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Target chases more e-commerce profits with new delivery centers and driver fleet

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MINNEAPOLIS. Every day, hundreds of drivers park at a delivery point in Target’s hometown and load packages into the trunk of their personal cars for delivery to customers.

The major retailer will soon have similar centers and jobs in three more locations — two in the Greater Chicago area and one near Denver — to deliver online orders to doors faster and at lower cost. The new hubs are part of a growing push by retailers, including Walmart, to make e-commerce more profitable as shoppers shop online and expect purchases to be delivered to their doors within a day or even hours.

Since it began testing at the Minneapolis facility in late 2020, Target has added five such hubs, where ready-to-ship packages are sorted and grouped together to create dense delivery routes. Three more are scheduled to open by the end of January.

“Our goal is to meet guests where they are, when they want and how they want,” COO John Mulligan said in an interview. “And so if they want us to ship something to their home, we want to make it as efficient as possible.”

E-commerce currently accounts for just under 20% of Target’s sales, with more than half of that coming from same-day services like pickup and the rest from home delivery. However, due to labor and transportation costs, these sales are less profitable than when shoppers visit Target stores, pick up merchandise from the shelves, and take it home.

Like other retailers, Target has been working to reduce the cost of fulfilling online orders, a goal that has taken on new urgency for retailers amid rising fuel prices.

Its delivery centers, called sorting centers, receive packaged online orders from stores twice a day. Parcels sent to the same city or nearby areas are bundled together to deliver more parcels to customers the day after the order is placed. An increasing number of sorted packages are then delivered by hired workers who ride Shipt, a delivery startup acquired by Target in 2017. agglomeration or state.

Over the past five years, Target has turned store backrooms into warehouses where employees pick and pack most of their orders. It has acquired Deliv and Grand Junction, two companies that develop software that helps determine which store is fulfilling an online order and plots dense shipping routes. The devices are also now helping some workers find the best ways to retrieve items from store shelves.

However, with growth came new challenges. Parcels started piling up in back rooms and employees had to wait every day for national carriers to pick them up. Carriers had to make stops in the regions. For example, prior to the opening of the sorting center, trucks had to pick up packages from 43 stores and an order processing center in Minneapolis, which required more time and labor.

Target’s first sorting center in Minneapolis was built on a former Sears warehouse. Parcels from the hub are delivered by over 2,000 Shipt drivers or shipping partners. The center started delivering 600 parcels per day and is now able to deliver 50,000 parcels per day.

With three new hubs, Target will have nine sorting centers, Mulligan said, with more expected in the coming years. Along with Minneapolis, its hubs are near Atlanta, Philadelphia, Dallas, Austin, Texas, and Houston. In the first quarter, they processed 4.5 million parcels.

Mulligan said Target is still trying to figure out how much sorting centers cut shipping costs. He said in March that Target had already reduced the average cost per unit of digital fulfillment by more than 50% over the past three years.

Ultimately, he says, the company wants to shorten the delivery distance of packages by placing desired items in stores near the customer.

Target is also testing the new concept at its Minneapolis office, with some Shipt drivers using delivery vehicles that can carry 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 hires employees to deliver packages. He delivers online shopping for Home Depot, Chico’s and other companies as part of a new business called GoLocal.

Another way Target has been able to cut shipping costs is by encouraging customers to use Drive Up, a pick-up service where shoppers pick up their purchases in the parking lot. It costs the company 90% less if they ship packages from a warehouse, said Mark Schindele, director of storage.

For Target, the move to profitability comes at a pivotal moment. The retailer has cut its operating margin forecast twice in recent months as it warned it would have to cancel orders and increase discounts to get rid of unwanted items it stocked during the Covid pandemic.

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