Amazon (NASDAQ:AMZN) has come to dominate e-commerce in the United States, in part because the company was the first to offer free two-day delivery with its Prime loyalty program. Walmart (NYSE:WMT) followed suit last January with free two-day delivery on orders over $35 with no membership fee.
Now, Target (NYSE:TGT) is raising the bar further. The big-box chain will offer free two-day delivery with no order minimum or membership fee for the holidays. The program starts November 1 and will run through December 22, but if it's successful enough, Target could conceivably make the offer permanent.
Armed and ready
When Target acquired Shipt a year ago, the company signaled that it was serious about e-commerce. The Instacart competitor has helped Target offer (for an additional fee) same-day delivery of 55,000 Target products in hundreds of markets in as little as an hour. That acquisition and an increased focus on e-commerce with programs like Drive Up -- Target's curbside delivery service -- have already delivered results for investors, as Target shares are up 29% year to date.
E-commerce growth has propelled that outperformance, as digital sales grew 41% in Target's most recent quarter, contributing to an impressive 6.5% comparable sales increase. In-store sales were strong as well, rising 4.9% on a same-store basis, as Target also seemed to benefit from robust consumer confidence and rising retail sales.
Target's decision to offer free two-day shipping for the holidays with no minimum could be a signal that momentum has continued into the third quarter and that management sees an opportunity to gain more market share and boost its e-commerce sales.
How Amazon and Walmart will react
Target's free two-day shipping offer certainly ups the stakes in e-commerce, where Amazon and Walmart are well ahead in sales. However, don't expect Amazon or Walmart to follow Target's move. For many years, Amazon's strategy has been to stuff its Prime loyalty program with benefits beyond free two-day delivery -- which currently include video streaming, discounts at Whole Foods, and access to the Kindle Owners' Lending Library -- to entice new members to sign up and hold on to existing ones. For an extra fee, Amazon offers delivery in as little as one hour to its loyalty members through its Prime Now program.
Walmart, on the other hand, seems more likely to be threatened by Target's move, as it doesn't have customers locked into a loyalty program. However, the retail giant has shown reluctance before to overspend on e-commerce, which is why it has a $35 order minimum. For instance, in August, Walmart began marking certain online products like detergent as "out of stock" after deeming that it was too expensive to ship them. Eliminating the $35 order minimum would lead to the kind of unprofitable low-price orders that Walmart has been trying to avoid.
Rather than drive its pure e-commerce business, Walmart's strategy has focused on selling online and making it easy for customers to retrieve items at its stores by expanding programs like grocery pickup and its pickup towers. Elsewhere, Walmart has made efforts to bring in new brands to its e-commerce umbrella like Bonobos, Modcloth, and Bare Necessities. The company has also formed partnerships with retailers like Lord & Taylor and Advance Auto Parts to sell on Walmart.com.
There's also an important difference between Walmart and Target. Walmart's U.S. stores derive the majority of their sales from groceries, while Target is more diversified into areas like home, beauty, and apparel and generates just 22% of its total sales from food and beverage. That means the two companies have different priorities and don't compete as directly as some might think. It also means that the holidays are more important for Target than for Walmart, as groceries don't see the same spike in holiday sales that other categories do.
What it means for Target
Target is making other moves to prepare itself for a blowout holiday season. With the recent liquidation of Toys R Us, Target is carrying its biggest-ever toy assortment with an eye toward grabbing sales from its former rival. The company is also offering thousands of curated gifts under $15, honing its aim on holiday shoppers.
The free two-day shipping offer signals that the company is more confident than ever about the strength of its customer base. In fact, CEO Brian Cornell recently said that the current consumer environment is the best he's ever seen. Target's strategy also signals that the company is continuing to pursue market share and sales growth, possibly at the expense of its bottom line. That means its operating profit growth next quarter is likely to be slim, if it grows at all.
However, Target is likely to be rewarded if it can continue to deliver strong sales growth over the holidays, as investors have cheered that strategy thus far this year.