When Target (NYSE:TGT) CEO Gregg Steinhafel outlined his company's growth strategy in April 2013, he spoke plainly about the company's long-term challenges, remedies to cope, and the evolution of retail customers:
Guests today, they want to shop anywhere, anytime, with their device, in front of the TV, they want to come to your store, they want to buy-online-pick-up-in-store, they want to go in-store and maybe have it shipped from another store, or buy online and have it shipped from multitude of places.
During this event, held by the Economic Club of Minnesota, he described the urgency with which strategic investments had to be made to accommodate changing consumer preferences. With the "digital revolution" clearly influencing shoppers' demands, Target's efforts to combat obsolescence meant transforming the company from a series of physical storefronts to a seamlessly integrated provider of retail services that could be conducted in person, online, and through mobile devices.
These ideas, when Steinhafel laid them out that day, weren't new -- the company began noting the importance of multichannel retailing in 2011 and had already been ramping up investments in IT and distribution infrastructure.
Those outlays continue today, and they're far and away the fastest growing piece of the company's capex -- from FY 2010-14, Target's expenditures in these areas grew at a compound annual growth rate of 22%.
Steinhafel wasn't with the company long enough to see the returns from those investments materialize. But the seeds that were planted during his time as CEO now seem to be sprouting. Last quarter, digital growth contributed 80 basis points to Target's comp sales, and the rate of digital growth has been increasing year over year. Target has made many changes since Steinhafel's departure last year, but the multichannel strategy that began under his leadership remains. And this could be the engine that drives the company's growth going forward.
A formidable e-commerce player
With beefed-up merchandise planning and allocation capabilities, Target is able to compete more effectively with e-commerce heavyweights. While Amazon (NASDAQ:AMZN) has been spending huge sums to develop fulfillment centers near major metro areas, Target has been positioning itself to leverage its pre-existing stores to complement web-based orders.
Instead of building similarly expensive depots that would create redundant capacity, Target can use its stores as mini-warehouses that gather packages and ship merchandise directly to the customer. The retailer's supply chain is, as the CFO describes it, meant to be like a web, with all nodes connecting directly to the customer. Depending on the contents of a web order, goods can be shipped either from the stores or from the upstream distribution centers.
Amazon has clearly set high standards for quick delivery and customer expectations. If Target's strategy goes according to plan, it can compete effectively with the online-only behemoth.
Knowing the customer
Multichannel operations are inherently complex, and Target spares no expense in recruiting people who can contribute most to the initiative. Even as Target reduces the corporate workforce, the company continues to hire tech-related personnel. During a Q&A in March, Target's CFO pointed out that these roles were essential to long-term growth: "We're going to continue to hire data and analytics individuals, engineers and technology, places we have to invest."
This prioritization makes sense, given the indispensable value that top-quality analytical capabilities provide. The company must synergistically manage the vast amounts of information it collects through every channel, and shrewd interpretation is essential to making sense of it. In every part of the organization, decisions are driven by this process.
Analytics help the retailer understand its customers and how best to use its resources. Which goods typically fill an average customer's basket? How does the physical placement of Product A affect sales of Product B? How is shopping behavior being influenced by XYZ marketing campaign? Which customers are responding most to that campaign? Target can use this insight to better forecast sales, allocate appropriate merchandise to appropriate regions, design in-store categories, and identify the most profitable customers.
Now and in the future, the most successful brick-and-mortar retailers will be the ones with the greatest capability to adapt, innovate, and maintain relevance. While technologically challenging, Target's endeavor to become a leading multichannel retailer with superior analytics resources is a positive sign for long-term investors. These strategic initiatives provide the building blocks of a sustainable competitive advantage.
Robby Greengold has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.