One of the defining elements in the battle for the hearts and minds of consumers is playing out in the struggle between e-commerce and brick-and-mortar retail. Amazon.com (AMZN +1.04%) has been the standard-bearer for the shift to online purchasing, but several established physical retailers have emerged from the pack by seamlessly blending digital efforts with their existing store base.
Target (TGT 0.87%) is one such merchant, and recent results illustrate what a successful transition looks like. The company reported third-quarter results that easily eclipsed expectations, sending its stock soaring to near all-time highs. Target generated revenue of $18.7 billion, up 4.7% year over year, accelerating from 4.6% growth last year, while earnings per share of $1.40 climbed 18%. Investors cheered by driving the stock up more than 13% as of this writing.
The company's efforts reflect a stunning blueprint for how physical retailers can thrive in the digital age. Let's look at three ways that Target has outflanked Amazon to generate its impressive results.
A Target Shipt employee checking out a digital order for delivery. Image source: Target.
1. Thriving e-commerce
While Amazon is the e-commerce leader, Target's online sales are growing at a faster pace. The company's comparable digital sales grew 31% year over year. This is even more impressive considering that Target's digital sales grew 49% in the prior-year quarter. By comparison, Amazon's net product sales grew by 18%, albeit from a much larger base.
During today's Q3 conference call, Target CEO Brian Cornell said: "The power of compounding really matters. Specifically, when you do the math, you'll see that our third-quarter digital comp sales have actually grown more than 95% over the last two years."
2. Getting more customers into its stores
What's helping Target deliver those lofty metrics? 80% of its Q3 growth was the result of same-day fulfillment options, including order pickup, Drive Up, and Shipt (its delivery service). Target shoppers have flocked to these options. Order pickup had the slowest growth, up 50% year over year, while Shipt orders doubled. Drive Up, Target's highest-rated service, delivered growth of more than 500%. Customers have the option of shopping online or via the Target app, with most orders ready for pickup within an hour.
Two of those same-day fulfillment options -- in-store pickup and Drive Up -- are also helping draw more customers into Target's stores. The company reported comparable-store sales that grew 4.5% year over year. While 1.7% of that growth was from digital sales, the remaining 2.8% was the result of growth from in-store sales. The combination of both in-store and digital channels increased total traffic by 3.1%.
3. Leveraging its existing store base
One of the unsung advantages of having an existing network of stores and employees is the lower marginal cost to fulfill digital orders.
During the call, Cornell said that the company's same-day fulfillment options -- order pickup, Drive Up, and Shipt -- drive more money to the bottom line. "Given that these same-day options rely on our store assets, team, and inventory, they are much more profitable than traditional e-commerce fulfillment," he said. It's also much more cost effective when customers opt for in-store pickup or Drive Up than paying for additional shipping -- just ask Amazon.
In its most recent conference call, Amazon CFO Brian Olsavsky said the company spent more than $800 million on one-day shipping in Q2, more in Q3 (though its didn't specify the amount), and was estimating an additional "$1.5 billion penalty in Q4 year over year for the cost of shipping, which is essentially transportation costs, the cost of expanding our transportation capacity, things like adding additional poles, and shifts in our warehouses."
Target has found a way to leverage its existing assets to sell more goods, while also increasing its profitability.
