Target sees new power in stores

Target has spent more than a decade adapting to the arrival of online shopping.

For a time, it outsourced much of its digital effort to Amazon. Then it tried to fight a head-to-head battle for the attention of internet shoppers.

Now CEO Brian Cornell is shifting the Minneapolis-based company’s emphasis again to focus on a not-so-secret weapon: its stores.

While Walmart and other competitors move resources toward online operations, Target plans to invest more than $3 billion over the next three years in its brick-and-mortar locations. It is remodeling one-third of them and opening new, smaller ones in the heart of cities such as New York, Chicago and Los Angeles.

“Despite the rapid growth we’re still seeing online and others are seeing online, the majority of retail shopping in America still takes place in a physical store,” Cornell said, reiterating what has become one of his primary talking points.

The company’s approach is counterintuitive at a time when the digital onslaught is leading other retailers to shutter hundreds of physical locations and some to go out of business altogether.

Yet Target’s strategy has already shown signs of working, with an increase in sales during the spring quarter as the company remodeled stores and prepared to introduce new private-label clothing and home brands.

Whether it can build on this success will be a critical test for one of Minnesota’s largest and most prominent businesses. But some retail observers believe that Cornell has identified an important advantage that online rivals can’t counter.

“With Amazon, you can’t walk into a store and return it,” said Brian Yarbrough, a retail analyst for Edward Jones. “That’s one of the reasons why I think stores are here for the long term and aren’t going away. And it’s about convenience. Some people just like to shop.”

There is a successful model for Target’s approach.

When Hubert Joly took over Best Buy in 2012, the electronics chain, also based in the Twin Cities area, was in the midst of a do-or-die moment with Amazon. The company’s previous leaders had closed 50 big-box stores and said more would be shutting soon.

“Five years ago, there was a lot of words about, ‘My God, Hubert, you’re going to have to close a lot of stores,’” Joly said.

He bristled at the idea. Instead of viewing stores as a liability in an increasingly digital world, he argued that they were one of Best Buy’s biggest assets. Located closer to where most people live compared to its fewer and far between distribution centers, he turned the stores into shipping hubs to more quickly and cheaply ship online orders to customers’ doorsteps.

As technology has become more complex, Best Buy has also embraced the idea of having its stores become showrooms. Customers can discover and learn about the newest gadgets with the expert advice of blue-shirted employees, and the company’s Geek Squad is available to help with installation. That’s an experience that is hard to replicate online.

Best Buy, which has 1,360 stores in the United States, has been quietly closing a few dozen a year, mostly its smaller mobile phone stores that are often in shopping malls. Joly said the retailer will continue to close some stores as leases come up for renewal, but that isn’t the main plan.

“We don’t have a strategy to close stores,” he said. “We’re excited by the roles that stores can play.”

To be sure, both Target and Best Buy have also been investing billions of dollars to overhaul their supply chains to get online orders to customers’ doorsteps more quickly and efficiently. They have also been upgrading their websites to be faster and more user-friendly, with better search capabilities and display pages of products.

But online is also still a relatively small part of most retailers’ business, 4 percent of sales at Target and 13 percent at Best Buy.

Part of the reason to focus on leveraging stores is that retailers get a bigger payoff from in-store sales, said Audrey Manacek, who heads up the consulting giant McKinsey’s Minneapolis office. Online sales, which are growing much more quickly, are less profitable for retailers because they have to ship items to customers.

Still, retailers have to be in both games.

“If you just stay focused on the stores and you’re not also investing at an even faster pace in online,” she said, “you’re going to miss the curve.”

Even big believers in the future of online retail think it will evolve gradually. The Minneapolis-based venture capital firm Loup Ventures thinks the eventual balance will be 55 percent online and 45 percent in-store but says it could take 30 years to get there.

“Customer habit is hard to change,” said the firm’s Andrew Murphy. “It will take a long time.”

About 30 million people still visit a Target store every week. So Target is making major investments to keep them coming back for the foreseeable future.

“We’re not thinking about stores the same way we did even five years ago,” Cornell said at a retail conference in March. “If we did, we’d be cooked.”

A recent $10 million makeover of the store next to Target’s downtown Minneapolis headquarters provides a glimpse into how it’s reformulating stores. Beyond the cosmetic changes with updated flooring and lighting, it has more of a department-store feel with more thought given to how items are displayed to help inspire more purchases.

And Target is looking to bring more digital elements into the experience, such as location-tracking capabilities that show shoppers what Cartwheel deals are nearby on the shelf through the Target app and via handheld devices through which employees can look up and order online different sizes or colors for customers.

Like Best Buy, more than half of Target’s online orders are now either picked up in or shipped from its stores. Doing so has helped Target not only get packages to customers more quickly, but also cut down on shipping costs.

Target is testing ideas such as curbside pickup where customers can drive up to the parking lot to fetch online orders without having to step in the store. Walmart has already been aggressively rolling out a similar service focused on groceries to many of its stores.

While it’s trying to give customers what they want, Target also knows that if it gets people in the store they’re more likely to buy more things, said John Rabenhorst, a principal in the retail practice of consulting firm A.T. Kearney.

That’s been part of the secret sauce for Target — people walk in looking for a couple of items and walk out with a whole cart full of merchandise.

“They don’t know what they need until they see it,” he said. “This idea of discovery doesn’t happen as much online.”