Who would have thought that Target (TGT +0.32%) would become the hottest stock in retail at a time when more people are shopping online, and brands are reaching customers directly more effectively than ever? On the surface, this should have been one of the industry's biggest losers over the past year.
Instead, Target reported another outstanding quarter in the second fiscal quarter of 2021, and it looks like temporary pandemic gains are becoming permanent gains for the business. Here's how Target turned its business around and why I think it will be tough for competitors like Amazon (AMZN 2.61%), Walmart (WMT +0.45%), and Costco Wholesale (COST +1.67%) to catch up.
TGT data by YCharts.
Target leaned into what it does best
As a resident of the Minneapolis area, where Target is headquartered and new concepts are often tested, I've had a first-hand look at how it has adapted to a more-digital retail world. More than three years ago, I started writing about how the company seemed to have given up on taking on Amazon in online retail and pivoted to turning its stores into a point of strength.
Target didn't really care if you set foot in the store itself, as long as you ordered from it and it could get your order to you efficiently. It did this through three main digital services:
- Drive Up/Pick Up in store, which is exactly what it sounds like. Someone in the store picks up your order, which is then either delivered directly to your car in dedicated Drive Up spots or picked up by you in-store. Even groceries are available for Drive Up, and my home Target has remodeled Drive Up with a fast and easy dedicated entrance and exit from the parking lot, which I think will become more common.
- Shipt/same-day delivery is a service through either the Target app or Shipt, which it owns. This is essentially someone else doing your shopping for you and delivering it to your door.
- Shipping of online orders also happens from stores. Management said that 95% of all sales in the second quarter were fulfilled by stores, including items shipped to homes.
The theme of these services is that they all center around the Target store. The store is a warehouse, it's the logistics center, it's a showroom, and it's the grocery store for Target's digital sales.
Meeting users where they are
What I think is compelling about this setup long term is that Target can deliver better prices and more convenience than competitors like Amazon. Studies have consistently shown that Amazon often has higher prices than competitors, but customers don't care because it's so convenient. A few clicks on an app, and items show up at your door.
Where Amazon hasn't been as successful is in the immediate-satisfaction business. Same-day deliveries are available in some locations, but pickup at warehouses is not, and groceries and other household items are a weakness for the company. If I need something right now, it doesn't have a service for me.
Target leans into the fact that its customers are urban and suburban shoppers, many of them with families, who are looking for fast, one-stop shopping for food, diapers, light bulbs, and some fresh makeup. What was missing versus Amazon was the convenience factor of not having to go into a store.
Now, I can get items delivered to my door with Shipt (which I signed up for when I unsubscribed from Amazon Prime about a year ago) or pick up items when I drive by a store. For parents on the go, these options are a godsend, and Target is providing arguably more convenience than Amazon for everyday items, including groceries. If it can grow these convenience features and keep prices low, it's a win-win.
Image source: Target.
Amazon is even copying Target
It's no coincidence that as Target leverages the strength of its stores, Amazon is moving more and more into retail. The company owns Whole Foods, has experimented with grocery stores and pop-ups, and is now planning to open department stores.
The strange theme in online retail is that companies eventually push into brick-and-mortar retail. Brands that start online like Casper, Harry's, and Bombas eventually end up in the very stores they intended to circumvent. Now, the largest online retailer in the world wants to go that route as well, but Target already beat Amazon to the punch.
Target has more room to grow
The beauty of Target's growth is that it doesn't require more stores or a larger footprint; the company is simply generating more revenue from each store by selling in-store and online. And with the operating leverage that comes with being a nationwide chain of stores that can act as fulfillment centers, this is a retail stock that could grow profits rapidly for years to come.
