Can Target Leverage This Last Major Advantage Over Amazon?

By Nicholas Rossolillo Markets Fool.com

Back in February, Target (NYSE: TGT) stated during its end-of-year earnings call that it was beginning a multi-year, multi-billion dollar effort to play catch upwith online retail. Earlier this month, the company followed up with the news that it would begin testing next-day delivery service through a new website. In this ongoing retail battle, the company is just beginning to learn how to take advantage of its most valuable asset: its real estate.

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What Target plans to do

The country's second largest brick-and-mortar retailer said employees were currently testing next-day delivery of what it deems "essentials" -- things such as cleaning supplies and non-perishable foods. The company said it will launch a customer pilot program version dubbed Restockthis summer in itshometown ofMinneapolis.

Image source: Target.

That news makes good on the promise management announced at the time of the dismal year-end 2016 earnings report that all Target stores would double as distribution centers by 2019. Customers using a new, dedicated site for the program this summer will have their order shipped from the store nearest their address.

The company's other major plans have revolved around small-footprint locations in high-density areas and on college campuses. Expanding its curated line-up of higher-end products and exclusive lines are also supposedly in the works, but this new e-commerce program could be a major development for Target that boosts online sales enough to offset declining foot traffic at its stores.

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Why the strategy makes sense

Shoppers have changed their habits, and making a run to the store isn't what it used to be. Pricing, convenience, and speed of delivery are now top of mind.

Picking up an order in store has become a standard option at most brick-and-mortar chains, but online stores likeAmazonthat offer cheap (if not free) next-day or two-day delivery make that option less appealing. Target and other traditional retailers have struggled to adapt.

But with their physical stores already located near millions of American households, fast and affordable shipping should be an obvious offering to compete with digital stores and their limited distribution centers scattered across the country.

Image source: Target.

Winning that gameseems as if it should be as simple as making an investment in the technology and supply chain to make it happen. But that hasn't necessarily been the case. Amazon sacrifices profitability to offer such convenient service to its buyers, and maintaining profit margins while rolling out new services can be a struggle for the old guard.

For example, curbside grocery pickup has gained in popularity over the past few years. Wal-Mart keeps expanding the number of locations that offer the service as it woos back online shoppers. After refusing to shop at a Wal-Mart for years because of a poor experience, I came back when it launched curbside grocery at a nearby store. Target, on the other hand, shut down its grocery-pickup pilot last summer, saying it needed to spend its resources elsewhere.

Real estate to the rescue?

That isn't to say the company hasn't had success in promoting its digital channel. Online sales have been expanding in the double digits for years and reached 34% year-over-year growth in the fourth quarter of 2016. Perhaps this new pilot will help fuel that trend.

However, it isn't exactly a revolutionary transformation for Target. Project Restock is an imitation service of Amazon Prime, and it's only in test mode. If the company is ready to dive in headfirst, however, it does make use of the biggest asset it has over pure-play digital competitors: a massive portfolio of real estate and merchandise within reach of nearly every American shopper. Other brick-and-mortar chains should take note.

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Nicholas Rossolillo owns shares of Target. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.