Brick-and-mortar retailers are facing pressure derived from digitalization at both ends – change in consumer behavior and technology required to satisfy a more complex operation. They must reinvent itself in everything they do. Early adopters seem to survive as they found a creative way to connect offline and online. The question is how online channel affect its traditional warehouse or store operation? What adjustments are due to enable its new strategy?
Consumers are shifting their non-food merchandise shopping behavior towards online; therefore, traditional 145,000 square-foot big box stores are now too large. In-store sales transaction did not sufficiently justify fixed operating costs – rent, labor and utility. Critical to its survival, retailers must adjust their way-to-market and refresh its brick-and-mortar sales. In 2013, Target revamped target.com and launched Cartwheel application to stay relevant to emerging online shoppers by integrating online to offline experience. The company renovated their physical stores and introduced flexible format concept in which each store has unique assortment catered to surrounding community. Moreover, by 2019 it aims to open 75 small format stores, ranging from 12,00-80,000 square-foot, which are significantly smaller than those original ones. Since Target’s unique offer is its large assortment, it has to find ways to best utilize limited space in smaller store format. In recent earning calls, Target discussed a warehouse technology that would enable inner pack picking so that stores would receive smaller amount of the same SKU but a broader variety of SKUs. As more general merchandise products, typically yield higher gross margin than grocery product, are being purchased more online, the company must find a way to compensate for the margins decline because of the shift in sales mix.
Brick-and-click retailers typically fulfill online orders out of their stores and dispatch last mile delivery or offer in-store pick-up to customers. Target was able to avoid building warehouses, but this has resulted in faster inventory depletion and out-of-stock issue in the store. Last year, it ended up with a 4% increase in inventory level compared to previous year. Although, it was intentionally to solve customers’ complaints and sale opportunity loss issues, but the result was the higher tied-up working capital in physical products. It is crucial to have a clear integrated picture along the chain starting from finished goods at its manufacturer until products leaving our store so that it could effectively manage inventory. In the past, the company tend to push inventory liability upstream to avoid the holding cost; however, today’s data driven supply chain would make it possible for the company to figure out a sustainable operating model to balance between stocking in warehouse and store to accommodate customers demand for both in-store and online shopping. It should find the right integrated technology to predict sales before they happen and perform ‘predictive shipping’. According to Target’s annual report, the company is now working to reduce safety stocks as well as out-of-stocks and improve speed to support online growth by investing in smart supply chain network transformation. An example of such technology is RFID or Radio-frequency identification that Target has rolled out since late 2015. RFID enables Target to have a near-complete store inventory and as real time as it ever had. Accurate and precise inventory planning is necessary as click & collect volume increases, stores require larger space in their back room for holding these online orders.
Although Target’s longstanding business model has been inevitably affected by digitalization trend, its only way out is to double down on digitalized supply chain management and technology to facilitate an increasingly sophisticated operation.
As Target’s e-commerce grows, does it make sense to further leverage on existing store network causing complication in supply chain or should it rely solely on dedicated fulfillment centers and develop last-mile delivery capability separately?
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Photos credits: Target corporate website