Retailer To Add New Distribution Facilities, Sortation Centers
Target plans to open six new distribution centers and five new sortation facilities, joining other big retailers that are expanding and bolstering their supply chains to deliver orders to customers as quickly and cheaply as possible.
Target, based in Minneapolis and with about 2,000 stores, provided an update on its expansion of both its distribution and retail footprint during a second-quarter earnings call on Wednesday. The retailer is still on track to add 24 new stores this year and so far has debuted a dozen of them, including locations in the SoHo neighborhood of Manhattan and Jackson Hole, Wyoming.
Target also reported a steep drop in its profits it suffered after dramatically slashing prices to get rid of excess inventory. Net income declined by 89.9%, to $183 million, from $1.82 billion last year.
Retailers including discounter Walmart, department store Macy's and e-commerce juggernaut Amazon have been adding various types of warehouses and logistics properties to their rosters as they jockey to find ways to get merchandise either to stores or direct to customers. And Target is no exception, citing its soaring number of online orders for its need for more distribution facilities.
Target had already been beefing up its distribution network, and it is stepping up that effort. The retailer debuted two "upstream" distribution centers at the end of last year, according to John Mulligan, the company's executive vice president and chief operating officer. And it plans to have six more new ones in the next few years, including two on track to open in 2023, he said.
Bumping Up Number of Sortation Sites
Target is also "rapidly expanding" the number of sortation centers it's operating around the country in order "to enhance our last-mile fulfillment capabilities," according to Mulligan.
“We have six of these facilities operating today, including three that have opened in the last few months," he told Wall Street analysts. "And we have plan to add five more by early next year.”
The company's first sortation center opened in 2020 at 2600-2800 NE Winter St. in Minneapolis. Target has previously said it had opened or planned to open sortation centers in Atlanta; Chicago; Denver; Philadelphia; and the Texas cities of Dallas, Houston and Austin.
Sortation centers are a link in Target's "stores-as-hubs" strategy, where the retail sites act as ship-to-store centers for digital orders. Rather than have a store employee pick, pack and sort items for orders in a backroom, sortation centers "take on the sorting process, saving our store teams time and space so they can fulfill more orders and reach guests faster at a lower delivery cost for us," according to Target.
“These small facilities expand ship-to-store capacity in the locations they serve, while significantly reducing last-mile delivery costs, particularly as we integrate our ship drivers into the process,” Mulligan said on the call. "Given the package-delivery density we’ve achieved across many markets over the last few years, we see continued opportunities to add more sortation centers over the next few years, which adds speed and significantly reduces last-mile costs in markets where they operate.”
Over time, Target is aiming to keep its distribution center network operating at or below 85% maximum capacity, “given that operational difficulties and costs rise significantly when we move beyond that level,” Mulligan said.
In June, as inventory peaked, the distribution centers were operating at well over 90% capacity, according to Mulligan. By the end of the second quarter, they were at below 80% capacity.
Profits Take Hit After Discounting
Earlier this year Target had revised and lowered its guidance on profits, saying it was taking dramatic measures — extreme discounting — to get rid of a glut of inventory that shoppers no longer wanted. Faced with record inflation, consumers had shifted their spending to essentials such as groceries and gasoline and away from items such as apparel and electronics.
"There are multiple sources of woe for the poor bottom line outcome," Neil Saunders, managing director of GlobalData, said in a note. "Higher freight costs and higher labor costs — especially in distribution centers — have taken a chunk out of earnings. So too has the mix of sales which is now higher in lower-margin categories like food and lower in higher-margin categories like apparel. But the main problem lies in the extensive discounting offered over the quarter to clear down inventory across several general merchandise categories."
Saunders said he acknowledged that Target has been affected by problems outside of its control, such as shipping delays, but added that the company has been far more affected by inventory issues than many other retailers.
"For this it needs to shoulder some responsibility in that it clearly badly misjudged demand and was too focused on getting product through the door at all costs while paying too little regard to the price paid," Saunders said. "It is now suffering from a hangover induced by this lack of operational control."
Target now expects to make capital expenditures of $5 billion or more this year, and so far has spent $2.5 billion of that, according to Chief Financial Officer Michael Fiddelke. In addition to expanding its supply chain operations, that money is also paying for the remodeling of nearly 200 Target stores this year, Mulligan said.