Big box retailers have been under assault from every angle in recent years, losing market share to online retailers like Amazon (AMZN 0.87%) and facing competition from new brands that market directly to consumers. Target (TGT +1.37%) has seen sales stagnate as a result, but is finally starting to figure out how it wants to respond.
Target isn't going to be the biggest online retailer in the U.S., but it can still serve customers both in-store and online in unique and innovative ways that leverage some of its unique assets.
Image source: Getty Images.
Target is changing
The face that Target is presenting to consumers is different than it was a decade or two ago. It's no longer a home for every brand under one roof. Now it's focusing on in-store needs like groceries and pharmaceuticals, and shifting many of its product lines to exclusive brands.
To augment the new model, Target has found ways to serve customers who value the speed of shopping at a big box store but don't want the hassle of walking inside. And those strategies are providing the differentiation the company will need in the next five years.
Online shopping is the future
Shopping online is definitely the future, but that future looks different for Target than for a company like Amazon. In 2017, Target acquired Shipt in an effort to enter the grocery delivery business. Customers can now have Target's grocery business come to them in a matter of hours, eliminating the need to go to the store at all. Minimizing the hassle of shopping is key to Target's model, and Shipt extends its stores straight to customers' homes.
The other innovation that has expanded is Drive Up, a service that allows customers to order online, pull into a designated spot near the front door of a Target location, and have items delivered straight to the car. The service is available at more than 1,550 Target locations, takes a matter of minutes to go from order to pickup -- and it's free.
Shipping online doesn't have to mean delivery comes to your front door two days later. Target is betting that its differentiation will be in delivering goods to your door or car within minutes, or hours most. That's a level of convenience that physical big box locations can offer that most online retailers can't.
Target is becoming a brand company
Rather than fighting the brands that are building their online presence and skipping traditional retail, Target is leaning into a brand-first business model. Walk around a Target store today and you'll see brands Target partners with, like Universal Thread, C9, and Hearth and Hand. It's also building new brands internally, like Heyday electronics.
The company has also invested in and partnered with startups like Harry's razors, Casper mattresses, and Quip toothbrushes to give online retail brands a physical store presence. This gives customers a showroom for brands they've seen online and Target access to up-and-coming brands.
Target 5 years from now
Take a look at how Target's strategy has changed in the last three years and I think you'll see previews of what the company will look like five years from now. Online shopping with quick delivery to the home and vehicle will improve, and inventory choices will expand. I think it's only a matter of time before groceries can be ordered on Drive Up, which could be an incredibly popular service for on-the-go professionals and parents.
Target will continue to invest in exclusive brands built in-house, which will give it stability and control over how its brands are presented. As these brands grow, they could even make their way to other retailers.
From a financial perspective, I think Target is poised to begin growing revenue again now that it's leaning into its best assets. If exclusive and private brands continue to grow, we may see margins creep a little higher as well.
TGT Revenue (TTM) data by YCharts
Target isn't going to be a huge growth stock like Amazon, but it's a valuable retailer that plays a vital role in millions of people's lives. If it can add even a little more value to that relationship, it will be a steady performer for investors.
