How Target's Digital Strategy is Driving Performance
An article by • Published Dec 1, 2020
Despite the Covid-19 pandemic, general merchandise retailers have had a good year as they benefited from govt stimulus checks, as well as from capturing consumer spending that has shifted away from travel and other out-of-home entertainment.
Target ($TGT) has been among the best performing retail stocks this year — the stock is up over 40% year to date, outperforming retail peers such as Walmart ($WMT) and
Large Cap Retailers
Inside this article, we'll take a look at what has driven much of the outperformance.
Table of Contents
Digital / eCommerce Sales
Looking Forward: Increased Engagement to Drive Future Performance
The recent outperformance was driven by the company's , where it reported that comparable sales increased ~21%, crushing expectations. For comparison, Walmart reported that comp sales grew ~6% in the same period.
Here's a look at Target's KPIs compared with those of Walmart, accompanied by management comments on what's driving the company's stellar performance.
Target reported that its 3Q comp sales over the same period last year, marking the second consecutive quarter of >20% comp growth following double digit growth in 1Q. These are astounding numbers for a company used to low to mid single digit comp growth.
The increase in comparable sales has been driven mostly by increase in average transaction amount as customers have consolidated shopping trips. Along with increased ticket, Target has maintained a healthy traffic growth despite the Covid-19 related restrictions.
The same cannot be said for Walmart, whose comp sales are shown below.
Although Walmart U.S. comp sales growth has seen a similar bump from the pandemic, the magnitude of the comp acceleration is lower. In contrast to Target, Walmart has seen traffic declining for the past three consecutive quarters, with double digit declines in the last two.
Digital / eCommerce Sales
Target reported that its digital comparable sales increased 155% in 3Q, contributing 10.9 percentage points to overall comp sales growth.
Store-originated comparable sales grew 9.9% in the third quarter following 10.9% growth in 2Q.
Management specifically called out the strength in store-originated sales at a time when digital shopping was at its peak:
It's worth pausing to acknowledge that at just under 11%, this store-only comp stacks up as one of the best in our history and yet, it happened at a time when American consumers are adopting digital shopping like never before.
Compare this to Walmart, where eCommerce sales grew 79.0% in the third quarter and contributed 5.7% of the 6.4% overall comp growth.
From the data above, we can note that in addition delivering higher digital sales growth as compared to Walmart, Target has also been able to drive double digit growth in store-originated comp sales as well has healthy overall traffic growth. Now we'll look at management comments from earnings transcripts to try to understand what's driving this performance.
Management comments across the earnings calls from the first three quarters of the year suggest that a key factor driving Target's performance is extraordinary market share gains:
As we evaluate these category trends relative to overall U.S. retail and on a category-by-category basis, we are seeing unprecedented share gains across every measure.
We mentioned in the first quarter that we had already gained a year's worth of market share in the quarter alone. Rather than slowing down, our share gains accelerated in the second quarter, and we gained double the dollars compared with the first quarter, bringing our year-to-date share gains to more than $5 billion.
And importantly, in a time where virtually nothing has stayed consistent, the one reliable through line across weeks and product categories has been consistent share gains throughout the year.
This unprecedented growth, both in the quarter and the year, has been driven by meaningful share gains across every one of our core categories as guests increasingly rely on Target to reliably and safely serve their wants and needs.
Some of the share gains, especially in the earlier part of the year, were driven by Covid-19 related mandatory closures of non-essential businesses which helped larger retailers:
Clearly, in portions of our business, share statistics reflect the fact that nonessential retailers across the country have remained largely closed.
In addition to benefiting from non-essential store closures, Target has also capitalized on Covid-19 driven changes in behaviors. In response to the pandemic, consumers have and are shopping larger baskets at fewer locations. Target's multi-category portfolio has been an for consumers in this environment.
The other behavioral change that Target has benefited from is the accelerated adoption of ecommerce. Over the past few years, Target has made into its digital channels, which have paid off massively this year. Target reported that it added new digital customers in the first half of this year.
The hallmark of Target's digital strategy has been to position its stores as fulfillment hubs, giving it the across channels in response to changing customer preferences. Management has often emphasized how this store-based fulfilment strategy is key to the company's business model:
Store-based fulfillment is uniquely suited to our business model because of the way it fits within our overall strategy. In particular, it aligns with our merchandising approach, which is based on curation, both in our stores and online assortments. As a result, the majority of our digital demand is driven by items that are already available in our stores, which positions us to efficiently rely on those locations to fulfill the demand.
This provided by Target's store-based fulfilment model has been key to it's success this year as demand for digital channels skyrocketed.
Target reported that it added new digital customers in the first half of this year.
Target's same-day services, which include store pick-up, drive-up, and Shipt same-day delivery, had been doing well even before the pandemic disrupted people's lives. Following the pandemic, the demand for these services exploded — after growing 90% year over year in 2019, same day services grew , , and this year.
Target noted that in 3Q20, ~, and were fulfilled by stores.
All in all, Target's multicategory portfolio combined with the convenience and speed of its digital channels are key factors that have driven the growth.
Looking Forward: Increased Engagement to Drive Future Performance
A key advantage of Target's store as fulfilment hub model and focus on same-day services is the lower cost of fulfilment as compared to home-delivery. However, Target management has often that the more important benefit from digital sales is that they drive increased engagement and incremental sales across the whole business:
Our most recent data indicates that a multichannel guest spends 4x as much as a store-only guest and 10x as much as a digital-only guest. Our research also continues to validate that after a guest tries Drive Up for the first time, we see a nearly 30% increase in their overall spending, including an increase in their conventional store shopping. It's particularly notable that this increase in store shopping is occurring despite the unusual environment in which consumers are minimizing time spent in public places. However, the data certainly provides some additional context for the unprecedented growth of more than 10% in conventional store sales we reported this quarter.
Moreover, management noted in 2Q that it was seeing higher engagement from the newer customer cohort.
As we gain new digital guests in unprecedented numbers, we are also seeing higher engagement from these guests than we've seen in the past. Specifically, among our new digital guests in the first quarter, we've seen nearly double the rate of repeat purchases within 7 days compared with a year ago. And the rate of repeat purchases in the intervening 90 days has been fully double what we measured a year ago.
On the 1Q20 earnings call management identified how engaging with customers at times when shopping habits change can drive long-term loyalty:
...the thing I'm most excited about on the digital front...is just the opportunity we have to capture relevance with guests as their shopping habits change. We know over the long run, when guest behavior changes...we want to show up because that's when shopping habits can change. Back to college, the first time you move into your new home, those milestones matter to us as a retailer and always have because that's when shopping habits can change. And I think across America right now, we're seeing an acceleration in the change of shopping habits as it relates to digital. And the way we've shown up with 280-plus percent growth in digital in April means we're capturing a lot of that mind share and those new routines as they're forming.
It would be fair to say that customers' shopping habits have changed significantly this year, and will continue to change throughout the holiday shopping season and beyond.
Target continues to further improve the value proposition of its digital offerings — they have fresh, refrigerated and frozen items to their Pick Up and Drive Up assortment across 1,600 locations across the country, and continues to add to this assortment as well. These additions should drive this holiday season.
With it's best-in-class digital services and curated multicategory assortment, Target is attracting an extraordinarily large number of customers since the start of the pandemic. These customers are than ever at a time when shopping habits are changing, which should drive long-term loyalty for these customers. And these customers are engaged across various channels, which makes them even more valuable.
Target will face tough comps in the coming quarters especially once the impact from the vaccines starts to slow down the spread of the virus and spending shifts back to travel and out-of-home entertainment. However, the consumer mind share and the market share that it will have gained until that time sets it up for a bright future.
(note: this article & data accompanying data visualizations were created using Unhedged's interactive, data-rich content creation tools - please reach out to firstname.lastname@example.org for a brief demo!)