Target (TGT +0.09%) has been quick to innovate around quick fulfillment. It now offers three ways for online shoppers to receive their items the same day they order them: in-store pickup, curbside pickup, and same-day delivery. And shoppers have responded. Fifty percent of Target shoppers said they used a same-day service at least once in the last six months, according to a recent survey by Stifel analyst Mark Astrachan.
Target shoppers are more likely to use its same-day fulfillment options than are Walmart (WMT +0.84%) shoppers (38%) and shoppers overall (36%). And Target's continued focus on same-day fulfillment could drive market-share gains for the retailer.
Image source: Target.
All about convenience
The coronavirus pandemic caused a big shift in consumer behavior. While there was a massive shift from in-store purchases to online sales, an underlying trend of that shift was a preference for convenience. It became safer and more convenient to order items for curbside pickup than to make a quick run into Target to pick up a few household items.
Target shoppers' willingness to try its same-day fulfillment options bodes well for the retailer to maintain the sales strength it gained during the pandemic once we can return to normal. Items ordered for same-day fulfillment are often more recurrent in nature, too, Astrachan points out. Therefore, Target should see continued improvements in adoption rates among its shoppers as existing same-day shoppers keep coming back and new ones are attracted.
Target gives its shoppers multiple options for how they'd like to receive their order. It's offered in-store pickup for online orders for years, and it added Drive Up, its curbside pickup program, in 2017, expanding nationwide in 2019. It also acquired Shipt, a subscription same-day delivery service, at the end of 2017, and moved to integrate the service with its digital platform in 2019. This level of optionality is unmatched by most other retailers.
Walmart is the closest competitor to Target. It now offers the same options to its shoppers as Target does, but it has historically trailed its smaller rival. The retail giant rolled out Walmart+, which is comparable to Shipt, in September after several delays. And while Walmart has had success with online grocery ordering and curbside pickup, it's been slow to expand those options to general merchandise.
Target, on the other hand, started with general merchandise ordering for Drive Up, and it's only recently expanded to online grocery pickup. The strong adoption of same-day fulfillment options among Target shoppers may lead it to take market share in grocery as Target communicates the new service to its existing Drive Up shoppers.
Growing digital sales profitably
Target's same-day fulfillment options are generally inexpensive compared with the costs of shipping items from a warehouse. For one, Target can save on shipping expenses for items picked up in the store or curbside. And when Target makes a delivery through Shipt, it's bringing in revenue to help offset the expense.
That's notable because Target fulfilled 42% of its online orders in 2020 with its same-day options, Astrachan estimates. That's up from 30% the year prior. And that number should keep climbing in 2021 as the retailer expands the product selection and generates more repeat customers.
Target's ability to fulfill its digital orders from its stores is enviable. The company said it fulfilled 95% of its November and December sales with its stores (including traditional in-store purchases). It's been working for years to leverage its store footprint to double as fulfillment centers, and its efforts have paid off. It expanded its operating margin in 2020 despite the shift to online sales, which typically come with additional operating expenses.
Investors can expect further operating margin expansion and improving return on invested capital for Target as its same-day fulfillment options continue to gain traction and scale.
