Shares of Target Corporation (TGT +3.11%) hit an all-time high this week as the retailer topped estimates in its fourth-quarter report. A big reason for the better-than-expected showing was the company's dramatic improvement in e-commerce. Sales through the online channel accounted for nearly 25% of the company's 3.8% comparable sales growth for the last quarter, and more than half of its 1.3% comparable sales growth for the year. E-commerce sales growth more than doubled from 2013 to 30% in 2014, better than two of its biggest rivals, Amazon.com, (AMZN +0.26%), and Wal-Mart Stores, (WMT +2.15%). In addition to that growth figure, Target also lowered its minimum purchase requirement for free shipping to below that of Amazon and Wal-Mart, and has increased its conversion rate sharply in the last four years.
Who wants free shipping?
Amazon has become the dominant player in e-commerce in large part because of its commitment to free shipping. The company offers free two-day shipping on millions of items for its Prime members, as well as free shipping on all orders over $35.
This week Target upped the ante in the free shipping battle by lowering the threshold from $50 to $25, making it the leader among major retailers. Wal-Mart is behind both Target and Amazon at $50. Target.com President Jason Goldberger explained, "Lowering the free shipping threshold from $50 to $25 is one more way Target is putting guests first and making it easier for them to shop Target when and where they want." Over the holiday season, Target also ran a promotion offering free shipping on all online orders, which created "a surge in traffic and conversion."
Target's decision to lower the free shipping threshold is just its latest move to improve its e-commerce value proposition. The retailer didn't even offer free shipping until last summer, and up until 2011 its website was run by Amazon, which perhaps accounted for its previously poor performance. Since taking control of its own website operations, Target's conversion rate -- the number of visitors to its website who end up making purchase -- has improved markedly since 2010, up from 31% to 58%. That figure still trails Wal-Mart at 66% and Amazon at 89%, but it's evidence that Target is fast closing the gap. Lowering the shipping threshold should help boost that percentage further.
To enhance its shipping capabilities, Target also plans to open two new distribution centers, one in Memphis and one in York, Penn., this year.
The price wars continue
Amazon still dominates e-commerce with nearly $61 billion in sales of general merchandise last year compared to online sales of $12.2 billion for Wal-Mart and $1.8 billion for Target, both of whom derive about 2.5% of total revenue from e-commerce.
But Target's initiatives show that the retailer, like many other brick-and-mortar sellers, is making e-commerce a top priority. Online sales growth improved to 36% in the fourth quarter, and could easily continue to increase this year now that management has lowered the free shipping threshold and lowered online prices to be more competitive with Amazon and Wal-Mart.
Wal-Mart has also stepped up its e-commerce game, offering price-matching with Amazon and other competitors, and has invested billions of dollars into improving its online platform. Amazon, of course, has its own investment initiatives with Prime and its goal of same-day delivery.
The winner in this dogfight is likely to be the consumer as the price wars and infrastructure investments will likely weigh on margins. Wal-Mart's recent decision to raise wages strikes a similar chord as the labor market appears to be tightening. With gas prices down and job growth up, retail sales are primed to soar. Expect this competition to only increase in the near future.
