Target (NYSE:TGT) shares have surged in recent years, and one strategic decision is a major reason why. 

The big-box retailer has invested heavily in same-day fulfillment service, including Order Pickup, Drive Up, and same-day delivery with Shipt. Sales from same-day fulfillment services jumped 90% last year, and accounted for three quarters of its 29% comparable digital sales growth.

Those services have emerged as a competitive advantage for the retailer, separating it from flailing mall-based chains and department stores and warding off competition from online retailers like Amazon. Not surprisingly, Target is investing further in the channel, as it's clearly resonating with customers. It was a big reason why digital sales jumped 141% in the pandemic-stricken first quarter -- in fact, same-day services jumped 278% in the period. Now Target is stepping up its offering by making fresh and frozen groceries available through Order Pickup and Drive Up.

The grocery department at a Target store

Image source: Target.

Getting fresh

Target said that after a successful pilot in the Twin Cities and Kansas City, it would roll out the expanded offering to more markets in the Midwest, reaching 400 stores by the end of the month with a goal of hitting 1,500 stores by the end of the year, about three quarters of its store base. Target will make 750 fresh and frozen items available, and COO John Mulligan said, "The speed and convenience of our fulfillment options are unmatched across the country, and they've become even more critical for our guests searching for easy and safe ways to shop during the pandemic. By adding fresh grocery to the pickup services our guests already love, we're giving them even more reasons to shop at Target."

Target isn't the first retailer to make such a move, of course. Curbside pickup has become popular at supermarket chains like Kroger during the pandemic, but no company's put more effort behind online grocery than Walmart (NYSE:WMT), and the retail giant has seen some impressive results

Walmart's U.S. e-commerce sales have increased by about 40% in each of the last three years, and its online grocery initiative is a big reason why. The company now has about 3,300 stores offering grocery pickup, and another 1,850 with same-day delivery. That expansion has helped consistently deliver comparable sales growth and increase market share in grocery. The service, which Walmart offers for free like Target will, has been a key differentiator for the retail giant. According to a survey from Escalent, 47% of online grocery shoppers ordered from Walmart in March and April, significantly more than any other competitor.

Target's next move

Online grocery is particularly valuable during the pandemic, as some customers are reluctant to go inside stores and risk exposure to the virus. The service helped Walmart's e-commerce sales jump 74% in the first quarter, and momentum appears to be strong in the second quarter as grocery sales remain above normal levels in the U.S. while restaurant sales stay down. Grocery pickup should be able to provide a lift for Target as well, although grocery makes up a much smaller percentage of total sales at Target, where it's less than 20% -- compared to more than half at Walmart.

But Target has a number of the same advantages that Walmart does. It sells a broad range of products, and frequently purchased items like groceries can help drive sales in other categories like toys, gifts, or clothes. Target stores are also spread around the country, like Walmart's -- it has stores within 10 miles of 75% of the U.S. population. As it has for Walmart, that proximity helps Target leverage its stores base and save costs on delivery in a way that competitors like Amazon can't.

Finally, at least some of the online grocery spending happening now is likely to stick after the crisis. Grocery is one of the biggest categories in retail with nearly $800 billion in sales last year, according to the Census Bureau. One forecast calls for online grocery sales to more than double from $28.7 billion in 2019 to $59.5 billion in 2023, and that was before the pandemic happened.

The percentage of grocery sales that happen online should steadily increase over the long term, especially with the boost from the pandemic, so it makes sense for Target to compete in that market. Considering the success it's had so far in same-day fulfillment services, making fresh and frozen groceries available for its customers is likely to be a winner too.