Target is testing a new approach to get packages to customers' doors even faster

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Target fulfills the vast majority of its online orders at its stores rather than fulfillment centers.
Target

Target wants to get online purchases to customers' doors even faster. Instead of shipping packages through carriers, the retailer will also enlist the help of its own team of dedicated delivery people.

The new approach — tested in Target's hometown of Minneapolis — will be supported by three companies that the retailer acquired. It begins with employees picking and packing orders at stores. Items are transferred from the store's backroom to a sortation center multiple times each day. Then, it will use technology it acquired from two companies, Grand Junction and Deliv, to group packages for the most efficient routes to neighborhoods. Finally, contract workers for Shipt, a same-day delivery service that Target bought in 2017, will deliver packages to customers who live in the same parts of town.

Target's strategy could help it better compete with larger and sometimes faster e-commerce rivals like Amazon and Walmart. It is an answer to customers' expectations for speed, as they use on-demand services from Uber to DoorDash. And it is an alternative to relying solely on carriers like United Parcel Service and FedEx, which have dealt with a spike in demand during the coronavirus pandemic and responded in some cases by hiking fees or limiting parcels.

“Shipping is the majority of the cost for getting a product to a guest. Shipping is the big number,” Target's chief operating officer, John Mulligan, said in an interview. “We continue to work on picking better and optimizing our pick and optimizing the batches [of packages] for the team — all of that is really important — but the key to the whole game from our perspective is to improve that ship cost.”

With the new model, Mulligan said Target can ultimately gain more control over the customer experience and make e-commerce orders more profitable.

Target opened its first sortation center in the fall, and it will support all stores in the Minneapolis-St. Paul area by the end of April. It began testing deliveries with Shipt from that facility at the end of March.

Mulligan expects the process will scale up over time. Target plans to open five more sortation centers this fiscal year and use Shipt to make deliveries around them, too. He declined to share the locations, but said the sites will be in dense, urban areas where multiple packages can be delivered to the same neighborhood.

Shipt has roughly 300,000 contractor workers who already drop off bagged groceries and other items hand-picked for a customer who pays $99 a year or $9.99 per order. Now, some of those same contract workers will drop off boxes in the Minneapolis area, too. For customers, it will look and cost no different than a delivery made by UPS or the post office.

It comes at a time when Target's online orders are soaring. Digital sales grew 145% in the most recent fiscal year, ended Jan. 30, compared with the year prior.

Its share price has risen, too. Since the start of the year, the stock is up more than 16% to a market value of $102.57 billion. In early April, it hit a 52-week high of $207.38 and the shares aren't too far below that level — even as the big-box retailer faces challenging comparisons in the year ahead.

Target is not the first to use contract workers for deliveries. Amazon has Flex and Walmart has Spark, their own networks of contract workers who use their own cars to make package deliveries.

Andre Pharand, a managing partner and a consultant for the postal and parcel industry at Accenture, said nearly every retailer is juggling higher costs and with ever-higher customer demands.

“What we're seeing is consumers are increasingly expecting more,” he said. “Fast is getting faster. Where three days was acceptable, two days now is barely acceptable. People with [Amazon] Prime are now used to same day.”

To cope, companies are tinkering with their supply chain, he said. Ideas include opening local fulfillment centers to reduce the distance a purchase needs to travel or using data and analytics to make deliveries in groups rather than as one-offs.

Over the past few years, Target has put stores — instead of giant fulfillment facilities — at the center of its e-commerce strategy. It has aimed to bring the economics of online sales more in line with those that take place at stores. About 95% of its sales last year were fulfilled at stores.

It has also promoted same-day options, called Drive Up and Order Pickup, that defray costs by having the customer retrieve their own online orders in parking lots or inside stores. Target also has free two-day shipping to homes for online purchases that are $35 or more.

Mulligan said orders through those click-and-collect services are 90% cheaper than having that product shipped from a fulfillment center. He said shipping a package from a store rather than a fulfillment center is 40% cheaper.

“We start with a place of advantaged economics,” he said. “This is just a way of continuing to improve speed, continuing to improve costs to create great value for our guests.”

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