Target is soaring past Wal-Mart and Amazon in the most important category

Target Posts Holiday Sales That Topped Estimates
Target Posts Holiday Sales That Topped Estimates

Target's sales are skyrocketing in a category that will determine the future of retail.

On Wednesday, the retail chain reported digital sales increased 34% in the fourth quarter.

For comparison, Walmart's digital sales only increased 8 percent in the fourth quarter. Target even beat ecommerce giant Amazon, which grew net sales 26% last quarter.

Ecommerce still only make up a small percentage of sales at most traditional retail chains -- 5% in Target's fourth quarter.

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However, it plays a major role in growth. Two-thirds of Target's 1.9 percent increase in comparable sales was rooted in digital.

"The blunt truth is that while stores remain a vital part of the retail mix, they are not quite as relevant as they used to be," Conlumino CEO Neil Saunders wrote in a research note on Walmart's closure of 269 stores in late January.

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As a result, retail chain are seriously investing in their ecommerce business. Last year, Walmart CFO Charles Holley told analysts the company planned to invest between $1.2 billion and $1.5 billion in ecommerce in 2015, and even more in 2016.

Even if retail chains invest billions of dollars, they won't catch up with Amazon's volume of online sales any time soon. Amazon had a huge head start on traditional retailers. The ecommerce giant actually powered Target's online business until 2011, making it an uphill battle for Target to compete to its former partner and competitor on a level playing field.

In an effort to play to their strengths, traditional retailers have emphasized the integration of online and in-store experiences.

"Our segment operations are designed to enable guests to purchase products seamlessly in stores or through our digital sales channels," states Target's quarterly earnings report.

On that count, Target has an opportunity to beat both Walmart and Amazon.

The company has recently debuted a number of pop-up concept stores, such as "Target Wonderland," that utilize aspects of digital sales (such as swapping out carts for digital radio-frequency identification, or RFID, keys).These limited-time locations also emphasize experiences that customers can only find at brick-and-mortar stores, including on-site games, activities, and spectacles like a huge LEGO pirate ship.

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