Target is chasing bigger profits from e-commerce with new delivery hubs, and a fleet of drivers

MINNEAPOLIS – Every day, hundreds of chauffeurs park at a delivery center in Target’s hometown and pack their personal vehicle boxes for delivery to customers.

Soon, the large retailer will have similar centers and temporary workers in three other locations, two in the greater Chicago area and one near Denver, to get online orders to the doors faster and at a lower cost. The new centers are part of a growing push among retailers including Walmart to make e-commerce more profitable as shoppers spend online and expect purchases to arrive at their doors within a day or even hours.

Since testing began at the Minneapolis facility in late 2020, Target has added five similar hubs where off-the-shelf packages are sorted and bundled together to create dense delivery routes. The other three are scheduled to open by the end of January.

“Our goal is to meet the guest where they are, when they want, and how they want,” said COO John Mulligan in an interview. “So if they want us to ship something to their homes, we want to make that as efficient as possible.”

E-commerce now drives nearly 20% of Target’s sales, with more than half coming from same-day services like curbside pickup and the rest from home shipping. However, due to labor and transportation costs, these sales are less profitable than when shoppers visit target stores, take items off the shelves and take them home.

Like other retailers, Target has been cutting costs to fulfill online orders — a goal that has taken on new urgency for retailers amid soaring fuel prices.

Delivery centers, called sorting centers, receive online filled orders from stores twice a day. Packages that go to the same city or neighboring neighborhoods are bundled together to deliver more to customers one day after placing an order. An increasing number of sorted packages are then delivered by contract workers who drive to Shipt, a delivery start target obtained in 2017. Some are also sorted and delivered by national transportation partners such as FedEx – generally to addresses as far away as another region. metro or country.

Over the past five years, Target has transformed backyard storage rooms into warehouses where employees pick and pack the most orders. It acquired Deliv and Grand Junction, two companies with software that helps determine which store fulfills an online order and design dense delivery methods. The devices are now also helping direct some workers to the best paths to retrieve items from store shelves.

But with growth came new challenges. Parcels started piling up in back rooms and staff had to wait for national carriers to get them back every day. Carriers had to stop across regions. For example, trucks had to collect packages from 43 stores and fulfillment centers in Minneapolis before the sorting center opened—which took more time and work.

Target’s first sorting center was built in Minneapolis in a former Sears warehouse. Packages are delivered from the center by more than 2,000 Shipt drivers or carrier partners. The center started delivering 600 parcels per day and now has the capacity to deliver 50,000 parcels per day.

With its three new hubs, Mulligan said, Target will have nine screening centers — with more expected in the coming years. Besides Minneapolis, its hubs are near Atlanta, Philadelphia, Dallas, Austin, Texas and Houston. In the first quarter, they handled 4.5 million packages.

Mulligan said Target is still trying to determine how much sorting centers reduce shipping costs. In March, he said Target had already reduced its average digital fulfillment cost per unit by more than 50% over the past three years.

Ultimately, he said, the company wanted to shorten the travel distance of packages by sourcing ordered items at stores close to the customer.

Target is also trialling a new concept at its Minneapolis location: Some Shipt drivers are using delivery vehicles that can hold up to eight times as many packages per route.

Other retailers are also working to make e-commerce more profitable. In addition to building high-tech fulfillment centers, Walmart uses its stores as warehouses and employs contract workers to deliver packages. It offers online purchases to Home Depot, Chico’s, and other companies as part of a new business called GoLocal.

Another way to target delivery costs is to encourage customers to use Drive Up, a curbside pickup service where shoppers retrieve their purchases in the parking lot. It costs the company 90% less to meet if they ship packages from a warehouse, Mark Schindel, chief warehouse officer, said.

For Target, the move to improve profitability comes at a critical time. The retailer has trimmed its forecast for operating margins twice in recent months, as it has been warned that it will have to cancel orders and increase write-downs to get rid of unwanted merchandise it has stockpiled during the Covid pandemic.

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