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Target CEO says record-setting 2020 was no ‘fluke’
Shares of Target fell yesterday after the retailer chose not to release guidance on the upcoming fiscal year due to the complexity of forecasting in the age of COVID-19. For those doubting the retailer’s prospects, only one rational reply comes to mind: “Give me a break.”
That is essentially the sentiment expressed by Target CEO Brian Cornell on the retailer’s earnings call with analysts, where it was reported that the company’s sales revenue increase last year topped what it did in the previous 11 years combined.
“Far from being a fluke, this performance is further proof that we built a business model that is working as intended, one that puts Target in a category of its own,” said Mr. Cornell.
“The enormous investments we made in supply chain, store operations and technology capabilities are already powering exponential growth in digital commerce. They’ve enabled us to use our stores as showrooms and service centers, but also as hubs for digital fulfillment,” he said.
“Without these investments, we simply wouldn’t have been able to satisfy the exploding guest demand for same-day services, represented by more than 600 percent growth in Drive Up. Likewise, Shipt is an extraordinary capability that grew by more than 300 percent last year and will continue to grow as more guests recognize the power of having their purchases brought to their doorstep in as little as an hour.”
The retailer, which fulfilled 95 percent of its online orders from its stores in the fourth quarter, plans to continue investing in its business. It is raising its capital investments from $2.59 billion last year to $4 billion annually. The investments are being earmarked for new store openings, remodels, fulfillment services and the building out of Target’s supply chain network. The retailer plans to open 30 to 40 new locations a year and is adding new distribution centers in Chicago and Delaware.
Mr. Cornell also spoke to the importance of Target’s employees in its success and mentioned the chain’s commitment to standing by its workforce with safety measures and a $15 minimum wage for hourly employees.
Merchandise, including own brands and partnerships with key brands such as Levi’s and Ulta Beauty, was also emphasized as a key contributor to Target’s ongoing success.
Discussion Questions
DISCUSSION QUESTIONS: What do you see as the keys to Target’s success in recent years? Where do you see Target’s biggest opportunities and challenges as it continues to try and grow its market share coming off its strong performance last year?
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Mr. Cornell has it exactly right. Target’s investments in infrastructure and technology perfectly positioned the company for pandemic response. Retail companies that are leery of investment should follow this story carefully. (Question for Target merchants, though — what’s with the oddly-colored women’s apparel?)
Cathy, their approach to store fulfillment is still unique today and refreshing in the sense that most retailers are just trying to copy Amazon, and not well.
Exactly.
Target’s keys to success: 1.) Brian Cornell, 2.) Strategic focus on supply-chain and in-store experience, 3.) Understanding the shopper and meeting shopper needs head-on.
Target is not perfect, but you have to give them credit for trying and staying focused on their strategic goals. Much of the credit for the focus goes to Brian Cornell. Target continues to invest in store remodels and the technology to efficiently run their business. They have differentiated themselves from competition creating Target branding that most consumers in the U.S. recognize and want. Target’s biggest opportunity is to continue their momentum at being fresh and exciting in the eyes of the shoppers.
What I found the most interesting was the continued success of their store brands. That is so critical to their approach. You can have logistics and supply and nice stores. But if they are not filled with unique and differentiated products, they would not be on the same growth and margin trajectory they are today.
Target had the clear advantage early in 2020 of remaining open as an “essential retailer” while many of its competitors (especially mid-tier stores like J.C. Penney and Kohl’s) were forced to close their doors. That being said, Target has worked hard under Mr. Cornell’s leadership to upgrade and update its apparel and soft home offerings; these were gaining share at other stores’ expense before the pandemic if you look at 2019 results.
Target was also very nimble putting its omnichannel practices to the ultimate test after COVID-19 hit. It has gained a reputation for convenience and execution perhaps second only to Amazon, especially in terms of its curbside pickup program. 2021 may not be a repeat of last year’s lofty numbers, but Target’s market share gains are cemented for awhile.
Target, Walmart and Amazon all grew faster than the market. That means they all grew market share. Who did they take it from? Who will Target take market share from in 2021?
Target is making the right investments and they are making them big as are Walmart and Amazon. Does that leave those without massive resources to be left in the dust?
How could it be a fluke under recent circumstances? Only a deliberate effort would allow Target to pull off a turnaround and navigate COVID-19 simultaneously. Target played a mean game of catch up on the convenience front, following Walmart’s example by expanding options to shoppers rather than attempting to force shoppers into options that are easier for Target. Target’s pre-pandemic focus on improving its grocery game was far-sighted, ensuring a steady flow of traffic and one-stop-shop convenience throughout the COVID-19 outbreak. Grocery and pharmacy are powerful gateways to the higher-margin apparel and home products that Target is traditionally known for. Target has a history of innovating through partnerships and wisely expanded that premise beyond fashion. Forging store-within-a-store partnerships with CVS on a large scale and select beauty and personal care brands has helped Target augment its offerings in traffic-driving (and data-gathering) categories. Target’s forays into small format retail also make sense as shoppers seek to get in and out of stores more quickly. All in all, Target has left its insular, store-centric past behind and that has made all the difference.
Target’s diligence, patience and long-term omnichannel vision have been key success factors. Partnerships, including Apple and Levi’s, and powerful private label brands also make Target’s assortment distinct and exciting. Target’s inviting stores and pleasant associates radiate cheer.
Opportunities include rising store traffic as local lockdowns lift and vaccinations rise. Apparel and beauty sales will go up as we go out more. Snagging more mall jewels (like Apple) would be a wise play.
Challenges include pressure to keep up its momentum, keep costs low and earn market share among lucrative Millennial and Gen Z consumers.
Good point re: Apple and Levi’s. That thinking builds on the many years of designer collaborations that were so successful for Target. Successful not just in sales, but more importantly in differentiating Target from the competition. Successful in creating a mindset that suggested “expect the unexpected” from Target. Target started as a value proposition and then continually reached UP rather than thinking they had to compete in the race to the bottom. Apple and Levi’s prove that Target has a firm grasp on higher rungs of the ladder in customer perception. That’s a pretty big deal in this market.
Target was one of those companies that was very reactive to the pandemic early on and made supply chain and delivery modifications to accommodate the changes in consumer shopping. I think the only way they could go is up. As long as they continue to take care of their store associates and support the increase in digital sales, they will continue to be one of the leaders of the pack.
Target and Brian Cornell do certainly need a break from the stock market criticism. Judge the company on what it has achieved, not on an earnings guidance projection. The article highlights the “why” behind Target’s success. The area that has had the biggest improvement is the food side. However this side of the business still needs improvement, which if done properly will produce the kind of earnings that make analysts drool.
As mentioned earlier on this thread, Target’s investment in Grocery over 10 years ago (PFresh initiative) is one of the reasons that Target saw such growth in a year when a lot of retail segments struggled. More recently, their investment in supply-chain and their partnership with Shipt have proven to be very timely and effective. Their commitment to safety and higher wages for their store employees is another thing they got right – people feel safer shopping and working there which is critical during COVID-19. If Target continues to focus on areas that are important to consumers, they will continue to grow share – but it is also safe to say that 2020 will be a hard year to replicate on numerous fronts.
Target was well positioned before the pandemic, with its relentless focus on innovation, technology investments, and connecting the digital and physical shopping experiences. Target was among a handful of retailers, including Walmart, Best Buy, and others that have significantly invested in the critical technology infrastructure and processes, streamlined their supply chain, and pivoted their in-store operations to meet the needs of a changing consumer landscape around digital.
Certainly a significant amount of the credit has to go to Brian Cornell and the Target leadership team. They have not relented on making Target one of the more seamless in-store and digital shopping experiences. With that said, the pressure will be on to maintain this level of excellence throughout 2021.
Target has also streamlined their assortments and offers plenty of value with their private label options focusing on the value-driven consumer. It will be interesting to see how the balance of the year plays out.
Target has made so many great decisions in the past several years, it’s hard to predict anything but continued success. I am constantly impressed by their strategic investments. One area of the business that I believe Mr. Cornell should begin seriously upgrading, however, is order fulfillment. While it is certainly impressive that 95 percent of online orders are fulfilled from stores, there I have serious questions about the implementation of that strategy. Most orders from Target.com arrive in numerous boxes from wildly varying locations with wildly varying timelines. I just can’t believe that their fulfillment model leads to optimal efficiency and margins, let alone optimal customer experiences.
I can do a $35 order from Target.com and I get 5 different boxes. I have seen boxes shipped with $2 of merchandise in them from some random store 8 states away. They are reliable on shipping items, but I find it hard to see how this model is profitable.
Target’s greatest innovation was the serious investment in technology infrastructure to support their in-store customer experiences, supply chain, and fulfillment. In many ways, Target went beyond what other retailers did in the recent years prior to the COVID-19 pandemic. This setup Target for massive success with the ways consumers changed their shopping habits during the pandemic, more so than nearly any other retailer apart from Amazon. I see Target as the biggest runaway success of 2020.
Does that mean they can sustain this momentum in 2021 and beyond? The logic center in my brain wants to say that the shopping conditions of 2020 won’t be repeated exactly in 2021 and therefore Target can’t expect the same 600 percent growth in curbside pickup or other amazing growth rates. But can they expect the same level of success and sales? Quite possibly yes, because consumers have formed new habits and it’s much harder for consumers to break a habit than to form one. If I look at my own household and how much more we shop at Target vs pre-pandemic as well as so many people I know who say the same thing, I’d say Target is making the right decision to increase those investments to $4 billion.
There is still room for improvement, too, as evidenced by their partnering with Ulta, Apple, Levi’s, and Disney. While Target has seen massive success with many billion-dollar private labels, they also realize they need to be a destination for brands consumers already have an interest in buying. They also recognize which departments could use a boost to become more appealing to customers – reference health and beauty with Ulta Beauty, and electronics with Apple. Target’s commitment to a $15 minimum wage for hourly workers also helps boost their brand image with shoppers. I expect Target will continue to make improvements in their in-store experience for both shoppers and associates to keep raising the bar. Their biggest threat is that other retailers will catch up in these capabilities before consumers form a habit of shopping regularly with Target. Until then, Target is in a very strong position.
There is no question that Target’s investments and classification as an essential retailer helped in 2020. It’s no fluke, BUT there will be a 10 percent shift back from groceries to restaurants in H2, meaning visits will slow. To counter that, Target has ten separate billion-dollar private brands, new partnerships and beauty and electronics to capture margin, and a host more shopper data from its CRM. Will that be enough to counter the downward pressure in grocery? Unclear, but it isn’t a fluke. Given grocery’s low margins (especially in e-commerce), I expect Target’s earnings to be more resilient than revenues.
Here are a few items that interested me in their earnings report:
Target was handed a gift by being deemed an “essential retailer.” All those folks who normally shopped at the mall — they were at Target during a significant chunk of the 2nd calendar quarter of 2020. And many of them stayed at Target after the mall reopened.
We will see what happens going forward and how many of these customers Target holds onto.
“Far from being a fluke…” Wait a minute: COVID is so disruptive we dare not even issue a forecast, but at the same time it apparently played played no part in last year’s success(es)? Really?
I’ll not fault Target — or any of the other “essential” retailers — for their performance(s), but one would have to be clueless to ignore the extraordinary conditions under which it existed. The real questions, I think, are: 1) will they hold onto the gains, and 2) did this just accelerate existing trends or fundamentally change the landscape?
For the first question, the answer is “some of them.” They won’t have the same market share they did when practically every other retailer’s stores were closed — realistically how could they? — but it will still be higher than it was.
For the second question, I’m leaning more to the former, largely because of the worldwide nature of the pandemic. Though obviously certain business models — e.g. online selling — enjoyed an advantage, I don’t think any particular company did (at least not in a way that wasn’t also shared by their competitors).
In my writing at this point, I’m looking at the difference between the image CEOs must present to investors and reality. This is a superb example.
Investors want CEOs to tell them they are masters of the universe controlling levers which allow them to increase profit forever. Of course, that’s impossible. The best a CEO can do is get the company into a reasonable position with a lot of the right things in place.
The truth here is that Target did smart things AND were substantially helped by accidentally being in the right position for Covid. That’s about the best any company can hope for up against a pandemic.
This is NOT intended to take anything away from Target. Only to note that statements like this are intended to project for investors a sense of absolute control. And the truth is always far different.
Closing my thoughts on this topic out — how would Target’s results have been, had COVID not taken place? Between being deemed an essential retailer where many competitors selling like merchandise were closed (the entire mall, Kohl’s, Ross, TJ Maxx, Bed Bath & Beyond, etc.), and the increased demand for food and consumables during COVID all greatly benefited Target.
But it will be interesting to see how many customers stick with Target in the coming year and do not go back to those other places. I am sure some will. This will be the true test.