Target's Departure from Amazon Is Not Risk Free

Includes: AMZN, TGT
by: Larry Dignan

Target (NYSE:TGT) plans to leave Amazon’s (NASDAQ:AMZN) e-commerce platform to build its own site ahead of the 2011 holiday season. The transition is going to be one of the more visible IT projects in the next two years.

Amazon will take a bit of a profit hit from the Target move. Target is expected to generate $87 million in non-GAAP operating profit in 2009 according to Cowen and Company. Most analysts expect Target’s departure to only ding Amazon earnings by 3.5 percent in 2012.

Aside from the profit hit, the Target transition away from Amazon will be an interesting project to watch. Target has to decouple from Amazon’s platform seamlessly and add features that can keep up with other retailers (like in-store pickup).

Meanwhile, Target has to build up its expertise after relying on Amazon for a decade. In a statement, president Steve Eastman said:

Amazon has been an important strategic partner since we re-launched in 2001, and the strength of Amazon’s technology and fulfillment services has been a contributing factor in’s success. However, to deliver a customized multi-channel experience for Target’s guests, we believe it is in Target’s best interest going forward to assume full control over the design and management of Target’s e-commerce technology platform, fulfillment and guest services operations.

Amazon will continue to run until the transition occurs. Unlike the Toys R Us breakup, the Amazon-Target split is amicable. Nevertheless, the project will be high risk. To wit:

  • Target will have to integrate its fulfillment capabilities with;
  • will need to build out its customer service;
  • And the new will launch without a lot of wiggle room before the peak 2011 shopping season.

J.P. Morgan analyst Imran Kahn said in a research note:

Rolling out a platform to fulfill the sales of a top-20 eCommerce site is likely to hit a few bumps in the road—and Amazon’s market share could see benefits if has any difficulties providing a top-notch customer service experience, in our view.

Add it up and it wouldn’t be all that surprising if Target cuts some kind of deal with GSI Commerce. GSI provides back-end e-commerce services for Toys R Us, Dick’s Sporting Goods, Nautica, Zales, the NFL and other big-name retailers. In a nutshell, GSI provides the same services Amazon does without the direct competition with customers.

Some analysts doubt that GSI Commerce will win over Target. Goldman Sachs analyst James Mitchell writes in a research note:

Target is the final large retailer on the Amazon platform (Toys ‘R’ Us exited in 2006), and following expiration of the partnership originally formed in 2001, Target plans to build and manage an online store independently. Unlike Toys ‘R’ Us, we do not believe that Target seeks to partner with GSI Commerce.

But a blended outsourcing approach could help manage some of the IT risk Target will face.