MINNEAPOLIS — Every day, hundreds of drivers park at a Target hometown fulfillment center and load the trunks of their personal cars with packages to deliver to customers.
Soon, the big-box retailer will have similar centers and gig workers at three more locations, two in the Greater Chicago area and one near Denver, to get online orders faster and at a lower cost. The new centers are part of a growing push among retailers, including Walmart, to make e-commerce more profitable as shoppers spend online and expect purchases to arrive at their doorsteps within a day or up to and all hours
Since it began testing the Minneapolis facility in late 2020, Target has added five similar centers where ready-made packages are sorted and bundled to create dense delivery routes. The other three will open at the end of January.
“Our goal is to meet the guest where they are, when they want, how they want,” chief operating officer John Mulligan said in an interview. “And so if they want us to ship something to their house, we want to do it as efficiently as possible.”
E-commerce now generates 20% of Target’s sales, with more than half of that coming from same-day services like curbside pickup and the rest from home delivery. However, due to labor and shipping costs, these sales are less profitable than when shoppers visit Target stores, grab items off the shelves, and take them home.
Like other retailers, Target has worked to reduce the costs of fulfilling online orders, a goal that has taken on new urgency for retailers amid rising fuel prices.
Its fulfillment centers, called sorting centers, receive online orders in store boxes twice a day. Packages going to the same city or nearby neighborhoods are bundled together to get more to customers a day after ordering. A growing number of sorted packages are delivered by contract workers who drive for Shipt, a delivery company Target acquired in 2017. Some are also sorted and delivered by domestic shipping partners like FedEx, usually to addresses as far away as another. metropolitan area or state.
Over the past five years, Target has converted the last few stores into warehouses where employees pick and pack most orders. It acquired Deliv and Grand Junction, two companies with software that helps determine which store fulfills an online order and designs dense delivery routes. The devices also help guide some workers to the best paths to retrieve items from store shelves.
However, with growth came new challenges. Packages began piling up in the back rooms, and employees had to wait for domestic carriers to retrieve them each day. Transporters had to make stops between regions. For example, trucks had to pick up packages from 43 stores and a fulfillment center in Minneapolis before the sorting center opened, requiring more time and labor.
Target’s first fulfillment center in Minneapolis was built in a former Sears warehouse. Packages from the center are delivered by more than 2,000 ship drivers or shipping partners. The center started delivering 600 packages a day and now has the capacity to deliver 50,000 a day.
With its three new centers, Target will have nine fulfillment centers, with more expected in the coming years, Mulligan said. Along with Minneapolis, its centers are located near Atlanta, Philadelphia, Dallas, Austin, Texas and Houston. In the first quarter, they handled 4.5 million packages.
Mulligan said Target is still trying to determine how much fulfillment centers reduce shipping costs. In March, he said Target had already reduced the average cost per unit of digital fulfillment by more than 50% over the past three years.
Ultimately, he said, the company wants to shorten the distance packages travel by having desired items in stores close to the customer.
Target is also testing a new concept at its Minneapolis location: Some boat drivers are using delivery vehicles that can hold up to eight times as many packages per route.
Other retailers are also working to make e-commerce more profitable. In addition to building high-tech fulfillment centers, Walmart uses its stores as warehouses and uses contract workers to deliver packages. It offers online shopping for Home Depot, Chico’s and other companies as part of a new business called GoLocal.
Another way Target has reduced delivery costs is by encouraging customers to use Drive Up, a curbside pickup service where shoppers pick up purchases in the parking lot. That costs the company 90 percent less to fulfill than if they shipped packages from a warehouse, said Mark Schindele, director of stores.
For Target, the move to improve profitability comes at a crucial time. The retailer cut its operating margin forecast twice in recent months as it warned it would have to cancel orders and increase markdowns to get rid of unwanted merchandise it had stockpiled during the covid pandemic