Target: Digitalization is a double-edged sword

Target's longstanding business model has been challenged by e-commerce growth. And its only way out is to leverage on digitalized supply chain management and technology.

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?[1] 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[2]. 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[3], 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[4]. 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[5]. 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[6]. 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[7]. 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[8], 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[9]. 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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[1] David S. Evans and Richard Schmalensee, “The Best Retailers Combine Bricks and Clicks,” Harvard Business Review, May 30, 2016, https://hbr.org/2016/05/the-best-retailers-combine-bricks-and-clicks, accessed November 2017

[2] Sharon Edelson, “Target to Spend Billions on Reinvention in Tough Environment,” WWD, March 1, 2017, http://wwd.com/business-news/retail/target-to-spend-billions-reinvention-in-tough-environment-10824205/, accessed November 2017

[3] Daniel Keyes, “Target opens new small-format stores,” Business Insider, Oct 23, 2017, http://www.businessinsider.com/target-opens-new-small-format-stores-2017-10, accessed November 2017

[4] Knut Alicke, Daniel Rexhausen, and Andreas Seyfert, “Supply Chain 4.0 in consumer goods,” McKinsey & Company, April 2017, https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/supply-chain-4-0-in-consumer-goods, accessed November 2017

[5] Marc Hamstra, “Supply-chain changes drive results at Target, Whole Foods,” Supermarket News, March 3, 2017, http://www.supermarketnews.com/retail-financial/supply-chain-changes-drive-results-target-whole-foods, accessed November 2017

[6] Andrew Meola, “Target is making a major change to its stores,” Business Insider, March 4, 2016, http://www.businessinsider.com/target-stores-changing-for-e-commerce-online-focus-2016-3, accessed November 2017

[7] Loretta Chao, “Target Says Online Sales Surge Tied to Store Inventories,” The Wall Street Journal, February 24, 2016, https://www.wsj.com/articles/target-says-online-sales-surge-tied-to-store-inventories-1456348233, accessed November 2017

[8] Target, 2016 Annual Report, p. 25, https://corporate.target.com/_media/TargetCorp/annualreports/2016/pdfs/Target-2016-Annual-Report.pdf?ext=.pdf, accessed November 2017

[9] Target, “RFID: New Tag Technology Will Elevate Target’s Guest Experience,” May 19, 2015, https://corporate.target.com/article/2015/05/keri-jones-perspectives-rfid, accessed November 2017

Photos credits: Target corporate website

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5 thoughts on “Target: Digitalization is a double-edged sword

  1. Thanks, Aimmy! Your post raises some key issues.

    Your closing question raises an interesting debate, and I’d like to add my perspective. On one hand, it sounds tempting to invest heavily in fulfillment centers — to your points above, this would allow Target to 1) lower its in-store inventory levels but restock before stockouts 2) streamline supplier-to-warehouse logistics, then optimize the SKU assortment of each store and 3) become nimble in its omnichannel approach, as these fulfillment centers could serve both in-store and online orders.

    However, while your point is valid that its existing store network causes supply chain complications, this brick-and-mortar presence also one of the only competitive advantages it currently has over online giants such as AMZN. Target will not beat AMZN at its own game of fulfillment centers with quick, cheap last mile delivery. One could argue that Target should leverage it’s brick-and-mortar presence (through initiatives such as in-store pickup for online purchases as you mentioned, especially for items such as clothing), as one of its greatest assets. The key for Target will be to break down these channel walls, and provide a consistent customerbrand experience across its valuable stores and growing site.

  2. Thanks for the informative article Aimmy!

    I agree that Target will have to make some changes in the future to survive in this increasingly digital world. I agree with 2 of the actions you mentioned that they are pursuing: Opening smaller store concepts and RFID. With the great recession and rise of ecommerce, Target has been hit doubly hard with customers moving to discount stores and Amazon. Opening smaller stores is a great way to combat against discount stores as they may be able to convince customers to enjoy the more convenient and satisfying experience of a mini-Target store than save a few dollars at a dollar store. Also, I think Target must embrace technology in their existing stores using RFID and other technologies to be more vigilant in their inventory management.

    I don’t think that Target should move outside of its core to build many more distribution facilities, however. I think Target should integrate its online platform into its existing store presence. This would mean encouraging more in-store pickups. But also, I think Target should make it much easier to know online exactly which products are at the local store, how many are currently in stock, and exactly which aisle to find them. By having a Target app that could allow a user to walk in a store and easily visualize exactly where desired/recommended items are would help the time-sensitive consumer have a quicker and more enjoyable in store experience.

  3. 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?

    I really appreciated your perspective on the current challenges facing Target. To address your question, I do not believe that Target should rely solely on dedicated fulfillment centers. While I understand this approach would significantly improve in store inventory management, I believe it would remove Target’s competitive advantage compared to online retailers. I think the physical design approach Target has taken to combat the change in purchasing behavior is one it should double down on while utilizing IoT technology to better manage its supply chain. I believe that the physical presence of the store with a catered offering to the local community will help maintain customer loyalty. If Target continues to rely on RFID’s and other censor based technologies to better inform its inventory and purchasing decisions, I believe they can iterate on their in-store experience to solidify the consumer behavior of stopping at a physical location.

  4. I think you pose an interesting question. While customer are moving online, we are starting to see many companies that started with only online purchasing models to move to brick and mortar stores. For instance, Warby Parker started out with only an online presence, sending samples of their products to consumers to test before purchasing. However, now, they have stores popping up all over the country, showing the value that customers find in brick and mortar store fronts. Given this, I do not think Target should move away from their physical stores. Instead, they should add value to the in-store customer experience, with demos and other customer service offerings that can only be accessed and appreciated in person.

  5. Great article Aimmy!

    In an ideal world, it should do both i.e. rehash existing stores as hubs/pick-up spots and build and expand dedicated fulfillment centers. Amazon and Walmart are both coming after Target’s cheese. The threat Target faces with the shift from brick and mortar to online is existential and it should respond in full-force.

    In an offline world, store experience matters. In an online world, often the lowest price, widest selection and fastest delivery wins. Target has been able to offer a lower price for a premium selection for the offline shopper; however, if it can’t make the faster delivery trade-off and meet customer expectations with quick fulfillment for the online shopper, it will lose. This involves complex integration of supply chain systems, real-time data chaining and visibility across the entire customer lifecycle. While orchestrating this will be tough in the short-term, it is necessary if Target is to survive in the long-term.

    Therefore, Target needs to both revamp its stores as a dedicated hubs and also offer wider selections at its fulfillment centers with a complicated technology overhaul to stand a chance.

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