Target Has a Lot of Ground to Make Up in E-Commerce

Target (NYSE: TGT) has made e-commerce waves this year, rolling out multiple initiatives aimed squarely at loosening Amazon‘s (NASDAQ: AMZN) grip on the market. The retailer now offers free two-day shipping, with no minimum order size for REDcard holders. Its next-day home essentials service, Restock, undercuts Amazon’s similar Prime Pantry service on price. And with its acquisition of Shipt, Target is rolling out same-day grocery delivery throughout the country.

All of these moves position Target to better compete online. The retailer’s digital sales grew by 27% in 2017, not a bad result but a bit slower than Amazon’s growth rate. Given that Target’s online business is far smaller than Amazon’s, the company needs to turbocharge its online growth to begin closing the gap with the e-commerce king.

Playing catch-up

Target still generates the vast majority of its revenue from its stores. Just 5.5% of revenue came from digital channels in 2017, which works out to about $3.95 billion. That number has grown in the past few years, but it’s still small potatoes relative to Amazon.

Data source: Target. Chart by author.

For comparison, Amazon’s product sales in 2017 totaled $118.6 billion. That number only includes items that Amazon sells directly, not items sold by third parties on its platform.

Target needs to grow its digital sales at a much higher rate if it wants to start making up ground. With free two-day shipping, Restock, and Shipt, I think it has a good chance of doing just that.

Focusing on food and household products

Restock and Shipt focus on Target’s two largest product categories: beauty and household essentials, and food and beverage. Together, these categories accounted for 43% of the company’s total sales last year.

Shipt is a subscription service, priced at $99 per year, so the appeal is limited to those willing to pay for convenience. There’s no shortage of grocery delivery options, from Instacart to Amazon’s Prime Now, so Target will be facing a lot of competition. Shipt will certainly drive some online growth for Target, but I doubt it will be the main driver.

Image source: Target.

Restock, on the other hand, has the potential to be a real success story for the retailer. Target charges a $2.99 fee to deliver up to 45 pounds of home essentials and non-perishable groceries by the next day, and it waives that fee for those paying with a REDcard. Nearly one-quarter of Target’s total sales came from REDcard holders last year, so this is a free service for a big pool of customers.

I’ve used Restock a handful of times since it launched, and it works as advertised. Prices are comparable to Amazon in my experience, and often much lower than typical grocery store pricing. There’s something magical about having heavy jars of pasta sauce arrive less than 24 hours after ordering, with no memberships required and no fees.

On the right path

Target hasn’t had much of an e-commerce strategy prior to this year. The company’s newfound focus on free fast shipping should go a long way toward boosting the online growth rate.

Restock is still a new service, rolling out nationally in May, and Shipt is still being expanded into more metro areas. We should start to see an impact on Target’s online growth rate in the second quarter, results for which the company will report in August. Competitor Walmart expects to grow its own e-commerce sales by 40% this year. There’s no reason why Target can’t beat that number.

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