Unlike many retailers, Target’s bottom line not hurt by online growth
Another excellent set of results from Target underlines the fact there is growth available in the consumer economy and that those retailers which inspire and engage customers can grab a slice of it. That said, Target has also outperformed the overall retail sector over the third quarter period, showing that it is taking market share from rivals.
At the heart of Target’s success is its assortment: The company has put together ranges across all its departments which are desirable and affordable. As obvious as this sounds, it is the result of a tremendous amount of hard work and innovation, especially in terms of the development of own brands. Our data shows that across most categories Target’s customer share has risen and that it is persuading more existing customers to buy from multiple departments.
Target has also ensured that its products are accessible to consumers, no matter how they want to buy them. Store improvements have made the physical shopping experience easier and more pleasant. Meanwhile, the digital experience is very functional and offers plenty of fulfillment options for shoppers with a variety of needs.
Target has been particularly savvy in nudging consumers to pick up their online orders from stores, whether from the counter inside the shop or by driving up outside. This dual approach, along with the focus on products, is why Target has delivered a 31% uplift in online sales alongside a very solid 3% rise in store sales.
Although online now accounts for a greater share of sales than ever (7.5% of revenue versus 6.0% last year), unlike many retailers there has been no negative impact to Target’s bottom line. Indeed, over the quarter net income increased by almost 15%, underpinned by a 22% uplift in operating profit. Much of this is because of the high frequency of orders fulfilled from stores, which is more cost effective than last mile shipping. However, Target also deserves credit for streamlining operations and for pushing higher-margin own brand product more heavily.
Something else that deserves to be called out is Target’s approach to creating occasions and selling opportunities. Recently it has done this with its limited-time 20th anniversary collection of products and with the expansion of the Disney franchise into a handful of stores. These initiatives generate interest among consumers and give people an excuse to visit Target whether it be online or in store. While it is true that such occasions do not make a major contribution to growth, they provide the icing on the cake.
Another factor that driving spending is Target’s store refurbishments. This improvement program is now mature, but Target continues to benefit from it as it revamps more and more shops. Our data show that where improvements have been made, dwell times, average visitation frequency, cross-category shopping levels, and average basket size all rise. Creating a compelling and engaging shopping experience is one of the reasons Target stores remain a destination for large numbers of American consumers.
During the quarter, Target launched its Good & Gather brand in grocery. The range refresh is not yet complete with more products scheduled to launch over the coming months. As such, it is too early to provide a full assessment, but our qualitative consumer research and channel checks all point to this being a positive change that will help Target drive more growth in grocery.
Looking ahead the outlook remains positive. Target is a retailer that has its act together.