As Amazon continues to dominate e-commerce, major retailers are stepping up their investments hoping to benefit from shifting consumer demands. E-commerce sales topped $790 billion in 2020, according to IBM’s U.S. Retail Index, and with them expected to continue to grow, more retailers are shifting more of their resources to hold onto the customers they gained in 2020, and hopefully land a few more.
Walmart (NYSE: WMT), Target (NYSE: TGT), Best Buy (NYSE: BBY) and Disney (NYSE: DIS) – already among the nation’s largest e-commerce players – are among the retailers making large investments in these areas. And that doesn’t even include investments from Amazon (NASDAQ: AMZN), which remains the largest e-commerce player with nearly 40% market share.
Digital comparable sales for Minneapolis-based Target rose by 118% over the year-earlier period, the company said in its Q4 earnings call on Tuesday. Digital accounted for two-thirds of the company’s overall comp growth in the quarter, Target said. Comparable store sales rose 6.9%, the company reported. Target’s same-day services, which include pickups of online orders at stores, drive-up pickups and its Shipt delivery services, rose 212% year-over-year. More than 95% of Target’s fourth-quarter sales were fulfilled by its stores, according to the company.
To continue to accelerate that digital growth, Target will invest $4 billion each year for several years in the company. This investment will include technology aimed at speeding up store restocking, new distribution centers, and 30-40 new stores each year, many of them “small-format” locations.
CEO Brian Cornell said Target will continue to build out its partnerships with brands such as Levi’s, and will be adding Ulta Beauty locations inside about 100 stores this year and selling the brand’s products on target.com. The investments are part of a differentiated services approach the company chose back in 2016.
“We could just as easily have constructed additional fulfillment centers and driven the shift to digital sales with more ship-to-home capacity, but as you know, the economics were terrible and we wouldn’t have been differentiated,” Cornell said on the earnings call. “In short, we didn’t see the textbook solution as scalable or as likely to do what we’ve done, namely set the groundwork for years of guest satisfaction and brand loyalty.”
Taking the long view created some early pain for the retailer, but Cornell believes with the billions in investments, it will be well positioned to hold and even grow its digital business.
“As we designed our strategy and invested accordingly, we relentlessly asked ourselves what products and services those stores should offer, where they should be located, how their operations should be tailored to meet neighborhood needs, and ultimately how to make our stores work together with all of our other assets as one shopping platform that would keep guests turning to Target, however they want to shop,” Cornell said.
“In answering those questions, we did two things at once. We placed the physical store more firmly at the center of our omnichannel platform, and we created a durable, sustainable and scalable business model that puts Target on a road of our own. Our goal was to use our proximity – [with] nearly 1,900 stores within 10 miles of the vast majority of the U.S. consumers – to offer the fastest and easiest digital fulfillment in retail, and the capabilities we’ve built to become America’s easiest place to shop also cracked the essential question of how to grow our digital sales exponentially while maintaining the overall profitability of our business.”
Cornell said same-day services saw a 600% growth in drive-up pickup in 2020, and Shipt, Target’s same-day delivery business, grew more than 300%.
Like Target, Walmart is investing heavily in its ability to deliver on e-commerce. The Bentonville, Arkansas, retailer said it would invest $14 billion in capital expenditures, with much of that coming on the supply chain side. Walmart officials expect e-commerce revenue to top $100 billion in the next few years.
The investments are designed to bear fruit over the next few years, “not the next 12 months,” Doug McMillon, Walmart’s president and CEO, said on the Feb. 18 investor call.
“Investments Walmart made over the past decade to boost its online business, like curbside pickup and speedy delivery, meant customers could purchase just about anything contactlessly, should they desire,” wrote FreightWaves senior analyst Andrew Cox in his Point of Sale newsletter on Feb. 23. “In 2020, online sales shared the continued momentum in general merchandise, while grocery pickup and delivery benefited from Walmart’s scale and continued strong execution across contactless fulfillment options.”
Brett Biggs, executive vice president and chief financial officer for Walmart, said on the earnings call, “From a position of great strength, we are now going to accelerate investments in supply chain, technology, automation and our associates, allowing us to stay ahead of shifts in customer behavior.”
Biggs added that Walmart Fulfillment Services is expected to gain steam and become a “larger portion of profit growth in the future, including [fiscal year] ’22.”
Walmart, though, faced challenges due to digital growth, and some of the $14 billion will go toward alleviating those.
“As we’ve added pickup and delivery capabilities, we’ve experienced a lot of growth, but too often we aren’t able to meet the demand. This is a good problem to have, but we need to solve it quickly, given how trends accelerated as a result of the pandemic,” McMillon said. “So we are going to invest more aggressively in capacity and automation to position ourselves to earn the primary destination position with customers. We are absolutely playing offense here.”
That offense means building speed and efficiency behind the scenes that McMillon believes will result in a better customer experience.
Best Buy is another retailer working to improve its e-commerce experience. The electronic retailer reported 90% growth in Q4 online sales to $6.7 billion, which accounted for 43% of its domestic sales.
“Our stores played a pivotal role in the fulfillment of these sales, as almost two-thirds of our online revenue was either picked up in-store or curbside, shipped from a store or delivered by a store employee,” CEO Corie Barry said, noting that ship-to-home volume was up 38% and same-day shipping volume was up 376% with Best Buy employees delivering more than 1 million units.
Barry pointed out that Best Buy stores saw a 15% reduction in foot traffic in Q4 but roughly 35% of stores fulfilled 70% of ship-from-store orders.
“We believe that we can achieve similar results consolidating volume, using a smaller group of stores as hubs over time. In addition, in a subset of these stores, we plan to reduce the sales floor square footage and install warehouse-grade packaging station equipment and supplies,” Barry said.
Best Buy plans to shrink retail floor space from 27,000 square feet to approximately 15,000 square feet in some locations, utilizing the space instead for filling or packing online orders.
Even Disney on Wednesday announced it would close about 20% of its retail locations in 2021 and place more of a focus on its e-commerce business.
“While consumer behavior has shifted toward online shopping, the global pandemic has changed what consumers expect from a retailer,” said Stephanie Young, president of Consumer Products Games and Publishing for Disney, said in a statement.