retail industry strategy at supply-chain software firm JDA Software Group Inc. Systems eventually will improve to help c
Target Says Online Sales Surge Tied to Store Inventories With digital sales up 34% last quarter, the retailer says in-store pickups were central to both e-commerce and store sales growth
Target last year created an out-of-stock “action team” to address an issue that the company believes cost it sales. PHOTO: ASSOCIATED PRESS
By LORETTA CHAO Feb. 24, 2016 4:10 p.m. ET
Target Corp. believes the key to success for online sales is managing inventory in its physical stores. The retailer, which has struggled in recent years with empty shelves, said Wednesday its in-stock performance improved 20% in the fourth quarter over the same period the year before. With more inventory in stock, 30% of online orders were fulfilled from the stores, the company said, and a record number of online customers picked up their orders up in person over the holidays, “While we’ve added capacity across our entire direct-to-guest network, our fourth-quarter experience demonstrated the power of relying on our stores to fill digital demand,” said John Mulligan, the company’s chief operating officer, on Target’s fourth-quarter earnings call. Target’s online sales grew 34% in the fourth quarter, topping rival Wal-Mart Stores Inc. thanks in part to free-shipping offers during the holidays and sitewide discounts. Foot traffic in stores rose for the fifth straight quarter, but the company’s gross margin declined.
Many brick-and-mortar retailers are trying to figure out the right balance of inventory on store shelves for walk- in customers and in warehouses to meet highly- volatile online demand. Although moving inventory up the supply chain and into distribution centers can reduce redundant inventory, it can leave stores low on stock and cost sales. Fulfilling orders out of stores can further complicate the equation. “Retailers are adjusting to where demand is coming from,” said Jim Prewitt, vice president of retail industry strategy at supply-chain software firm JDA Software Group Inc. Systems eventually will improve to help companies get a better grip on to stock each of sales channel, but until then “the only way is to have enough safety stock to cover both locations.” Today, many retailers are piling up inventory faster than their sales are growing, “which is not a good model…but if you have ongoing availability issues, you are going to do what you need to do in the short-term, Mr. Prewitt said. In the long-term, “they will work on how to do that profitably.” “Nobody wants stock-outs. If you’re to a place, and they never have [what you want], pretty soon you just stop going there. That’s very difficult revenue to recapture,” said Brooks Bentz, president of supply-chain consulting services at logistics company Transplace LLC. “Positioning inventory closer to the front line is vital.” Mr. Bentz said retailers are increasingly using technology to help manage replenishment rates, but most are still seeking the right balance. “People are experimenting to see what works best,” he said. “No one has quite figured out precisely the perfect model.” Target said last year it had created an out-of-stock “action team” to address an issue that the company says had cost sales. On Wednesday, executives said the team conducted tests during the fourth quarter to reduce variability in the inventory moving into distribution centers, including setting standards on how much safety stock to have and prioritizing items most likely to keep customers returning to stores.
“Because upstream variability in the supply chain hampers our ability to keep our stores in stock and provide tight shipping windows to our guests, a key pillar of the team’s work is focused on improving freight flow through the supply chain,” Mr. Mulligan said. The company said inventory levels rose 4% from a year earlier, a higher rate than Target’s sales growth, but reflecting the “intentional inventory investments which are supporting record instock levels in our focus categories,” said Target CFO Cathy Smith. Ms. Smith said that as online sales grow as a portion of its overall sales, the company will gauge its performance “based on Target’s overall traffic and sales growth, without making an a rbitrary distinction between channels.”
