Target Jumps on the Free-2-Day-Shipping Bandwagon

Retailer Target (NYSE: TGT) reported solid fourth-quarter results on Tuesday. Comparable sales jumped 3.6%, while online sales soared 29%. The company's slew of initiatives, ranging from a collection of new exclusive brands to same-day shipping via its acquisition of Shipt, appear to be bolstering sales.

Target took another step on Tuesday in its battle to steal away shoppers from (NASDAQ: AMZN). During the company's earnings call, CEO Brian Cornell announced a few new initiatives. The most important: Target has begun offering free two-day shipping on hundreds of thousands of items for orders above $35 and for customers using the company's REDcard.

Following in Walmart's footsteps

Target had previously offered free shipping on orders over $35, but the switch to free two-day shipping is an acknowledgement that two-day shipping is becoming the standard. If Target's goal is to peel away Amazon Prime members, free two-day shipping is table stakes.

This move comes about one year after fellow big-box retailer Walmart (NYSE: WMT) launched its own free-two-day-shipping initiative. Walmart has the same $35 minimum, and it's been working to vastly expand its selection of online merchandise.

Free two-day shipping could take a bite out of Target's bottom line. Walmart ran into that problem during the fourth quarter, with gross margin dipping and operating expenses surging. There were other factors at work, but free two-day shipping played a role.

The good news for Target investors is that the company plans to utilize its base of stores to fulfill as many orders as possible. COO John Mulligan provided details during the earnings call: "[N]ext year this meeting you will see that our penetration of units delivered from stores will grow relative to 2017 and relative to two-day, absolutely, we would expect the majority of that to be delivered from store. We know that's the fastest place that can be delivered from."

Even though fulfilling online orders from Target's stores won't be as efficient as running them though a sophisticated fulfillment center, the company should save on shipping costs and cut down on shipping times by bringing the fulfillment closer to the customer. There are over 1,800 Target stores in the U.S., and each can act as a mini fulfillment center.

Target is rolling out some other initiatives in an effort to offer increased convenience to its customers. The company is bringing its Drive Up program nationwide, allowing customers to place orders online and have those orders loaded into their trunks at a Target location. That's similar to Walmart's online grocery pickup service, which the company has been aggressively expanding.

Battling Amazon Prime

The problem facing every online retailer that's not Amazon is that tens of millions of consumers in the U.S. are paying $99 each year for Amazon Prime, giving them unlimited two-day shipping. This makes Amazon the default choice for many, even if its prices aren't the lowest.

For Target and Walmart, free two-day shipping is a must. Both companies have now taken that step, although Target has some work to do when it comes to selection. Hundreds of thousands of items is a drop in the bucket compared to Amazon's vast assortment of Prime-eligible products.

After dragging its feet for so long, Target is now being much more aggressive when it comes to e-commerce. Keeping up with Amazon will require continued investments, which could ding the bottom line. But there's no alternative if Target wants to remain relevant in the age of e-commerce.

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