Target plans to bolster delivery options, execs say

Target Corp. will invest in its delivery options in 2018, offering free two-day delivery for "hundreds of thousands" of items and extending same-day delivery to all New York City boroughs and other big-city markets, Target CEO and Chairman Brian Cornell said March 6.

The general merchandiser's two-day delivery option will require no membership or extra fees, Cornell said. That is compared to Inc.'s Prime membership that costs members $99 a year for two-day delivery. The Target service will, however, require that customers spend at least $35 or pay with the company's REDcard program, Target said in a press release issued later in the day.

Target's same-day delivery expansion will bring the service from four locations in New York City to 25, reaching all boroughs of the city by the fiscal fourth quarter. The same-day delivery option will also be rolled out to other major markets including Boston, Chicago, San Francisco and Washington, D.C., he said. Drive Up, a curbside pickup program, will also expand to nearly 1,000 stores from 50 during 2018.

Cornell made the announcements during Target's conference call and investor day following the release of fiscal fourth-quarter and fiscal full-year 2017 earnings. Target posted a year-over-year 10% rise in sales to $22.77 billion, but a 5.8% decline in adjusted EPS to $1.37 for the fiscal fourth quarter ended Feb. 3. The company's gross margin fell to 26.2% in the fiscal fourth quarter from 26.6% in 2016, which the company attributed to "pressure from digital fulfillment costs." The company also said it experienced higher compensation costs for its workers.

"We made significant investments in the last year," Cornell said during the call. "We expect to see gross margin rates stabilize, if not slightly improve, in 2018, offset by some of the investments we'll make."

Target made two acquisitions in 2017 related to its delivery capability. In August 2017, the company said it would acquire Grand Junction, a a delivery services firm. On Dec. 13, 2017, Target announced that it would acquire same-day delivery platform Shipt Inc. for $550 million in cash. Target has expanded Shipt's same-day delivery service to multiple markets, most recently Louisiana, according to a Feb. 27 announcement. Shorter delivery times are becoming increasingly important for retailers, S&P Global Market Intelligence has reported.

For at least the near term, Target will focus on its stores as points to begin the delivery process, rather than fulfillment centers, said John Mulligan, Target's chief operating officer and executive vice president, during the call.

"We're fortunate to to have more than 1,800 stores in really great locations, prime real estate just down the street from our guests, so we can deliver it faster, nearly two days faster than if we'd sent it from a regional fulfillment center," Mulligan said.

Not only can delivering from stores be quicker, building regional fulfillment centers would be expensive, he said.

"At some point, we'll need to build more upstream facilities just to manage volume, but we're just not there yet," Mulligan said. "Using our stores to fulfill millions of orders lets us delay those investments or avoid some of them altogether, and because our stores are the fastest and most efficient fulfillment method, they'll continue to be our preferred shipping point in the long run."

Target also announced the remodel of 325 stores in 2018, up from 110 in 2017. By 2020, the company expects to have completed 1,000 remodels, compared to the commitment of 600 the company gave a year ago. The investment into key markets including Chicago, Los Angeles and Minneapolis will "exceed several hundred million dollars," Cornell said.

Those investments include the store remodels and the opening of other small-format stores in urban areas, he said.

The company will also raise its minimum wage to $12 an hour this spring, part of a five-year effort announced in September 2017 to bring the general merchandiser's minimum wage to $15 an hour by 2020. At the time, Target said it would bump its minimum wage to $11 an hour.