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Target Corporation Wants to Cancel Your Grocery Trip

By Demitri Kalogeropoulos - Sep 20, 2015 at 9:01AM

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The retailer is making another expensive play for millennial shoppers.

Maybe you can skip the trip out to Target (TGT 3.80%) after all. The retailer just launched a trial grocery delivery service that aims to have an online order at your door in as little as one hour.

Source: Target.

The test's geography is limited to just a few sections of the Minneapolis metro area right now. But Target and its partner Instacart are looking into adding other markets. Delivery costs start at $4, and online shoppers have access to groceries as well as products in Target's household, health and beauty, pet, and baby categories. 

The program touches two of Target's big strategic priorities: improving the food department and winning the e-commerce retailing war. It's no coincidence that both goals aim to boost results by nabbing more business from millennials. Target is adding things like craft beers, granola, yogurt, and organic foods to its grocery mix to attract younger families that aren't as interested in packaged and processed foods. These customers also tend to do more of their shopping online. That's why CEO Brian Cornell said it is "critically important" that Target become an e-commerce leader.

That hasn't happened yet: Online sales make up less than 3% of Target's business, compared to 7% for the broader industry. Still, recent results are encouraging. The retailer booked a 30% jump in online sales last quarter as that business contributed 0.6 percentage points to Target's 2.4% comparable-store sales growth. 

Yet those extra sales aren't coming cheap. In fact, Target is spending $1 billion this year on things like upgrading hundreds of stores into fulfillment centers, making improvements to the shopping app, and cutting delivery times through supply chain tweaks. 

As management tells it, there really isn't another choice except to make these investments. Target's shoppers are moving online, so the business needs to adapt. Here's Cornell on the topic just this week:

Retail is changing more rapidly today than at any time in my career. Our guests can shop anytime, anywhere, with a few quick swipes of their finger. Thanks to digital technology, consumers carry their favorite stores around in their pockets and purses. These are incredibly important areas we must address to truly succeed. 

Target's grocery ordering app. Source: Target.

Assuming this program eventually scales up nationwide, grocery delivery will likely bring slightly higher sales growth. But it's more about defending against the competitive threats of all those portable digital stores than anything else. 

On the offense side of the equation, Target needs to get its in-store product mix and shopping experience right, especially for signature categories like apparel, home, beauty, baby, kids, and wellness.

These divisions carry higher profit margins than the grocery business, even as an improved food section promises to boost traffic in stores. Signature categories are also harder for rivals to copy since they include many Target-exclusive items. 

The best news about the operations lately is that store traffic is higher through the first half of this year, compared to the dip Target suffered over the same time period in 2014. Meanwhile, sales in signature categories are rising at three times the growth pace of the rest of the store. Sure, online deliveries won't contribute to those positive trends, but at least they'll keep competitors from stealing that business.

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