Why CPG Brands Must Aim to Win on Target

While Walmart and Amazon captured more headlines during 2020, it was the often-underestimated Target that pulled off an almost flawless performance amidst the pandemic’s turbulent retail environment. In August 2019, I wrote the article “Why Your CPG Brand Needs a Target E-commerce Strategy.” Since then, Target’s influence in the e-commerce and CPG space has grown significantly, as consumer trends stemming from COVID-19 have largely benefitted the Minneapolis-based retailer.

This article will serve as a follow-up by highlighting the key developments Target has made since the previous one, which was published before the COVID-19 pandemic. It will also further explain why the retailer should be a major focus for all CPG e-commerce teams, and it will provide a prediction for the company’s future growth.

Peak Pandemic Performance

While many retail competitors temporarily closed and saw sales drop during the height of the pandemic, Target experienced record growth in 2020 and may actually emerge stronger because of COVID-19. Last fiscal year, the big-box retailer grew its sales by more than $15 billion, more than the previous 11 years combined. Digital sales accounted for $10 billion of this growth, driven by a 235 percent increase in same-day services. Sales from same-day services reached a total of $7 billion in FY2020, surpassing the previous year’s entire digital sales. Overall, Target had approximately $9 billion in market share gains last fiscal year across its multi-category portfolio.

Stores as Shopping & Fulfillment Hubs

The key to Target’s standout performance in 2020 was its previous decision to make stores the cornerstone of its digital sales, using them as fulfillment centers for shipping items and as destinations where customers could pick up their online orders. The alternative – to build an expensive network of e-commerce fulfillment centers – was not scalable for the retailer, and the economics of this option were less than ideal. Instead, Target adopted a unique “stores as hubs” model, which enables it to use its stores as showrooms and service centers but also as hubs for digital fulfillment.

This gave the retailer a competitive edge during the pandemic and allowed it to meet the exploding guest demand for its same-day services. Because of Target’s more flexible operating model, 95 percent of its more than $92 billion in total sales last year were fulfilled by its stores. This store-driven growth is translating to long-standing bottom-line performance for the retailer.

Building for the Future

On the heels of a nearly flawless performance last year, Target announced that it would be investing $4 billion annually over the next few years to build on its momentum, retain its substantial market share gains, and drive its long-term growth. The retailer plans to open 30-40 stores a year, with a focus on urban and dense suburban markets as well as college campuses. It will remodel 150 stores by this year’s holiday season, growing to more than 200 remodels a year starting in 2022. The retailer will also be making several improvements to its same-day services, such as adding more fresh food, making alcoholic beverage pickup available in 800 more stores, and implementing more options for Drive Up guests to personalize their experiences.

To support its stores’ continued growth, Target will open four new regional distribution centers by the end of 2022, with the first two buildings slated to open later this year in the high-volume markets of Chicago and New Jersey. It will also open five new sortation centers by the end of 2021, with additional openings planned for 2022 and beyond. These facilities will be built after the pilot sortation center that Target opened in Minneapolis in 2020, and they’ll utilize the technologies and services that the retailer obtained through its acquisitions of Grand Junction, Deliv and Shipt. By removing the sorting process from the backrooms of stores, Target hopes for more efficiency in its shipping processes and even faster delivery for its guests.

Growth in Grocery

Last year, food and beverage accounted for 20 percent of Target’s sales, but that number will likely climb as the retailer increases investments in this area. In Q2 of this fiscal year, Target’s comp sales in the food and beverage category grew by “the low double digits,” second only to the apparel category, which also saw double-digit growth. This growth has been driven by the increased popularity of the retailer’s same-day services, as well as the addition of 5,000 more items, including adult beverages, fresh produce and meal kits, available through Drive Up and Pick Up.

Target’s owned brands, which in grocery include the two-year-old Good & Gather label and the Favorite Day label that debuted in April, have further lifted its sales in the category. Good & Gather generated $2 billion in sales in 2020, and now includes Signature and Plant Based lines, for a total of 2,000+ products and counting. Building on the success of Good & Gather, Favorite Day features more than 700 high-quality, carefully crafted items across bakery, snacks, candy, ice cream, cake decorating supplies, and more. The company’s expanding roster of private labels is a “huge part” of its strategic imperative, according to Chief Growth Officer Christina Hennington.

Updates to Executive Leadership Team

This past February, amid strong sales performance and continued investments to acquire more market share, Target announced significant updates to its executive leadership team that will “create new opportunities for key leaders to bring their knowledge and experiences to different areas of the business” – particularly food and beverage and e-commerce. Rick Gomez, who has been with Target since 2013, was named executive vice president and chief food and beverage officer. Gomez succeeds 15-year Target veteran Stephanie Lundquist, former president of food and beverage, who announced her departure from the organization earlier this year. Cara Sylvester, who joined Target in 2007 and previously served as senior vice president of home, was promoted to Gomez’s former role of executive vice president and chief marketing and digital officer.

The company also named Katie Boylan as executive vice president and chief communications officer and Christina Hennington as executive vice president and chief growth officer, a new role for the company. In this new role, Hennington will “identify and pursue revenue-generating strategies.” Jill Sando will take on Hennington’s role and become executive vice president and chief merchandising officer. According to Brian Cornell, Target’s chairman and CEO, “these moves will drive Target’s position as a best-in-class retailer today and well into the future.”

“On Target” For Future Growth?

As the COVID-19 pandemic roars past its one and a half year anniversary and more adult Americans are vaccinated, will the retailer continue to be “on target” for future growth?

Initial signs point to yes, thanks in large part to Target’s unique operating model. In the retailer’s Q1 2021 earnings call, Cornell brought up two contrasting scenarios that demonstrate the flexibility of its model and how its stores and digital channels work together to drive guest engagements. During last year’s call, the company was highlighting a digital comp of 141 percent, driven by more than 275 percent growth in same-day services. Store comps also increased, but only by about 1 percent. Compare that to Q1 of this year, when shoppers began feeling more comfortable returning to stores. Target’s store comp increased 18 percent, accounting for the vast majority of its growth. At the same time, however, the retailer’s digital comp sales also grew 50 percent on top of last year’s enormous number. As Cornell said, “This is the power of ‘and.’ Guests go to Target because of our stores and our digital options. Not one versus the other.”

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