Target’s second-quarter sales uptick was accompanied by faster delivery speeds as sortation centers expand into a larger role in the mass merchant’s supply chain.
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According to Michael Fiddelke, Target’s chief operating officer and chief financial officer, local orders processed through a sortation center arrive more than one day faster than the company’s network average.
Most importantly for the Target business—faster shipping doesn’t require more dollars invested. The retailer’s unit delivery costs from a sortation center are about 20 percent lower than the average, the CFO said during the company’s Wednesday earnings call. Mass merchants appear to be figuring out how to optimize these expenses as they scale their logistics networks, with Walmart saying just days earlier that it slashed delivery costs per order nearly 40 percent year over year.
In 2024, Target’s sortation centers have processed 19 percent more packages than the year-to-date period in 2023.
This was the plan all along for Target, which is spending $100 million on the sortation project to bolster its last-mile delivery capabilities. The facilities are designed to serve a different purpose than the company’s legacy distribution centers, in that they’re positioned farther downstream from the retailer’s stores.
The sortation centers provide another direct, but often unheralded benefit to Target, Fiddelke noted. Processing space is freed up in the stores the facility serves in the individual market, while saving labor costs in those locations as well.
Target is opening its 11th sortation center this month, debuting it in Detroit. The warehouse is expected to process up to 60,000 packages daily by 2028, while operating in a “smaller-than-average” footprint, according to Fiddelke.
Last year, the Minneapolis-based retailer outlined a goal to operate at least 15 sortation centers by the end of 2026.
“Beyond growth in the number of these facilities, our existing sort centers continue to ramp up their capacity, and we’re finding new ways to integrate them into our broader network,” said Fiddelke. “For example, our recently opened sort center in Chicago will be feeding the Detroit sortation center, increasing the number of packages eligible for next-day delivery in that market.”
Target is also cutting down fulfillment costs from both within the warehouse and the store by using fewer brown boxes for packaging.
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“The most expensive thing we do in fulfilling product is shipping a brown box,” said Fiddelke, who noted that the retail giant cut costs in the area primarily by better aligning inventory with expected demand.
“We have to split shipments frequently,” said Fiddelke. “The core productivity within those processes, big improvements in our stores team, and how we delivering that product more efficiently as we pick and pack in the stores—that work adds up. And the teams have been at it for multiple quarters now, and we’re seeing it pay off.
Target’s e-commerce business saw 8.7 comparable sales growth in the quarter, outpacing the 0.7 percent comparable sales growth for stores. But the demand for faster delivery and pickup options is clearly working in the company’s favor.
According to Target CEO Brian Cornell, same-day services saw double-digit growth that surpassed the digital sales growth.
The Drive Up curbside pickup service and the membership-based Target Circle 360 same-day delivery offering both grow roughly 14 percent each.
Same-day services now account for more than two-thirds of e-commerce sales, with the biggest contribution coming from Drive Up, which generated sales of more than $2 billion in the second quarter and more than $4 billion so far this year.
“The thing we see when people engage with Drive Up and with Circle 360 same-day delivery, is that their in-store shopping actually increases after they become users of those services,” Fiddelke said. “And so, continue to watch that relationship closely and growth of those services means growth in our share of wallet as the consumers that use those services.”
The digital sales jump for Target is promising, as it was the largest individual increase for the company since the second quarter of 2022, when online comparable sales growth jumped 9 percent. The metric increased just 1.4 percent from the year prior in the first quarter.
Across the company, Target saw total revenue increase 2.7 percent to $25.5 billion on net income of $1.2 billion—a 42.7 percent improvement from the year prior. Comparable store sales increased 2 percent year over year, with traffic growing 3 percent in the period.
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