Target plans to open six new fulfillment centers and five new sorting facilities, joining other major retailers that are expanding and strengthening their supply chains to get orders to customers as quickly and cheaply as possible.
Target, based at Minneapolis and with about 2,000 stores, provided an update on expanding its distribution and retail footprint during a second-quarter earnings call on Wednesday. The retailer is still on track to add 24 new stores this year and so far has opened a dozen, including locations in Manhattan’s SoHo neighborhood and Jackson Hole, Wyoming.
Target also reported a sharp decline in profits after it dramatically cut prices to get rid of excess inventory. Net income decreased by 89.9%, to $183 million, down from $1.82 billion Last year.
Retailers including discounter Walmart, department store Macy’s and e-commerce juggernaut Amazon have added various types of warehouses and logistics properties to their rosters as they jockey for ways to get goods to the stores or directly to customers. And Target is no exception, citing its growing number of online orders for its need for more distribution facilities.
Target had already strengthened its distribution network, and it is intensifying this effort. The retailer launched two “upstream” fulfillment centers late last year, according to John Mulligan, the company’s executive vice president and chief operating officer. And it plans to have six more in the next few years, two of which are expected to open in 2023, he said.
Target is also “rapidly increasing” the number of sorting centers it operates across the country to “enhance our last-mile fulfillment capabilities,” according to Mulligan.
“We have six such facilities in operation today, including three that opened in the last few months,” he told Wall Street analysts. “And we plan to add five more by early next year.”
The company’s first sorting center opened in 2020 in 2600-2800 NE Winter St. in Minneapolis. Target previously said it has opened or plans to open sorting centers in Atlanta; Chicago; Denver; Philadelphia Cream; and the Texas cities of Dallas, Houston and Austin.
Sorting centers are a link in Target’s “stores as hubs” strategy, where retail sites act as shipping hubs to stores for digital orders. Rather than having a store employee pick, pack and sort items for orders in a back office, sorting centers “take care of the sorting process, saving our teams time and expense. space so they can process more orders and reach customers faster at a lower delivery cost to us,” according to Target.
“These smaller facilities increase ship-to-store capacity in the locations they serve, while significantly reducing last-mile delivery costs, especially when we integrate our ship drivers into the process,” Mulligan said during of the call. “Given the parcel delivery density we have achieved in many markets over the past few years, we see continued opportunities to add more sorting centers over the next few years, which significantly speeds up and reduces last mile costs in the markets they operate in.”
Over time, Target aims to maintain its distribution center network at or below 85% maximum capacity, “as operational difficulties and costs increase significantly when we exceed that level,” Mulligan said.
In June, when inventory peaked, fulfillment centers were operating at well over 90% capacity, according to Mulligan. At the end of the second quarter, their capacity was less than 80%.
Earlier this year, Target revised and lowered its earnings forecast, saying it was taking dramatic steps — extreme discounts — to get rid of a glut of inventory shoppers no longer wanted. Faced with record inflation, consumers shifted their spending towards basic necessities such as groceries and gasoline, away from items such as clothing and electronics.
“There are multiple sources of misfortune for poor results,” Neil Saunders, chief executive of GlobalData, said in a note. “Higher transport costs and labor costs – especially in fulfillment centers – have taken some of the revenue off. The same goes for the sales mix, which is now higher in the low-margin categories like food and lower in higher-margin categories like apparel. But the main issue is the deep discounts offered during the quarter to reduce inventory in several general merchandise categories.”
Saunders said he recognizes Target has been affected by issues beyond its control, such as shipping delays, but added that the company has been affected by inventory issues far more than many other retailers. .
“For that he has to take some responsibility as he clearly misjudged the demand and focused too much on getting the product across at all costs while giving too little importance to the price paid. “, said Saunders. “He now suffers from a hangover induced by this lack of operational control.”
Target now expects to make capital expenditures of $5 billion or more this year, and so far has spent $2.5 billion of that amount, according to chief financial officer Michael Fiddelke. In addition to expanding its supply chain operations, that money is also paying for the renovation of nearly 200 Target stores this year, Mulligan said.