Winning online sales is largely a numbers game, as Target's latest deals show.
Target announced on Monday that it has partnered with e-commerce platform Shopify to “offer some of its most popular merchants and their products on Target+,” which the company described as a “third-party, highly curated digital marketplace.” Target also plans to become the first mass retailer to sell some of Shopify's other retail partners' products in its brick-and-mortar stores.
The Target news comes as third-party marketplaces have rapidly become a way for retailers to expand their e-commerce offerings, a model pioneered by Amazon.com Inc.
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Having other sellers help fulfill orders increases the number of products available on a retailer's website without necessarily increasing overhead costs.
Walmart also adopted the strategy after abandoning individual brands it had acquired before the pandemic, including Bonobos and ModCloth. Target has also been expanding its third-party offerings on its website, but a partnership with Shopify will increase the number of brands it offers and bring more of them to its brick-and-mortar stores.
The move comes as e-commerce continues to make up a growing share of total retail sales, making digital options essential for nearly every brand. While Amazon clearly holds a commanding lead, Walmart has also been making strides in e-commerce, ranking second in U.S. online sales.
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The problem is, none of this is cheap. From the cost of maintaining bug-free apps to last-mile delivery to individual homes, selling online is hard to make a profit on. Amazon has notoriously failed to turn a profit for nearly a decade, and many investors are more interested in its other businesses, like Amazon Web Services and advertising, than in its retail division. So Walmart and Target are rapidly expanding their e-commerce businesses, which aren't contributing to revenue.
TD Cowen analyst Oliver Chen said Monday that the numbers show Amazon benefits from an early lead. He estimates that Amazon Prime has about 200 million members, its Walmart+ subscription service has 24 million members and its free program, Target Circle, has 100 million members.
Still, he thinks Walmart deserves credit for its e-commerce progress: “According to management, Walmart is a winner on its path to e-commerce profitability within two years,” he wrote. He predicts that the company's domestic e-commerce business will lose just 10 cents per share in fiscal 2024, helped by lower delivery costs.
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Target doesn't have a forecast for when its e-commerce business will be profitable, but Chen believes it “will take longer than Walmart.” He reiterated his buy rating on Walmart and hold rating on Target, but said Target's e-commerce model has a lot of potential given its strategy to use stores as fulfillment hubs for digital orders to lower delivery costs.
E-commerce is a costly game for retailers, but most can't afford to give it up. As they look for ways to compete with Amazon, we're likely to see more deals like Target's partnership with Shopify. The Shopify partnership is another step in the right direction for Target, bringing more brands into its stores while also expanding its digital marketplace.
Email Teresa Rivas at teresa.rivas@barrons.com.
