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Target's Next Big Problem: Amazon Fresh Is Now Part of Prime

By Travis Hoium - Nov 20, 2019 at 8:22AM

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Amazon keeps adding services to its Prime membership, and Amazon Fresh now being included in Prime is a big problem for Target.

Target ( TGT 0.84% ) has managed to grow its sales ever so slightly recently by offering an increasingly easy way to shop at its stores. Drive Up has enabled customers to pick up groceries without ever entering the store, and services like Shipt have made it easier to order products and get them delivered to your door from individual stores. 

The problem for Target is that Amazon ( AMZN -1.38% ) continues to improve its own delivery services, now offering Amazon Fresh with 2-hour delivery with a Prime membership. How does Target compete with Amazon Prime for delivering products in just a few hours? There are ways it can stay relevant, but it's in a much more tenuous position if Amazon is delivering everything from groceries to home appliances for free with a Prime membership.

Here's how Target can stay relevant this holiday season and become a top retail stock once again. 

A customer sitting in her car in a Target parking lot chats with a Target employee standing at her window

Image source: Target.

Drive Up will be key to the future

I don't live far from Target's headquarters in downtown Minneapolis, and that means we often see things Target is testing before the rest of the country. Drive Up, for example, was tested around Minneapolis before making its way to a larger number of stores. 

Noticeable around here as of late is that the Drive Up locations have shifted from outside of a store's main entrance to a low-traffic location on the side of the store. Some of these areas look more like bank drive-thru windows than Target stores. Given Target's locations on main roads through the towns they are located in, offering pickup in a convenient location with less traffic could make it an easier stop for customers. 

Lean into the Red Card

Amazon has made Prime its central subscription and is often adding new services, such as Amazon Fresh, to the Prime service. Target needs to do the same thing with the Red Card rather than adding fees to services like Shipt. 

As a Red Card holder, I would love to be able to order products from my local Target store and have them delivered to my house, but right now, that would cost an additional $99 per year, or $14 per month. I already pay for an Amazon Prime subscription, so adding another service isn't very appealing. 

Red Card needs to become more than just an in-store loyalty card; it needs to be the pass to the Target ecosystem. It has the possibility to become that with Shipt, Drive Up, and more being rolled out, but that's not yet how Target is treating its most valuable loyalty card. 

Partnerships are key for Target

If you look at Target's retail strategy over the last few years, it's leaned heavily into partnerships with start-ups like Quip and Harry's while building in-store brands that often lean on partnerships like Hearth & Hand, C9, and Threshold. Better brands in-store have led to better sales for customers who come to Target's locations. But what about everyone else? 

Target could partner with organizations that do logistics, such as Uber or Lyft, to bring goods directly to customers. Imagine, ordering a gallon of milk and getting it delivered to your front door by a driver who was already picking up and dropping off a paying customer on the way to your place of residence. This wouldn't be a Shipt personal shopper, but someone else delivering your Drive Up order. Anything to make shopping easier would keep people going to Target. 

Target's core customer

Since having a child more than two years ago, I've become keenly aware that parents are Target's core customers. The largest section in the middle of stores with diapers, cribs, strollers, and car seats certainly isn't there by accident. So, Target has a unique opportunity to serve those customers better than anyone else. 

Parents are great customers because they usually order the same things on a regular basis. Diapers, wipes, formula, cleaner, and more can come to our front door every couple of weeks, and we'll always be able to use them. I think there's a huge opportunity for Target to offer a regular delivery service through Shipt that's geared directly to parents.

Target has the products people need in its stores, so if a regular delivery service can save parents a one- or two-hour shopping trip, it would be a huge value and maybe pull some of the customers who are choosing to make those purchases through Amazon over to Target.

Target knows who its core customer is; now it needs to offer them a service they're longing for every day. 

Target needs to find ways to fight back

Amazon certainly has a leg up on traditional big-box retailers when it comes to e-commerce and fast delivery services. But Target is finding ways to lean into its advantages with physical stores and customers who need products on the go. It's an uphill battle, and now that Amazon Fresh is free for Prime customers, there will be an even bigger pull toward Amazon. Target may need an even bigger answer to the competitive threat. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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