To Speed Up Delivery, Target Invests $100 Million In e-Commerce Hubs

As part of Target's efforts to improve the speed and efficiency of the delivery process of online orders, the retailer said Wednesday that it would invest $100 million in expanding its network of supply chain hubs.

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It is expected that the retailer will own and operate at least 15 of these sortation centers by the end of January 2026, dubbed sortation centers. Having tested the concept in the company's hometown of Minneapolis, it has opened nine stores so far. Target's expansion will also result in the company's workforce growing as well. There are usually more than 100 people working at each sortation center on average.

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In spite of a glut of inventory and a noticeable pullback in sales, the company is betting on e-commerce growth. As part of its plans to reduce costs over the next three years, Target lowered its holiday-quarter outlook. Tuesday will be the day when the company announces its fiscal fourth-quarter earnings and its full-year outlook.

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The company's e-commerce sales have also slowed, partially because of the rapid rise during the early days of the pandemic, which made comparisons difficult. In the most recent reported quarter, which ended in October, digital sales grew by less than 1%. Compared to the third quarter of a year ago, the third quarter this year has seen a nearly 29% growth.

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Target's retail rivals Walmart and Home Depot warned this week that the year ahead will be tough after the pandemic-driven sales boom and inflation weighs on household budgets. According to Walmart, same-store sales will increase by 2% or 2.5% for its U.S. business in the fiscal year, excluding fuel, based on the company's expectations. In terms of sales growth, Home Depot said it anticipates a roughly flat growth in the current fiscal year.

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Regardless of the economic backdrop, Target has to meet customer expectations, especially when it comes to online purchases, said Gretchen McCarthy, the company's chief global supply chain & logistics officer. “As far as consumer spending is concerned, we are absolutely monitoring it closely. As a result of the retailer's lowered forecast, we are taking recent trends into account," McCarthy said.

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Regardless of whether people shop online, in stores, or use a curbside pickup, the delivery hubs will improve Target's customer service.

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Target aims to increase that number to 50% of packages that go through sortation centers and get delivered by Shipt the next day.

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There is little doubt that Target has embarked on a "stores as hubs" strategy over the last six years, transforming its approximately 1,950 stores into mini-warehouses where employees help pick and pack the bulk of the company's online orders over the past six years. It is estimated that nearly 97% of the company's total sales were fulfilled by stores in the fiscal third quarter of 2018, according to the company's filings.

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Target's backrooms became clogged with packages over the years as online sales grew, however. Sortation centers, which are facilities where packages arrive from about 30 to 40 nearby stores and get grouped into more efficient delivery routes, are being tested by Target. The packages are being picked up by a third-party carrier or by a contract worker with Shipt, the company Target owns that provides third-party delivery services. It opened the first one in 2020 in Minneapolis.

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In addition to Minnesota, Texas, Colorado, Illinois, Georgia, and Pennsylvania, it has opened sortation centers across a wide range of major markets in those states. As of last month, it has opened two more in the Chicago and Denver areas.

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McCarthy, Target's vice president of store operations, said that by switching to the new model, Target has been able to clear up space in its backrooms and give its employees more time to help customers. Since the sorting centers were opened, she was unable to specify the savings that the company has made as a result of the hubs, but she said the company has saved "tens of millions of dollars in last-mile expenses."

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It is anticipated that Target will deliver 50 million packages through sortation centers in the coming year, an increase from 26 million packages in 2022.

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