How Big Can Target’s E-Commerce Business Get By 2020?
E-commerce currently accounts for only around 6% of Target‘s (NYSE: TGT) total revenue, but the company has been emphasizing e-commerce growth going forward, in order to remain competitive in the Amazon (NASDAQ: AMZN) dominated retail market. E-commerce has been on the rise in the last several years, thanks in large part to Amazon, making it necessary for brick-and-mortar retailers to pick up their digital initiatives to grow further.
By 2020, we expect Target’s e-commerce sales to contribute about 9% of the company’s total sales. While this figure is unlikely to be massive, it should help the company offset secular pressure on brick-and-mortar retail locations. However, we expect this aggressive push in online initiatives to put pressure on the company’s margins, due to increased fulfillment costs resulting from growth in digital sales. We have created an interactive dashboard on Target’s e-commerce contribution to its overall sales. You can modify our forecasts to see the impact any changes would have on the company’s revenue total.
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Target’s e-commerce sales have grown from 2% of its total revenues in 2013 to 5.5% in 2017. Target has been investing heavily in e-commerce and omnichannel retail strategies in order to keep up with the changing retail industry dynamics. In order to compete in the grocery sector and deal with growing overlap with Amazon (NASDAQ: AMZN) since it purchased Whole Foods, retailers such as Target need to focus on faster delivery of essentials to stay competitive. To that end, Target agreed to a $550 million acquisition of Shipt, a company that delivers same-day groceries. Target plans to leverage its network of 1800 stores and Shipt’s technology platform and community of shoppers to quickly add same-day delivery to its capabilities. This deal is Target’s largest acquisition to date and is expected to be modestly accretive to its net earnings in fiscal 2018. This acquisition is also in line with Target’s previous acquisition of Grand Junction – a transportation technology company – which will likely help the company in strengthening its supply chain and improving its last mile delivery capabilities. In addition, Target also launched its Restock next day delivery program to all its store locations in the U.S. for a delivery fee of $2.99, and waived this fee for REDcard holders. Further, Target launched its own mobile payment system in the Target app, which facilitates checkout of some items in stores as well as the use of Cartwheel digital coupons.
Estimating Target’s E-Commerce Revenue
We expect Target’s 2020 store count in the U.S. to be around 1865, with an average square footage per store of 303k and revenue per square foot of $133, translating into $75 billion in revenues in fiscal 2020. We expect Target’s e-commerce sales to grow at a 16% CAGR through 2022, based on the Target’s reported e-commerce numbers in previous fiscal years.
Total U.S. e-commerce sales came in at $453 billion for 2017 (8.9% of total retail sales), and are expected to reach $526 billion (+16% y-o-y), representing 10% of total retail sales in 2018. Additionally, total e-commerce sales could grow to represent 12.4% of U.S. retail sales in 2020 and reach approximately $703 billion.
Target has been looking to overhaul its business model with the expansion of small-format stores, in addition to revamping its existing stores and improving supply chain management, since the beginning of 2017. In fact, the company has planned to invest around $7 billion over 2017-2019 for the same purpose. Although the positive results of the company’s business transformation have started to show in its financials in the recent first quarter, it is going to take a lot of effort on its part to keep up with Amazon (not to mention Wal-Mart, which has spent billions on e-commerce initiatives and acquisitions). Target saw its stock decline nearly 10% in 2017 but is now up about 15% year-to-date.
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