Target Betting Big on Digital Transformation, Likely To Yield These Benefits

Target (NYSE:TGT) has had an impressive first half in the current fiscal, marked by growing sales despite a challenging environment for retailers. It has also undertaken a massive cost reduction program, aiming to save up to $2 billion by the end of fiscal 2017 (ending January 31st). An earnings beat in the recently concluded quarter led the company to raise its full-year guidance.

Looking ahead, we believe Target has quite a transformation to undergo to keep its sales growth ticking. The company’s efforts are evident from its increasing investments in information technology, distribution, and other areas.  In fact, the $2 billion that will be saved via cost reductions will primarily be invested in this transformation to make Target a multi-channel retailer. The change is already underway as the company grew its digital channel sales by 30% in the second quarter, on top of more than 30% growth seen in the same period an year ago. However, only 2.7% of the total sales are generated from the digital channel currently.

One of the initiatives that will likely enable future growth in this channel is the company’s plan to use its all of its stores as distribution centers, a model that electronics retailer Best Buy has successfully implemented. Currently, digital orders are being delivered only from 140 of the company’s stores, a number that is expected to rise to 450 stores by the end of the year. At the same time, competitors such as Amazon have also been spending huge amounts on developing fulfillment centers near major metro areas.

In addition to boosting digital channel sales, investments in technology will benefit Target in other important ways as well. Let us take a look at some of them.

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Relevant Promotions at the Right Time

Target is currently experimenting with Apple’s iBeacon technology, which is a software that helps iOS users connect to third-party beacons deployed in real-world settings. These beacons track the location of a customer within the store and alert them to a deal on a nearby product as they pass by. Along with generating incremental revenue for the retailer, this also helps consumers to save on products that interest them. If successfully implemented, this technology will take targeted promotions to the next level at Target.

Better Insight Into Customer Behavior

As Target expands its online operations and gathers data from multiple channels, it could generate additional insights into customer behavior. For example, a combination of information gathered from a particular customer’s online browsing habits and data gathered from the iBeacon technology could be used to generate highly relevant in-store recommendations for customers. While methods like this will help Target increase the spend per customer, the same information can also be used to make store-wide improvements.

Real estate is a major cost for retailers like Target, which makes store space utilization all the more critical. While retailers experiment with the physical placement of products in a store, metrics that indicate the effectiveness of the method have been limited. With the availability of new technology such as iBeacon, Target will have more data at hand to measure the effectiveness of various product placement designs. Also, movement patterns of customers through the store will help the company allocate appropriate merchandise to appropriate in-store regions, which will likely boost the revenue generated per square foot.

According to reports,  ((The Motley Fool)) Target plans to conduct a trial by deploying beacons at 50 stores throughout the country. If it succeeds, this technology will make a significant contribution to Target’s transformation into a multi-channel retailer.

Our price estimate for Target stands at $79, which is slightly above the current market price.

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