Target (NYSE: TGT) on Monday announced the expansion of its sortation network by 50% with three new hubs, two in Chicago and one in Denver. The facilities are scheduled to open this year, bringing Target’s sortation center count up to nine.
In the pursuit of same-day shipping, the United States’ largest retailers have been lining up to buy transportation assets at an unprecedented rate. But the same-day delivery machine runs on much more than trucks and vans. While that capacity is needed for speedy deliveries, having a facility footprint remains just as important.
In 2022, Target has made a strong strategic push to get the most out of its physical locations. The company in March announced a $5 billion investment to overhaul its logistics network by adding four distribution centers, 30 retail locations and 10 sortation centers. It also plans to renovate 200 existing stores with same-day fulfillment, pickup and returns capabilities.
“Our goal is to meet the guest where they are, when they want, how they want,” John Mulligan, Target’s chief operating officer, told CNBC. “And so if they do want us to ship something to their home, we want to make that as efficient as possible.”
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Last year, Target stores fulfilled more than 95% of its total sales. The retailer’s digital business tripled in size over the past two years — and same-day fulfillment services accounted for over half of that growth. But with only six sortation centers to cover nearly 2,000 stores, store associates were left doing most of the sorting and packing.
With a sortation hub, all associates need to do is place the packages on pallets. From there, a Target sortation center truck picks them up and brings them to the facility to be sorted and batched. Then, a driver from Shipt or one of Target’s other carrier partners delivers the orders, which are consolidated by neighborhood to reduce the distance between them.
Three new centers in Chicago and Denver should help ease the burden on store associates. But there are more on the way — at least seven, if Target’s plans haven’t changed. The retailer also plans to test large-capacity delivery vehicles, which can hold up to eight times as many packages per route, out of its hub in Minneapolis.
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Brands like Target are betting sortation centers can reduce the costs of online order fulfillment. Though e-commerce orders are beginning to make up a significant portion of retail sales — they comprised around 20% of Target’s last year — labor and transportation costs make them less profitable than orders from in-store shoppers.
Unsurprisingly, Walmart and Amazon are leading the way in terms of sortation footprint. Walmart boasts a network of 28 e-commerce fulfillment centers, its equivalent to Target’s sortation hubs, while Amazon features almost 100 outbound sortation centers.
It’s still unclear just how big of an impact sortation centers have on transportation costs. But the logic is they reduce the number of miles between the retailer and customer, meaning brands can spend less on drivers, fuel and sustainability costs.
Some more insight might come next month, when Target reports earnings for the second quarter of 2022.
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