Target's New Online Strategy: Less Is More

By Khadeeja Safdar Published May 15, 2017 Features Dow Jones Newswires

 

Target Corp. expects to get more with less. The Minneapolis-based retailer, under pressure after issuing a dismal profit warning for the year, has passed on potential acquisitions to focus on improving in-store sales and online margins.

The shift comes as competitors like Wal-Mart Stores Inc. are investing heavily in e-commerce operations, snapping up companies to help diversify their offerings. Target, meanwhile, has revamped some e-commerce projects, cut ties with digital partners and walked away from prospective deals, according to people familiar with the talks.

Target says it isn't looking to be a soup-to-nuts retailer. "We're not trying to be the catalog of everything," said digital chief Mike McNamara. "We aren't going to add products to our website and stores just because they exist."

The company has been squeezed in recent years by Amazon.com Inc. as shopping moves online, and by Wal-Mart, which has remodeled stores and lowered prices. Sales at Target stores open at least a year have fallen for three straight quarters. In February, the company said its 2017 profit could be as much as 25% lower than Wall Street estimates.

Target's stock has fallen about 20% this year, while Wal-Mart's has climbed 11% and Amazon is up 27%. Target is slated to report first-quarter results on Wednesday.

As those two companies have expanded into new product categories or bought businesses, Target has been more cautious. It remained on the sidelines when Wal-Mart paid $3.3 billion for discount retailer Jet.com last fall. Executives considered Jet overpriced and a poor fit with Target CEO Brian Cornell's strategy to focus on high-margin categories such as apparel and home décor, according to people familiar with internal discussions.

Instead, Target pursued a more traditional deal. The retailer, which has struggled with declining sales in its food department, was in advanced talks last summer to buy Sprouts Farmers Market Inc., a Phoenix-based chain of about 250 grocery stores. But it eventually walked away, people familiar with the discussions say. Sprouts declined to comment.

More recently, it looked into acquiring an e-commerce player, including Boxed.com, an online service offering household essentials in bulk, people familiar with the discussions say. Talks with Boxed didn't go anywhere, the people say. Boxed, which has raised more than $130 million in funding, didn't respond to requests for comment.

"Thinking about possible mergers and acquisitions is something we do every day as a regular course of business," said Mr. McNamara, who joined Target in 2015 and took over digital operations last September.

Target has been a latecomer to some aspects of e-commerce and digital remains only a sliver of company sales. Its online business generated about $3 billion last year, accounting for 4.4% of total sales. Digital sales grew 27% in 2016, falling short of Target's goal of 40% growth.

The company outsourced nearly all of its online operations to Amazon in 2001, before ending the relationship in 2011. Last year, it built a new infrastructure for its website after experiencing technical problems during busy shopping times.

Target has begun to centralize decision-making for digital projects. Earlier this year, it eliminated an in-house startup that was developing a marketplace for third-party sellers. The platform, internally called Goldfish, was to feature products from outside sellers and function separately from Target.com, according to people familiar with the project. Such marketplaces account for a substantial portion of the merchandise now sold on Amazon.com and Walmart.com.

People hired to work on Goldfish estimated it would generate $1 billion in sales over three years, but Target pulled the plug after learning about its weak holiday results. Engineers who had been hired at its Sunnyvale, Calif., office a few weeks earlier were laid off, the people said.

Target also dissolved a partnership with Curbside, an app for picking up orders outside stores. Other projects, including a robot-enabled store prototype and a food-research lab, were also axed. The company's chief strategy and innovation officer, Casey Carl, departed earlier this month after nearly 20 years at the retailer. Target's marketing, digital and grocery chiefs have also left the company in the past year.

Under Mr. McNamara, Target is moving forward on select digital initiatives. The company is working on its own curbside-pickup service, according to a person familiar with the plans. Executives have also discussed the possibility of developing another marketplace with a limited selection of products.

Target has been testing a program that would let customers fill up a box and have it delivered within two days for a flat fee. Last week, it increased the shipping minimum from $25 to $35 -- matching Wal-Mart. Both changes are aimed at encouraging customers to buy more items at one time, thereby lowering the retailer's shipping costs.

But executives have moved much of their attention to restoring store traffic, which has fallen as customers shift to online shopping. Target plans to invest $7 billion over the next three years to improve stores, launch exclusive brands and develop digital and supply-chain capabilities. It also expects to sacrifice about $1 billion of potential profit to lower prices and drive lower-margin digital sales.

"The future of retail is digital, but people will also be shopping in stores for a long, long time," Mr. Cornell said at a conference in March. "Our focus on innovation has to be something we can realize over the next three or four years inside the core business."