Dive Brief:

• Target stores fulfilled 90% of the retailer's total sales in the second quarter, despite a pandemic-driven shift to digital orders. Digital sales doubled year over year (YoY) in the second quarter, and stores fulfilled more than 75% of these sales, according to a company release.
• COO John Mulligan credits growth in store-fulfilled channels that don't require shipping for growing operational efficiency, as omnichannel orders increase. "As our same-day options continue to grow faster than overall digital growth, average unit costs go down because these options are much less costly compared with shipping to home," Mulligan said on a Wednesday call with analysts. Drive-up orders increased by 734% YoY in the quarter, CEO Brian Cornell said on the call.
• The growth and maturation of same-day services, along with updates to the e-commerce order fulfillment process, led to a 30% reduction in the average unit cost for digital fulfillment, compared to a year ago, Mulligan said.

Dive Insight:

Mulligan said Target's store-centered fulfillment strategy is still often met with skepticism, despite digital fulfillment gaining efficiency as sales grew 195% YoY.

"I want to address the nagging questions we continue to hear regarding our capacity and ability to further scale our store based fulfillment model," Mulligan said. "I've addressed this question multiple times in prior earnings calls, and I would think that our recent results will dispel these worries. We clearly haven't convinced everyone yet. So, we'll continue to provide facts to support our model."

Digital sales so far in 2020 have already overtaken full-year digital sales from 2019, he said.

"Much of this year's growth has been unplanned, meaning our systems and store teams have had to adjust quickly in real time," he said, offering apparent agility as another justification for the model.

Target's ship-from-store fulfillment is gaining speed and sophistication, thanks in part to an improved algorithm that prioritizes orders for packing and shipping based on the time-sensitivity of the items, he said.

Shipped digital orders will always be less cost-efficient than same-day services, however, and Mulligan said the explosive growth in same-day service (273% YoY covering pickup, drive up and Shipt) will help with the overall efficiency of omnichannel order fulfillment.

Target is fulfilling orders faster and cheaper, but that only helps if it has the items it needs to fulfill in stock. Like other retailers, including Walmart, executives reported that Target vendors are still struggling to get back in stock. Total inventory fell only slightly from the first quarter to the second but was down nearly 3% YoY as of Aug. 1, which came alongside an all-time record 24% bump in total quarterly sales, YoY.

Mulligan said Target has been negotiating larger allocations and working more closely with vendors to accommodate demand spikes as they come, as forecasting is still challenging in the pandemic environment.

"Demand forecasting is difficult right now both for us ... and for our vendors who have long lead times as well," said Mulligan. "The thing we're working with them on is what we call joint business planning — just being sure we're both aligned." This may look like smaller initial orders with the understanding that Target can flex up stock quickly if demand strikes, he said.

"This is mostly about conversations and then agility and being flexible when we see the data coming in, because it is moving rapidly," he said.