By Neil Saunders
Another excellent set of results from Target underlines the fact growth is available in the consumer economy and retailers that inspire and engage customers can grab a slice of it. Target has outperformed the overall retail sector over the third quarter, showing that it is taking market share from rivals.
At the heart of Target’s success is its assortment. The company’s ranges across all its departments are desirable and affordable. As obvious as this sounds, it is the result of a tremendous amount of hard work and innovation, especially in terms of the development of own brands. Our data shows that Target’s customer share has risen across most categories and that it is persuading existing customers to buy from multiple departments.
Target also has ensured that its products are accessible to consumers, no matter how they want to buy them. Store improvements have made the physical shopping experience easier and more pleasant. The digital experience is functional and offers plenty of fulfillment options for shoppers with a variety of needs. Target has been particularly savvy in nudging consumers to pick up online orders in stores, whether from the counter inside the shop or by driving up outside. This dual approach, along with the focus on products, is why Target has delivered a 31% uplift in online sales alongside a 3% rise in store sales.
Target hits the bull’s eye with:
• Desirable, affordable product assortment across all departments, including high-margin private labels
• Omnichannel functionality, including BOPIS
• Creation of occasions and selling opportunities
• Store refurbishments
Although its online channel now accounts for a greater share of sales than ever (7.5% of revenue vs. 6.0% last year), Target, unlike many retailers, has not seen a negative impact to its bottom line. In fact, over the quarter, net income increased by almost 15%, underpinned by a 22% uplift in operating profit. Much of this is because of the high frequency of orders fulfilled from stores, which is more cost-effective than last-mile shipping. However, Target also deserves credit for streamlining operations and for pushing higher-margin own brand product more heavily.
Something else that deserves to be called out is Target’s approach to creating occasions and selling opportunities. Recently it has done this with its limited-time 20th anniversary collection of products and with the expansion of the Disney franchise into a handful of stores. These initiatives generate interest among consumers and give people an excuse to visit Target whether it be online or in-store. While such occasions do not make a major contribution to growth, they provide the icing on the cake.
Another factor driving spending is Target’s store refurbishments. This improvement program is now mature, but Target continues to benefit from it as it revamps more shops. Our data show that where improvements have been made, dwell times, average visitation frequency, cross-category shopping levels, and average basket size all rise. Creating a compelling and engaging shopping experience is one reason Target stores remain a destination for large numbers of American consumers.
During the quarter, Target launched its Good & Gather brand in grocery. The range refresh is not yet complete; more products are scheduled to launch over the coming months. It is too early to provide a full assessment, but our qualitative consumer research and channel checks point to this being a positive change that will help Target drive more growth in grocery.
Looking ahead, the outlook remains positive. Target is a retailer that has its act together.
Neil Saunders is managing director of research firm GlobalData Retail.