Dive Brief:

• Target plans to spend an additional $1 billion this year to keep pace with close rivals Walmart and Amazon, executives announced yesterday during the company’s quarterly earnings call. This includes raising employee pay from $11 to $12 an hour, remodeling more than 300 stores and building around 30 small-format stores.
• Target also plans to hit the accelerator on its e-commerce growth. In addition to expanding home delivery with its newly acquired Shipt stores, as previously reported, Target will expand its Drive Up click-and-collect service to 1,000 stores from around 50 currently. The company will also offer free two-day shipping on thousands of products, and center more of its shipping efforts on its stores.
• For the fourth quarter 2017, Target reported same-store sales growth of 3.6%, a 3.2% increase in traffic and online growth of 29%. The results came in ahead of analysts’ estimates, but steep investment costs cut into margins, making investors cautious on the company’s stock.  

Dive Insight:

After lagging behind its brick-and-mortar competitors in key areas like e-commerce, and with Amazon continuing to vacuum up customers across categories, including grocery, Target has increased its capital expenditure budget from $2.5 billion in 2017 to $3.5 billion this year. Unfortunately for the company, those investments — combined with wage increases and store updates — have cut into its margins, and will likely continue to do so. But they’re also vitally important for Target to remain competitive.

Neil Saunders, managing director with GlobalData Retail, said these deep investments are already starting to pay off. He noted that Target’s comp-store gains in this most recent quarter were driven equally by store and online sales.

“Not only does this indicate that Target's omnichannel strategy is delivering, but it also shows that the store enhancements are working,” he wrote in a note emailed to Food Dive. “In essence, it justifies Target's view that stores remain a critical part of the proposition and are worth spending money on.”

Stores will continue to play a major role for Target moving forward. In addition to delivering groceries and other goods from each of its 1,875 locations by the end of this year, the retailer will also significantly grow its Drive Up service from a few dozen stores to around 1,000. The click-and-collect program has been in test mode in the Minneapolis area since last year, and Target officials say it’s testing very high with consumers.

The pickup service, which has employees deliver goods to shoppers’ cars, could be a big value-add given the size and variety of Target’s merchandise. As CEO Brian Cornell noted during yesterday’s presentation, not every consumer can carry a flat screen TV in one arm and a bag of groceries in another. However, with Walmart and Kroger each offering store pickup from more than 1,000 stores, Target is playing catchup on this front.

Drive Up will complement Target’s home delivery efforts with newly acquired Shipt, now available in more than 400 stores and set to be available in every store and cover the company’s entire assortment by the end of the year. This is a massive undertaking, but it will make Target the first company to offer nationwide same-day shipping, giving it a leg-up on other brick-and-mortar retailers and even Amazon.

Raising wages will help Target recruit workers in a tight labor market. By 2020, the company plans to make $15 an hour its minimum pay rate. Store updates, meanwhile, which offer more prepared foods, better lighting and displays, will keep giving shoppers a reason to visit stores. In the Twin Cities market, Target will spend $250 million to update close to 30 stores. Considering the weakness of grocery market share leader Cub Foods, this could drive significant gains for Target.

Target’s grocery offerings have been an after-thought in recent years, and haven’t really driven trips. But the company is putting more heft behind this channel with more private label, fresh and organic offerings as well as enhanced category management efforts. Last year, the company hired veterans from Kroger, Walmart and General Mills to revamp its efforts in food.

Target may be lagging behind its closest competitors, but it’s quickly catching up. While the biggest battle in grocery and in broader retail has boiled down to Amazon versus Walmart, Target is making a case for a third competitor.