Target agreed to purchase grocery-delivery startup Shipt for $550 million, stepping up efforts to challenge Amazon in e-commerce orders.
Target will use the all-cash acquisition to accelerate its rollout of same-day delivery across the country, the retailer said in a statement Wednesday. The idea is to let customers order groceries and other goods online, and then have the items sent directly to their doors from nearby Target stores.
“With Shipt’s network of local shoppers and their current market penetration, we will move from days to hours, dramatically accelerating our ability to bring affordable same-day delivery to guests across the country,” John Mulligan, Target’s chief operating officer, said in a statement.
The deal is Target’s latest move to beef up its logistics operations, following the acquisition earlier this year of software company Grand Junction, which manages local and same-day deliveries.
The retailer currently offers same-day delivery in New York City and can send online orders from 1,400 of its stores. Competition in this space is growing fiercer, though, as rivals Walmart and Best Buy have started offering same-day service, aiming to keep pace with Amazon.
Four out of five shoppers want same-day shipping, according to a survey by fulfilment software maker Temando, but only half of retailers offer it.
The deal will allow Target to bring same-day delivery to about half of its 1,834 stores by next summer and to the majority of stores in time for next year’s holiday season.
The service - costing $99 a year for unlimited deliveries - will initially encompass categories like groceries, household essentials and electronics, expanding to all major product groups by the end of 2019.
Consumers’ increasing preference for shopping online, along with Amazon’s purchase of upscale grocer Whole Foods and its encroachment into new arenas like apparel, have sent retailers scrambling to improve their online offerings.
E-commerce sales are up about 17% this holiday season, according to Adobe Systems, and online merchants racked up a record $6.59 billion on Cyber Monday alone, the company found.
The question for traditional retailers is how to handle all those internet orders. They could build their own delivery network, but it’s an arduous and expensive process. That’s why many of them are seeking help from e-commerce startups like Shipt and Instacart.
Founded in 2014, Shipt serves about 20,000 customers through partnerships with retailers including Publix Super Markets, HEB Grocery Co. and Costco. It will continue to operate independently and plans to expand its business with other retailers, Chief Executive Officer Bill Smith said in an interview.
“We’ve spoken to a number of our existing partners about this deal and all the conversations have been very positive,” Smith said. “Having multiple retailers allows us to grow our membership base and make it more attractive. In same-day delivery, scale matters.”
For now, Target shoppers will need to pay Shipt’s $99 annual membership fee to gain access to the service. Once a customer orders, they send a “shopper” into the store to grab the groceries, and then deliver the items. Target is working on how to integrate Shipt into its website and mobile shopping app, Mulligan said.
The deal is expected to close before the end of the year and will be “modestly accretive” to Target’s profit in 2018, while boosting online sales, the company said. The retailer’s e-commerce sales already surged 24% in the third quarter.
Target has worked with Shipt’s rival Instacart for same-day service in cities like Minneapolis and Chicago since 2015, and Mulligan said he “will have conversations with them on where we go next.”
The two companies began discussing the deal in the middle of the summer, Mulligan said. They decided to pursue an acquisition rather than just a partnership in order to plow Target’s resources into expanding Shipt’s business, and to maintain its current level of customer experience.
Smith will stay in his role, reporting to Mulligan, and its 270 employees will remain in Shipt’s offices in San Francisco and Birmingham, Alabama.