With its Drive Up service almost nationwide — Order Pickup is already nationwide — and Target’s recent move to make Shipt’s same-day delivery available for 65,000 items for a flat $9.99 fee rather than requiring a paid Shipt subscription, these services could drive more volume and growth going forward.

Target’s stores are the key to its digital success and offer it an advantage over Amazon, but it will need to be able to scale its in-store fulfillment operations significantly to truly compete with Amazon.

The retailer fulfills many of its digital orders in-store, which enables it to get purchases to consumers quickly. Handling pickup orders in-store is faster than if products need to first be sourced from a warehouse. And same-day delivery orders can get to consumers faster since Target’s 1,855 US stores are likely closer to consumers than a sparser network of warehouses would be.
Utilizing its network of stores can enable Target to offer speedy delivery in a way Amazon can’t, but scaling it to handle order volumes similar to Amazon’s may prove difficult. Amazon is shifting its free Prime two-day shipping to one-day, and also offers on-demand delivery through Prime Now, but it doesn’t have a brick-and-mortar network setup for digital fulfillment like Target does. This can make it harder for Amazon to offer same-day delivery on a variety of items. However, considering Amazon’s global online store net sales totaled $31 billion in Q2, Target is not yet close to competing with its scale. And handling more volume in its stores could prove difficult for Target given their set size; Mulligan suggested, though, that the retailer’s stores can handle greater capacities, which could make the retailer a more serious threat to Amazon in the coming years.

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