Target is doubling down on a key advantage it has over Amazon - but one analyst is sounding the alarm
- Target is betting on meeting shoppers' needs with a variety of fulfillment strategies.
- UBS analyst Michael Lasser pointed to Target's improved fulfillment options in a note on Wednesday.
- But he added a word of caution that the focus on in-store fulfillment could "cannibalize in store sales."
- Target COO John Mulligan, on the other hand, said during the retailer's earnings call on Tuesday that the company's "stores-as-hub strategy isn't putting our core business at risk, it's simply helping us grow faster."
Target's aim proved true on its last earnings call, with the retailer posting its highest annual comparable sales growth in over a decade.
The retailer has succeeded in part by catering to a wide range of customer preferences regarding product fulfillment.
And, unlike online rival Amazon, Target hasn't had to invest in a string of new warehouses; the chain has kept costs down by making room for fulfillment capabilities in its existing stores.
But UBS analyst Michael Lasser is sounding the alarm that Target's improved in-store fulfillment strategy could dampen in-store sales.
In response to Business Insider's request for comment, a Target spokesperson pointed to comments that COO John Mulligan made during its earnings call on Tuesday.
"It's also important to note that while our stores are fulfilling more digital orders, it's not coming at the cost of in-store sales," Mulligan said. "Since 2016, we've made our stores more productive by using them as fulfillment centers. Our fulfillment sales per square foot have grown at an average 67% rate per year. Now, more than $14 a foot as our stores increasingly support our digital business. At the same time, our in-store sales per square foot have grown at a 4% rate per year, which means our Target stores can support incremental growth from Target.com without hurting in-store sales."
Lasser noted that Target has overhauled its digital-fulfillment capabilities, specifically citing the chain's store-based fulfillment services. According to Lasser, Target has kept costs down by utilizing stores as fulfillment centers, rather than purchasing warehouse space.
"One way Target believes it can improve its digital profitability is by marketing its plethora of store fulfillment options more efficiently," Lasser wrote.
Target currently offers same-day delivery through Shipt, as well as a Drive Up pick-up service and an in-store order pick-up option for busy shoppers. Target said during its earnings call that its stores fulfilled almost three quarters of its digital sales in the fourth quarter.
However, Lasser also pointed to what could turn out to be a potential downside of Target's success, asking whether the focus on in-store fulfillment could "cannibalize in store sales."
"While this should provide the customer with more convenience, we believe Target could be cannibalizing some in store sales, which would likely have come at a higher margin rates," Lasser wrote. "Thus, overall benefit to margins may be a bit lower than it initially appears."
During the earnings call, however, Mulligan expressed no concerns about this possibility.
"Our stores-as-hub strategy isn't putting our core business at risk, it's simply helping us grow faster," he said.