Target investing in the basics to grow offline and online
Target has been one of the big retail success stories during the pandemic. The company has grown from $77 billion in revenues before the pandemic to $106 billion in 2021.
With almost $20 billion in digital revenue, Target has been hailed as a multichannel retail success story. Some of the reasons for this has been said to be 10x growth of the Drive Up service and the use of stores as fulfilment centers (95% of all orders go through the stores).
However, Target has not always been flying this high.
From the founding to the dark ages
Target's roots go 60 years back, when the Dayton Department Store Corporation founded Target as its discount department store arm.
In the 1990s Target became a famous brand with cheap and chic style that could provide fashionable products with affordable prices.
Bullseye logo became a household brand symbol in the US. First designer collaboration with renowned architect Michael Graves was the first of many designers (currently 75 designers) to collaborate with Target. Also many other retailers have followed suit in the designer collaborations. Most famous probably being H&M.
In the early 2010's Target had lost its edge with the customers. In the 16 quarters between 2013 and 2016, Target's revenues declined during 10. Year 2017 became the low-point for the company. Companies revenues had dropped by $3 billion in four years.
In February 2017, CEO Brian Cornell introduced a plan to turnaround Target. During a time, when majority of the retail buzz was about the growth of Amazon and pure play retailing, Cornell's plan to take Target back to it's roots was not met with a lot of fanfare.
The five principles to turn Target around
Brian Cornell outlined a five step action plan to turn Target around.
1. Enchancing digital experience
2. Reimaging stores
3. Opening small formats
4. New exclusive brands
5. Competitive prices everyday
“final piece of our strategy is about standing proud and being confident about who we are”
It turned out that it was good business for Target to be confident about getting back to its roots of affordable and exciting products in pleasant and convenient shopping environments.
Diverse assortment as a strength
Besides being a testament to the importance of doing the basics really well, Target’s turnaround is a reminder of how important broad assortments and solid customer value are.
Especially during the pandemic, the broad assortment became a real strength for Target, as customers were able to get everything during one shopping trip. Compare this to department store, which relied mainly on fashion and accessories and were forced to close stores.
It meant that Target was not relying on an individual category. In fact all of the five main categories represent 16% to 26% of revenue for Target. All of the categories have grown since the dark days of 2016. Even Apparel, which was hit hard by the pandemic has grown by 6,4% since 2016. The top performer was Beauty & household items category, which has grown by 57%.
Even though the channels and technology are important, one could say that the assortment and value are even more important.
This is highlighted by the strong performance of all Target categories. However, one could say that even more meaningful has been the success of Targets own brands.
Last year Target generated over $30 billion in revenue from its own brands. This segment has grown faster than the overall Target business. Target now boasts 45 own brand labels, many of which are already selling north of $1 billion in revenue.
Stores as a source of growth
“we also have a large percentage of the portfolio where the buildings just don’t match the brand. They are old, they’re tired, and they have not been updated in years.”
In 2016, Target had a large network of very big stores. Almost all of its stores were 50 000 square feet or bigger. Only a year earlier it had introduced the concept of smaller and more centrally located stores (less than 50 000 sqft). During 2016 the company had opened 21 more of these small stores. Fast forward to 2021 and the small stores were the only part of the store network that had grown and it had grown a lot.
Since 2016 the small store square footage grew by 623%!
Before and after images that highlight the how stores changed
In 2017 Brian Cornell pledged to invest $7 billion in three years. Much of that investment was directed in renovating the existing big stores and building the new smaller stores. In terms of investments, Target somewhat failed itself during the years of poor performance. The Capital Expenditure by Target had steadily declined from 2011. Since 2016 Capital Expenditure by Target has grown by 128%.
The stores also became important drivers of growth for the nascent online business. In 2016 only 4,4% of sales were originated in the online channel. This has changed until 2021. Online represented 18,9% of sales in 2021 and 95% of all orders were fulfilled by the stores.
Online growth has been especially fast in the Same day service segment. Using stores to provide fast same day services is a good way for Target to provide customers something that can match or even be better than what Amazon is offering. For next day home delivery it is nearly impossible to compete with Amazon’s fulfilment capacity.
In 2021 more than half of Target’s $19,8 billion online revenue came from the same-day services.
The same-day services and fulfilling online orders from stores has an additional benefit for the stores themselves: according to Target, the store efficiencies have improved significantly. In their Q4/2021 investor call, Chief Operating Officer John Mulligan stated that in five years, average Target store added $15 million in sales increasing the average sales by a store from $50 million to $65 million. The increased volumes enable the stores to become more productive in terms of “cost leverage and lower clearance markdowns”.
The same-day services are also significantly more cost-effective. According to Target, shipping from stores saves them up to 90% of costs compared to shipping from an upstream warehouse. This is a somewhat surprising statement, but with Click & Collect services like the Drive Up, it is easy to imagine the cost savings. Target also been building sortation centers to make their home deliveries from stores more efficient.
Online has also been an important growth driver for Target. Since 2019 Target has added $27 billion in revenues. Of that added revenue $13 billion came from online and $14 billion from stores.
Summary: Target did what department stores used to do
All in all, one could conclude that Target has taken some of the space left empty by the decline of the traditional department stores. Target offers broad assortment in clean and pleasant shopping environments added with convenient online services.
Department stores are known by the big flagship stores in the centers of big cities (Harrods, Macy’s Herald Square, Selfridge, Gallerie Lafayette…), which mainly serve tourists. Department stores used to be much more than that. They used to be a retailer for the big middle class. Retailers like Marks & Spencer and John Lewis became famous for serving the “middle England” so very well for decades.
In the most classic depiction of the Disruptive Innovation theory, Target has taken the place of traditional department stores.
Target, which was born as a discount department, has moved upmarket taking ever bigger share of the middle class consumption from the traditional department stores.
Target serves as a great case study of investing itself back to growth. In the midst of revenue decline, the company went back to it’s roots to understand what initially had made Target successful. That was the core of the turnaround. For all discussion around the importance of online in the turnaround success, one can say that digital was essential, but only secondary.
When Target had set up its fundamentals in order (interesting brands, good value, enough investment in stores…), only then online became an important part of the growth story.
Online is only a channel that offers what the business overall can sell. If the products are not interesting, it does not matter what is the channel.