Target said Wednesday it will spend $100 million to build a larger network of supply chain hubs to speed up and lower the cost of delivering online orders.
The retailer plans to have at least 15 of the facilities, dubbed sortation centers, by the end of January 2026. It already has opened nine, after testing the concept in its hometown of Minneapolis. The expansion will also grow Target’s workforce. On average, more than 100 people work at each sortation center.
The company is betting on e-commerce growth, despite struggling with a glut of inventory and a noticeable pullback in sales. Target lowered its holiday-quarter outlook and announced plans to cut up to $3 billion in costs over the next three years. It will report fiscal fourth-quarter earnings and its full-year expectations on Tuesday.
E-commerce sales growth has slowed for the company, too, partially because of the sharp rise during the earlier days of the pandemic, which created tough comparisons. Digital sales increased less than 1% in the most recently reported quarter, which ended in late October. That compares to nearly 29% growth in the year-ago third quarter.
This week, Target’s retail peers Walmart and Home Depot forecasted a tougher year ahead, after the pandemic-fueled sales boom and as inflation weighs on household budgets. Walmart said it expects same-store sales for its U.S. business to rise by 2% or 2.5%, excluding fuel, in the fiscal year. Home Depot said it expects sales growth for the fiscal year to be roughly flat.
Gretchen McCarthy, Target’s chief global supply chain & logistics officer, said regardless of the economic backdrop, Target has to keep up with customer expectations – namely getting online purchases conveniently and quickly.
“We are absolutely tracking consumer spending closely. We’re taking recent trends into account,” McCarthy said, pointing to the retailer’s lowered forecast.
But, she added, the delivery hubs will help Target better meet customers’ needs, whether they’re shopping online, in stores, or using a curbside pickup.
She said up to 40% of packages that go through sortation centers and get delivered by Shipt arrive at customers’ doors the next day – and Target aims to get that number higher.
Over roughly the past six years, Target has leaned into a strategy of “stores as hubs.” It has turned its approximately 1,950 stores into mini-warehouses where employees help pick and pack the majority of the company’s online orders. Nearly 97% of its total sales were fulfilled by a store in the fiscal third quarter, according to company filings.
As online sales grew, however, Target’s backrooms became crowded with packages. Target began testing sortation centers, a facility where packages arrive from about 30 to 40 nearby stores, get grouped into more efficient delivery routes, and get picked up by a third-party carrier or a vehicle of a contract worker for Shipt, a third-party delivery company that Target owns. It opened the first one in 2020 in Minneapolis.
It has opened sortation centers across major markets in Minnesota, Texas, Colorado, Illinois, Georgia, and Pennsylvania. Last month, it opened them in the Chicago and Denver areas.
By switching to the model, Target has cleared space in its backrooms and freed up time for store employees to help customers, McCarthy said. She declined to specify the savings that come from each hub, but said since the sortation centers have opened the company has saved “tens of millions of dollars in last-mile expense.”
In the coming year, she said Target expects to deliver 50 million packages through the sortation centers – up from 26 million packages in 2022.Source: CNBC