Quest for Profit

Every morning, hundreds of drivers congregate at a delivery hub in Minneapolis. They get ready to fill their personal cars with packages that they will deliver to thousands of customers in the area. This hub belongs to Target (TGT), and these gig-workers are how the retailer is able to fulfill the increasing amount of orders it receives online.

E-commerce now comprises roughly 20% of Target’s sales. Approximately half of that number comes from same-day services like shipping to homes and curbside pickup. But transportation and labor costs make these sales less profitable. To change that, Target is building a growing network of sortation centers across the country.

The Bullseye: Cutting Costs

Target has added five similar hubs like the Minneapolis location since 2020. Three more distribution centers are scheduled to be open by the end of January. The goal of fulfilling online orders has taken on a new urgency as fuel prices rise.

At these sortation centers, contract workers pick up and deliver packages that are going to the same general location. While the exact price of these cost-saving measures isn’t official, Chief Operating Officer John Mulligan said average per unit digital fulfillment expenses are down over 50% since 2019.

Competition

Target isn’t alone in its efforts to cut the cost of its e-commerce operations. Walmart (WMT) is using its stores as warehouses not only for its own products but for other companies’ goods as well. Through a new business called GoLocal, Walmart is helping deliver online purchases for companies like The Home Depot (HD) and Chico’s.

Of course, there is Amazon (AMZN) too. Not only is the tech giant building more local distribution centers, but they also recently announced they will begin drone deliveries in College Station, Texas through a program called Prime Air. As more and more people shop online, big retailers like Target, Walmart, and Amazon are locked into a battle to win those purchases and bring down costs, which can be a tall order.

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