Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.
Target’s free next-day shipping is far more limited than Amazon Prime, but it shows that the pieces are in place for the retailer to compete.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
The biggest piece of news that came along with Amazon.com's (AMZN +0.01%) first-quarter report on Thursday was the e-commerce giant's plan to make one-day shipping the standard for its Amazon Prime subscription service. Unlimited two-day shipping has been the main draw of Prime since it launched in 2005, but it doesn't stand out as much as it once did. Both Walmart and Target (TGT 0.01%), for example, offer free two-day shipping on online orders above $35, with no membership fee required.
By moving to one-day shipping, Amazon is certainly raising the bar. But the idea that this move will leave other retailers in the dust ignores the progress that Amazon's competition has made. Target Restock, Target's home essentials delivery service, already offers free next-day shipping for a large swath of customers.
Target Restock has a $35 order minimum and a small selection relative to Amazon Prime, but it demonstrates that Target is perfectly capable of delivering orders fast, without membership fees or an Amazon-scale distribution network. Amazon's one-day shipping push will certainly force Target and other retailers to become more aggressive, but it's not the end of the world.
Image source: Amazon.
The basics of Target Restock, which the retailer revamped last year:
Target Restock offers a much smaller selection than the millions of items available through Amazon Prime. It's certainly not a replacement for Prime. But the fact that Target is able to offer free next-day delivery at all, without the vast distribution system Amazon has spent decades building and perfecting, and without tanking its bottom line, shows that the retailer has come a long way.
The key to Target's free next-day shipping is its base of more than 1,800 stores. All Target Restock orders, and many standard online orders, are fulfilled directly from store shelves. That may seem inefficient, but it's saving Target a boatload of money. The company was able to forego around $3 billion of spending on new warehouses by using its stores to fulfill orders, and orders shipped from stores cost the company about 40% less on average than orders shipped from warehouses.
The bottom line: Target has already built the infrastructure necessary to offer free next-day shipping. It's limited to Restock orders for now, but it wouldn't be surprising to see Target expand the effort to a broader set of merchandise in the future, especially now that Amazon is moving to one-day shipping.
Target hasn't felt a huge impact on its bottom line from its fast, free shipping initiatives, but they are taking a small toll. In the fourth quarter of 2018, Target's gross margin dipped 0.4 percentage points year over year to 25.7%, reflecting higher digital fulfillment and supply chain costs. The company was able to keep its operating margin flat at 4.9%, but that's mostly because in-store sales growth was so strong.
Target's margins will certainly face some pressure as the company continues to grow online sales, especially if the performance of its stores starts to cool off. But the retailer has demonstrated with Restock that it can provide Amazon-level convenience without the Amazon-level membership fees.
One-day shipping from Amazon sounds like a disaster for Target, but it's really not. Target will be just fine.