Expert Analysis: Target’s new next-day delivery program faces some challenges

Greg Portell, lead partner in the retail practice of global strategy and management consultant A.T. Kearney, discusses Target’s plan to test next-day delivery of online orders of household essentials. The new service, called Target Restock, is open to shoppers of the chain’s REDcard loyalty program.



What influenced Target’s decision to launch the program?

Retailers no longer have the luxury of trying to force consumers into channels. Artificial walls segmenting how consumers shop have collapsed with technology and competition. For any retailer, it is critical to find the intersection between the products they sell and consumer demand. In the case of Target, it intend to compete on staples.



Failure to answer competitive challenges from Walmart, Amazon and others would cede a huge and only growing part of this market. Conversely, Amazon’s entry into brick-and-mortar is driven by a similar need to meet consumers where they are not a channel defined by retailers.



What challenges does Target face in this regard?

Fortunately, the home-delivery market is still very much in flux. Target shouldn’t have to face entrenched consumer preferences. This plays to their favor.



But the challenges of last-mile distribution are real. Newspapers have struggled to create reliable networks for years despite having large distribution teams. Retailers are now experiencing the difficulty that come with low-margin, high-expectation delivery.



Unlike Amazon, Target is pivoting from an existing infrastructure which both gives them an anchor and a base to operate. Unlike Walmart, Target has spent years trying to leave behind a no-frills brand. As a result, Target has lower margin for error and will need to achieve customer satisfaction quickly. Failure on either front will spill into Target’s mainline business.



It will be critical for Target to keep their pricing segmentations pure. Consumer tolerance for perceived pricing games has disappeared. The penalty for pricing arbitrage between on-line, instore, pick-up and delivery will be steep.



Target will need transparent pricing tiers. There will be increased pressure on Target’s internal P&L structures as the different profit centers compete for revenue while avoiding costs to service.



What is in Target’s favor?

Target is one of the few retailers that can rival Amazon in applying customer data. Their investments in Cartwheel and the REDcard program provides a powerful base to build out the Restock program. Look for them to combine a well-positioned brick & mortar footprint with behavioral data to carve out a defensible value proposition.



Rather than worrying about predictive analytics, the advantage will come from anticipatory analytics where they leverage data to shape consumer preferences rather than react to them. The ability to use the program to influence and potentially circumvent consumer preferences will become a differentiator of these programs. At some point, the benefit of consistency and convenience outweighs the hassle of logging in to make account changes.



What are Target’s biggest logistical challenges?

Scaling a business that keys on the last mile from thousands of distribution points with low margin for error is daunting. Ensuring the right products are staged in the optimal locations to fulfill demand will increase inventory distributed across their network. While increased inventory levels will bring scrutiny, the risks should be manageable in the short term.



But perhaps the biggest challenge will be managing the ecosystem. Target is unlikely to be building this with in-house resources. Beyond the pilot, it wouldn’t make sense at scale. The use of partners over such a vast network creates sizeable problems from employee performance to network scheduling. The bet is too big for Target to leave execution decisions to their partners without strong oversight. They will need to manage behaviors tightly without overstepping co-employment regulations.