Target sees stores as key to meeting its distribution challenges

Discussion
Photo: Target
May 15, 2018
George Anderson

Target’s top executives were feeling pretty good in March when the retailer announced its fourth quarter financials showing a rise in customer traffic in stores and online that drove positive results. One of the keys to Target’s performance was its ability to handle distribution for nearly 70 percent of its online orders through its stores.

John Mulligan, Target’s chief operating officer, told analysts on the call that the retailer sees its stores as “hubs that offer a great shopping experience, support our communities and fulfill digital orders.”

The COO said that Target has a choice when it receives an online order — to fulfill it either through a warehouse or a local store. The retailer has concluded that using its stores results in getting orders to customers more quickly, while reducing costs.

Mr. Mulligan said that shipping from a store enables Target to deliver orders “nearly two days faster” than if it were sent from a regional facility. He said that most of what Target sells online mirrors what customers buy in stores, meaning stores in an area are more than likely to have the item ordered online already in stock.

“Shipping from a store is the best way to lower the total cost of digital fulfillment,” said Mr. Mulligan (via Seeking Alpha). “We hear a lot about optimizing, picking and packing, which can help make fulfilling an online order more efficient. But step back and look at the total cost of fulfillment. There are fixed and variable costs required to run and staff the fulfillment center, but no question shipping is by far the largest chunk.”

Increased customer traffic and the demand placed on stores to fulfill online orders has led Target to test a new distribution strategy, according to a Wall Street Journal report. The pilot being run through a warehouse (AKA as a “flow center”) in Perth Amboy, NJ offers smaller and more frequent deliveries to Target’s small store formats as well as locations in more densely populated areas.

Preston Mosier, Target’s senior vice president of global supply chain and logistics field operations, offered an example of how the flow center would work at an industry conference this week. He said it could ship “five bottles of shampoo, a case of ketchup, two polo shirts on hangers and a pallet of water, all prepared to move out directly to the sales floor.” The same or similar items could also be prepared in the store to “to move directly to a pack station to later go out to a guest in the neighborhood.”

The flow center test is the latest in a series of supply chain initiatives and acquisitions Target has made. In December, it acquired the online same-day delivery service Shipt for $550 milion in cash. As a result of the deal, Target expects to offer two-day delivery from most of its stores before the start of this year’s Christmas selling season.

DISCUSSION QUESTIONS: Do you approve of Target management’s emphasis on using stores as hubs to serve customers on-site and to fulfill online orders? Will the flow center pilot help Target achieve its goal in New Jersey? Do you expect Target to expand the distribution concept to other densely populated markets?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Every retailer must figure out how to blend digital and physical to meet customer needs at a profit. "
"...it’s an operational win for the business and a convenience/price win for consumers."
"There is no doubt that this is sensible. Fulfillment from stores is often more efficient and profitable, plus it leverages existing assets."

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18 Comments on "Target sees stores as key to meeting its distribution challenges"


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Mark Ryski
BrainTrust

Target is making the most of its physical store assets and this is a great example. The flow center seems like a good solution for serving smaller store formats and ultimately time will tell if the model works, requires modification or needs to be replaced by an entirely new model. Overall, I think Target is on the right track when it comes to fulfillment.

Jon Polin
BrainTrust

For some period of time, it makes sense for Target to leverage the valuable asset of its nationwide footprint. Over time, it’s hard to imagine that Target won’t transition their e-commerce fulfillment to mix-use stores (sections designated for e-commerce pick and pack) to manual warehouses to robotic warehouses. Once e-commerce sales reach some threshold, having store employees walk the store simply becomes inefficient, not to mention a nuisance to actual shoppers.

Max Goldberg
Guest

Target has traditionally been plagued by out-of-stocks. Anything it does to alleviate this issue, as well as deliver goods more quickly and efficiently to consumers, is welcome. I salute Target’s management for trying multiple approaches. Some will work. Others will not. The key is that management is trying.

Charles Dimov
Guest

Yes. Target’s ship-from-store strategy is smart. There are savings, as the customer is closer to the store locations resulting in lower last-mile shipping costs. But, it also supports the stores. It drives up inventory turnover. Target is also putting more inventory in the field stores. That’s closer to the customers — where products are actually bought.
I encourage Target to keep going with its tests. Princess Auto started doing ship-from-store after implementing an advanced OMS. They were able to close an entire distribution center as a result. Imagine the cost savings for retailers if more could shut down a DC. If Target did this, that could be a $7 million to $13 million annual savings. Straight to the bottom line!

Bob Amster
BrainTrust

While using stores to fulfill online orders appears to reduce the delivery time and reduce costs, it introduces the challenge of having to be very accurate with the right amount of inventory in the right stores to satisfy both the walk-in traffic purchases and the online orders. Out-of-stocks and overstocks are costly and managing the inventory becomes tricky. Distribution centers have more flexibility in fulfilling online orders. One way to attempt to keep the store inventory properly aligned is to ship from stores every day. That is also costly. What has Target gained then?

Peter Charness
BrainTrust

Target is absolutely on the right track and others would do well to consider the same approach. The customer expects the store to be a “store,” a show room, while serving the customer also demands that the store act as a logistics hub for fulfillment and returns. After all it’s “just down the street” from the customer’s home in many cases. Stores need to optimize physical space for this multi-purpose design.

Chris Petersen, PhD.
BrainTrust

The last mile is getting much faster and more expensive. The fastest and cheapest route is most often being able to ship from stores. In many ways Target’s flow center is a “natural” solution that will make it and other big box retailers more competitive on both cost and speed.

While Target’s approach seems to be a natural way to leverage stores as hubs, the details and nuances required for execution should not be underestimated. It literally requires real-time inventory tracking by SKU all the way to the shelf. The worst thing that can happen is to ship items from stores and create out-of-stocks on shelves for customers already there. Picking and shipping will require new staff or at least more staff than previously on the store floor.

At the end of the day, retail has become “phygital.” Every retailer must figure out how to blend digital and physical to meet customer needs at a profit. Kudos to Target for working on solutions now before it’s too late.

Dave Bruno
BrainTrust

This absolutely feels like a winning strategy for Target. Taking full advantage of every store is the key to competing against Amazon, and while this move will put more pressure on allocation/replenishment and assortment processes, getting those things right ought to be a priority anyway. So why not try to leverage the stores to improve the customer experience and lower costs while they sort out the inventory challenges?

Neil Saunders
BrainTrust

There is no doubt that this is sensible. Fulfillment from stores is often more efficient and profitable, plus it leverages existing assets.

That said, if not properly managed it can also disrupt store stock levels. Target’s performance on out-of-stocks and general inventory control is poor. It needs to fix its systems and distribution otherwise this could exacerbate the problem still further.

Matt Sebek
BrainTrust

They aren’t stealing as many headlines as Amazon and Walmart, but Target’s ability to proactively thwart disruption over the past five years is enviable. That has certainly been achieved through some acquisition, but it starts first with an underlying strategy that is in tune where the industry is headed and what their customers desire.

The reality is that the postal service is already at capacity and traditional DCs are costly. By providing new relevance to their stores (that exist in last mile locations in major neighborhoods), it’s an operational win for the business and a convenience/price win for consumers.

Lee Peterson
BrainTrust

YES! This idea is already working in spades for Home Depot, so this is just a “fast second” idea. C’mon, let’s go! We really believe that if the showroom idea becomes more prolific, all departments inside the behemoth boxes like Target (or Home Depot) should be smaller, allowing for the re-organization and re-deployment of floor space and expanded use of space for other means, like shipping to site, BOPIS or returns on a much larger scale.

Stores as part social playgrounds (experience) and part distribution centers is a great competitive advantage that once re-organized can be used as a tremendous advantage against the 900-pound gorilla. This is not a time to be slow on great ideas — fail fast and get the bugs out for 2.0.

Mel Kleiman
BrainTrust

I love the fact that Target is asking the one question that all in business need to keep asking, especially in today’s rapidly changing world: “Can we do what we are doing differently and more effectively in each area of our business? And why are what we doing what we are doing that way?”

This sounds like a great approach to maximize inventory, labor, location and time.

Dick Seesel
BrainTrust

Given Target’s spotty history of in-stock rates in its brick-and-mortar stores, there is a risk involved in depending too heavily on ship-from-store. As the Braintrust discussed a week ago, using stores as mini-distribution centers makes it tougher to assess actual demand in a given location accurately — in turn making replenishment more unpredictable. So if the “flow center” concept helps Target address this problem it’s a good idea and worth rolling out to other regions.

Rebecca Fitts
Guest

I agree with most of the BrainTrust. This seems like a winning strategy from another perspective as well. In major cities, they are taking smaller spaces (perhaps shorter leases) protecting themselves from overhead issues while still leveraging an omnichannel strategy. I see their urban stores working well and continuing to expand. If it’s executed properly, it will also be good for their consumers.

Craig Sundstrom
Guest

If it’s really true that “using its stores results in getting orders to customers more quickly, while reducing costs” then it makes sense to expand the program. But I’m very dubious that they’re properly accounting for all of the costs involved (or all of the time either).

And what’s the effect on the stores — those places where they do the overwhelming portion of their business? Target is notorious for its OOS issues, and I would have to think this makes it worse.

Kai Clarke
BrainTrust

It is great that Target can utilize its stores like DCs. However, this also points to another issue which Target has to address: the amount of inventory kept in each store, vis a vis the demand “seen” by the store. The ability to respond to increased demand from Target’s online efforts also points to a lack of inventory control reflecting the SKU velocity and the ROI in each store. Decreasing the amount of inventory at store level will free up cash flow, decrease the ordering quantities and allow Target to better control both its cash on hand and the resulting inventory at store shelves.

Min-Jee Hwang
Guest

In the age of Amazon Prime, Target needs to take advantage of every leg-up they have against the behemoth. Target’s recent pilots and announcements show that their stores (something that Amazon doesn’t have a large network of just yet) can be used to advance their eCommerce customer experience. When shoppers can get orders faster and Target can make better use of its existing assets to make this a reality, this is a win for all involved.

Thomas Andersson
Guest
1 year 5 months ago

Considering the size of the US market and its relatively low population density, it does make sense for grocers to use their store estate as an extended warehouse despite the higher costs compared to automated fulfillment.

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Braintrust
"Every retailer must figure out how to blend digital and physical to meet customer needs at a profit. "
"...it’s an operational win for the business and a convenience/price win for consumers."
"There is no doubt that this is sensible. Fulfillment from stores is often more efficient and profitable, plus it leverages existing assets."

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