As Target (TGT +0.37%) tries to rebound from the data breach scandal that cost former CEO Gregg Steinhafel his job, the company plans to bring out the big guns this holiday season. Target announced it will offer free shipping on all Target.com orders for the holidays from now through Dec. 20.
The company has also made 65,000 items for sale on its website available for same-day in-store pickup with 80% of the orders being fulfilled within one hour. That program runs through Christmas Eve.
In general, Target is stepping up its digital game, improving its website and app. The company is also launching a Wish List app on Halloween. The app will allow kids and parents to add items to their list which can be shared with friends and family. The app will also allow customers to save 10% on their Wish List items for one day between now and Nov. 26.
It's a bold set of moves designed to offer an answer to customers who find it easier to do all their shopping online, most likely at Amazon.com (AMZN +1.65%). Offering free shipping -- the centerpiece of Target's holiday plan -- is a bold, risky step. Good or bad, Target's new CEO seems to understand that his company needs to take a bold step to win back the customers lost after the data breach that may have put information from up to 110 million customers at risk.
"We've been building capabilities that put us in a strong starting position, including the right digital tools and a broad assortment of unique, on-trend merchandise," said CEO Brian Cornell. "It's about delivering on our promise of 'Expect More. Pay Less,' and when we do that, Target is impossible to beat."
Amazon and Wal-Mart (WMT 0.24%), to name two, may beg to differ on that, but at least Target is getting up off the canvas.
How does this differ from Amazon?
Amazon offers non-Prime members free shipping on orders over $35 sent to one address. Prime members pay $99 a year for free, two-day shipping on millions of items that Amazon stocks in its fulfillment centers.
Target's free shipping offer will likely be enticing to customers specifically because many gift items cost less than $35, so adding a shipping charge can make the overall order dramatically more expensive. This will vary from item to item as Target and Amazon can have vastly different prices, but it will often be a major factor.
Let's look at how it would work for one popular children's toy, Playskool's Sesame Street Lullaby and Good Night Elmo.
Amazon sells the toy to non-Prime members for $14.74 but would add an additional $6.27 for standard shipping in the United States (3-5 days, which is the same as what Target is offering for free).
Target sells the same product for $14.79, but offers free shipping.
That makes the buying choice pretty clear -- it's cheaper to buy from Target.
This Elmo toy plays a Lullaby. Source: Amazon
Cornell sees the free shipping as way to entice people to shop at Target.com by removing the biggest barrier to entry.
"It's an easy way to eliminate one of the most common hurdles that's associated with online shopping," he said. "No one likes being surprised with shipping charges when they go to check out, so a standing free shipping offer for the holidays just makes sense."
It's a risk for Target
There is a short-term risk for Target that customers pick and choose between retailers using Target only for orders under the Amazon shipping threshold. That could bury the retail giant with a host of small orders where it must eat the shipping cost.
That could happen, but the real benefit for Target here is gaining customers with accounts and credit cards on file for its website. Part of the reason Amazon is so successful is that it has over 240 million credit cards on file. Getting someone to register and turn over their credit card info is the biggest hurdle in customer conversion. If Target can use free holiday shipping to achieve that, it will increase its online customer base and benefit over the long term.
For this investment to be worth it, Target has to deliver an Amazon-like flawless online ordering system with delivery which shows up when promised. If it can do that, even when it drops free shipping, it should be able to get some -- perhaps many -- customers to price compare with Amazon when placing an order.
This is not a strategy that's likely to make a huge difference for Target over the holiday season since shipping costs will eat into (or even eliminate) any margin made on under-$35 orders, but it could pay off well in the long run.
