Please ensure Javascript is enabled for purposes of website accessibility

Target Corporation Wants to Cancel Your Grocery Trip

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$162.37 (3.80%) $5.95

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
332%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.