One of the surprise beneficiaries from all of the disruption COVID-19 has brought to the U.S. is Target (TGT +2.04%). The big-box retailer is shining now that customers have been given an incentive to try its same-day online services, many for the first time.
In the first quarter of 2019, which included only about a month and a half of COVID-19 impact, comparable sales rose 10.8% on the back of a 141% increase in digital sales. This could be the start of a big transformation of the business, and investors should take notice.
Image source: Target.
Leveraging its brick-and-mortar presence
Target has spent the last few years building out digital offerings that utilize its existing stores rather than trying to replace them. Drive Up and Shipt are the two big additions to the company's portfolio, and they've combined with Pick Up to drive 278% growth in same-day services.
Some stores have been reconfigured to enable easy Drive Up service, which I think could be a core offering for decades to come. My local store has eight Drive Up spots next to the side of the store, which looks more like a grocery store drive-up lane than a traditional Target store. It makes ordering online and pickup within hours easy. And dry foods are now available for Drive Up, with more grocery items being added before the end of the year. In time, a trip to get everything from clothing to groceries might involve an online Target order and pick-up without ever getting out of the car.
Shipt leverages Target stores by using shoppers to pick up groceries and other items for home delivery. Within a matter of hours, customers can go from ordering to having items sitting on their doorsteps.
Taking on the e-commerce giants with a Target twist
It was always clear that Target wasn't going to beat Amazon (AMZN +3.51%) and Walmart (WMT +0.63%) at their own games. Amazon is the e-commerce giant with two-day delivery for Prime members and nearly everything in its store. Target.com has proven that it can't compete with Amazon in e-commerce alone.
Walmart has proven to be an e-commerce giant in its own right and has a loyal following of customers looking for low prices. Competing on price has never been Target's business, and it doesn't have Walmart's scale, so that was not where it was going to win either.
However, Target has been able to leverage its brick-and-mortar stores and curated merchandise to offer a high-value service to customers. Drive Up and Shipt aren't going to win on price alone, but they're adding value to consumers who want same-day service from convenient locations. And with a clientele that skews to the higher end, that's where it can win against companies like Amazon and Walmart.
What does the future look like for Target?
We've seen a preview of what Target's future looks like. High-value services like Drive Up and Shipt are the core of its offering, and the addition of grocery to Drive Up could be a game changer.
What I think Target will use to grow in the future is exclusive brands and partnerships to draw even more customers to these services. Harry's, Bevel, and Casper are the third-party brands that are added to exclusives like Room Essentials, Cat & Jack, and Good & Gather at Target stores. Having convenient services for same-day commerce and great brands is the leverage Target needs to lean on, and its strategy appears to be working well, fueled by purchasing changes brought about by COVID-19.
