Can a rather old-fashioned discount retailer succeed in the world of ecommerce? That’s the question American discount giant Target (NYSE: TGT) has asked itself.
For those of you unfamiliar with it, Target is the third largest publicly-traded discount retailer in the United States, behind Walmart Stores Inc. (NYSE: WMT) and Costco Wholesale (NASDAQ: COST). Unlike Walmart and Costco, Target does not operate outside the United States and probably will not any time soon. Target’s only venture outside the U.S. to date, a foray into Canada, ended in catastrophe last year.
Instead, Target concentrates on the operation of 1,792 stores in the United States and a successful online retail operation. Like Costco, Target caters to a middle-class clientele by trying to project the image of being an “upscale discount retailer.” This strategy has paid off because Target has something of a cult-like following and a reputation as a place for hip young urban people to shop.
The most interesting thing about Target is its successful online operation. The company is spending $1 billion (€880 million) to expand its online retail infrastructure in an effort to counter Amazon.com (NASDAQ: AMZN), Fortune reported. Target is very vulnerable to the Amazon Effect because the Everything Store competes directly for its core customers, younger middle-class people with lots of disposable income.
Can Brick-and-Mortar Retailers Compete Online?
Target has succeeded in establishing a presence online. Target.com is the fifth most popular retail website in the United States, attracting 60 million visitors in August 2015, according to Statista.
Target still has far to go to match Amazon.com, which received 188 million visitors during the same period. Only one other U.S. brick-and-mortar retailer—Walmart—received more visits to its website than Target. Walmart.com had 87 million visitors in August 2015, making it the third most popular retail website in the United States, after Amazon.com and the auctioneer eBay.
Naturally, investors will want to know if all those visitors are contributing to Target’s bottom line. The answer appears to be sort of; Target’s revenue has grown, but its profits and income have not.
Target’s revenue grew steadily over the last year despite the Canadian debacle. Target reported a TTM revenue of $71.07 billion (€62.80 billion) in October 2014 that grew to $72.62 billion (€64.22 billion) in January 2015, $73.08 billion (€64.58 billion) in April 2015, $73.55 billion in July 2015 and $73.91 billion (€65.31 billion) in October 2015. Target has managed to add $2.84 billion (€2.51 billion) in revenue over the past year.
Unfortunately, that revenue does not seem to be doing the company much good. Target reported a net income of -$703 million (-€621.22 million) in October 2015. The retailer is losing money, but it is not clear how much of that loss is coming from Canada.
It is pretty safe to assume that ecommerce is contributing to Target’s revenue growth. Target itself reported that digital sales increased by 30% in the second quarter of 2015, adding .6% to the company’s overall sales growth.
The Low Return from Online Retail Investment
The problem here, as at Amazon, is that the additional revenue generated by online operations is not generating new income. Amazon reported revenues of $107.01 billion (€94.56 billion) during the fourth quarter of 2015 but net income of just $596 million (€526.66 million).
Amazon’s revenue has been growing at a staggering rate over the past year, rising from $88.99 billion (€78.64 billion) in December 2014 to $107.01 billion (€94.56 billion) just a year later. Yet its income still remains very low.
Judging by these figures, it looks as if Target has not only adopted some of Amazon’s business practices but it has also given itself one of Amazon’s biggest problems: a limited capacity to add income. Amazon has to invest massive amounts of money just to make a modest profit from its online operations.
Amazon’s experience in particular shows us that the potential return on investment in ecommerce is very low. That means to succeed in online retail, a company needs to generate a massive volume of sales, much as Amazon does. If Target wants to succeed in online retail, it will have to generate the kind of sales volume that Amazon has.
Can the Amazon Effect Be Duplicated?
Obviously, duplicating the Amazon Effect at Target will be difficult because Amazon has already captured the best location online. It was attracting 188 million customers a month compared to 60 million at Target.com.
So can Target succeed online? The answer is yes because it has the one attribute needed to succeed in online retail, and that is patience. It has taken Amazon.com 20 years of hard work just to become a serious retail competitor. Amazon is actually one of the most patient companies around, spending years quietly building up its infrastructure and market.
Target, like Walmart, has the resources, the name recognition and, more importantly, the patience to establish a presence online. The question facing the company is, can it afford to cope with several years of low returns on its online investment before those expenditures pay off?
A more intriguing question is, will investors allow Target to spend that time and make those investments? Walmart’s shares have been hammered hard by U.S. investors over the past year despite massive spending on ecommerce. Walmart was trading at $85.91 (€75.92) a share on February 9, 2015, and $65.13 (€57.55) a share on February 9, 2016. Therefore one big danger Target could face is a massive drop in share value if investors become skeptical of its ecommerce efforts.
Target’s ecommerce experiences provide no easy answers, because there is no clear-cut success here. The company’s revenue is growing, but that revenue is not translating into additional income.
Only time will tell if Target can make the transition from brick-and-mortar discount store to online retail. Investors will have to decide whether they want to go along for the ride or not.
