Concept Stores And More: Target’s Plan To Compete With Amazon

When Target opened its smaller, “flexible format” store — equipped with in-store pickup, expanded self checkout, and other digital “extras” —  in NYC’s Tribeca neighborhood last fall, it read as a direct response to criticisms of big-box retail as archaic or over extended.

Target hasn’t yet released data on how the store performed over the holidays. But in a conversation at NRF’s Big Show, Mike McNamara, Target’s EVP and chief information and digital officer, hinted at the concept as just one small part of a major reinvention for Target.

In a Q&A session with NBC’s Jo Ling Kent, McNamara talked about how major enterprises must change their approach to adopting technology now — and the big question: competing with Amazon.

We see an increasing number of millennials who desire to live in small or large metropolitan areas. Let’s talk about the new Target concept store down in Tribeca. How are those stores performing, and are the stores also supplying the e-commerce element?

Mike McNamara: Reorganization has been a trend all over the world, not just the United States. It’s occurring everywhere, and I think that for a number of years the majority of [successful] new stores have been smaller formats. Target is seeing exactly the same thing. As we move into neighborhoods — whether they’re big cities or on college campuses — that’s where we see trade move to, and they’ve been very, very successful for us. The store in Tribeca has only been open for a few months, but it’s had a phenomenal start. I can see us building out more and more of those smaller stores in urban areas because that’s where our consumers are moving.

They also are fantastic when it comes to buy online, pick-up in store — or even as shipment locations if they’re large enough, so I see them as being hugely important to the future of Target.

How do you compete against Amazon?

That’s not just the million dollar question, that’s the billion dollar question. Amazon is fantastic; there’s no two ways about it. I think they’ve been phenomenal over the last decade. They are playing against a different set of financial rules, as we all know.

I think they remain our fiercest competitor going forward. There’s no doubt about it. To be honest, I don’t see Target hitting them head-for-head. I don’t see us trying to be the catalog of everything, and delivering everything — but we do have some strategic advantages over them. They’re spending a lot of money to build out a fulfillment network to get close to major populations. Target already has that: We have 1800 stores that are probably physically within 5 or 10 miles of 95 percent of the population.

Over last Christmas period, or the last holiday period rather, about 40 percent of our online trade came out of our stores, because we do a lot of our shipment direct from our stores as well as order pick up. In that way, I think we have a lead time advantage over Amazon, and I think we potentially have cost advantage over Amazon because our last [transportation] leg is shorter — but there’s no doubt they’re fierce, and we’re going to have to fight hard.

Regarding that, you say that [the supply change] needs to be turned on its head. It has changed so much over the past 20 years. What is Target’s biggest challenge when it comes to making the supply chain more efficient?

I think it’s just time. I think we know what to do and I think we know how to do it, it is just a major investment we’re looking at. It’s a many, many billions of dollar investment but it is doable, I believe. All retailers historically have been really good at shipping boxes, big containers to their network.

What needs to change is this: We’re [set when it comes to] moving a case of, say, 24 things, but shipping that single unit is what Amazon is so good at, that’s what we’ve all got to think about. It’s that single tube of toothpaste you’re ordering, not the carton of 36 of them.

That’s what we’ve got to address, and that’s going to be our challenge over the next few years.

I think the good thing about Target is that that model suits our stores business as well as it suits our online business, because we’ve got a lot of relatively slow-moving inventory. So [single unit] replenishment into the stores, which we can build out, also services our online guests. We’re in a pretty good place on that.