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Target and Walmart's Next Step to Take on Amazon

By Adam Levy - Updated May 25, 2021 at 10:27AM

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The two big-box retailers are investing heavily in this key aspect of e-commerce.

Both Target (TGT 0.51%) and Walmart (WMT 0.81%) have seen their digital sales channels grow tremendously since the start of the coronavirus pandemic. With the strong growth in e-commerce sales, both big-box retailers see an opportunity to take a page out of Amazon's (AMZN -0.99%) playbook and spend more on bringing package delivery in-house.

Amazon says it delivers the majority of its U.S. orders itself, but third parties still handle most of its competitors' orders. Target and Walmart are investing to change that.

A package sitting on the front doorstep of a house.

Image source: Getty Images.

Where Target and Walmart are investing

Target's investing across its entire supply chain. During its first-quarter earnings call, management announced plans for two more regional distribution centers in addition to the two distribution centers it expects to open this year. "Once these buildings are operating at scale, they'll meaningfully shorten lead times to nearby stores, improving in-stock levels, while reducing the need for safety stock in those locations," COO John Mulligan told analysts.

Target's also planning for five more sortation centers. Sortation centers receive packages from stores and organize them by zip code for local delivery. The growing number of packages heading out the back of Target stores can make these sortation centers much more cost effective because they have enough packages to sort more granularly. That level of precision helps reduce the price it pays to its delivery partners.

Target's also relying on its acquisitions from the last few years to improve efficiency. It uses Grand Junction to optimize its delivery partner selection. It's using its 2020 acquisition of Deliv to improve sortation. And it's started using independent drivers from Shipt to deliver some packages from sortation centers to customers' doorsteps.

Walmart, meanwhile, is testing a last-mile delivery network of vans to get packages from its stores or distribution centers to customers' homes. The pilot started in Arkansas earlier this year.

The move rivals Amazon's delivery service partner program, which has grown tremendously since its launch in 2018. The growth of the last-mile network of vans has allowed Amazon to offer more products available for one-day or same-day shipping and expand cut-off times for those fast delivery windows.

Walmart has made efforts to offer delivery speeds like Amazon over the last few years. It started offering next-day delivery on select items in 2019. It revamped its same-day delivery service, focused on groceries, last year as Walmart+. Adding flexibility to the supply chain by controlling the entire logistics chain could help Walmart grow those services as speed becomes an increasingly important factor in e-commerce.

A long way to go to catch Amazon

Both Walmart and Target have a long way to go in order to catch up with Amazon. Amazon has quickly built out a network that takes an item from one of its warehouses to its customers' doors in record time. Later this year, it'll have increased capacity to get items across the country when it opens its own air hub. Combined with a growing number of sortation centers and delivery stations, Amazon's built a logistics business to rival the delivery partners other retailers are wholly reliant upon.

The good news for Walmart and Target investors is that they don't have to do the same thing as Amazon. For one, they each have a network of stores they can use to fulfill online orders and a logistics network that supplies those stores. Walmart already operates a trucking network for store deliveries. Target, meanwhile, says its stores fulfill three-quarters of online orders.

Additionally, the vast majority of their sales still come from in-store shoppers, and both have strong grocery businesses that drive shoppers back to their stores over and over again.

Walmart and Target are making incremental improvements in the efficiency of their supply chains, which should help them better profits and increase product availability for online sales. However, they must be aware of Amazon's improving product selection and delivery speeds as it aims to take what was traditionally in-store shopping and bring it online. The ability to offer similar fulfillment speeds on a comparable selection of items may grow in importance for Walmart and Target to keep their customers' loyalty as more shopping moves online.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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