Target expanding same-day delivery with $550 million acquisition of Shipt

Target Corp. is getting serious about same-day delivery of groceries and other items with a $550 million deal to buy Shipt Inc.

The cash purchase is the Minneapolis-based retailer's largest acquisition in decades and represents one of its boldest answers yet to the growing Amazon threat.

Target said Wednesday it will leverage Shipt's technology and its network of shoppers to bring same-day delivery to about half of its 1,800 stores by next summer and to most of its stores before the next holiday shopping season.

"We believe we'll now be able to leap several years ahead, significantly accelerating our nationwide same-day delivery," John Mulligan, Target's chief operations officer, told reporters during a media call.

Shipt, a Birmingham, Ala.-based company with 270 employees, is the smaller but fast-growing rival to delivery firm Instacart. It charges an annual $99 membership fee in return for unlimited free deliveries on orders over $35 from a range of grocery partners that include Costco, Kroger, Meijer and Publix.

The last year has seen a number of high-profile acquisitions, including the $13.7 billion purchase of Whole Foods by Amazon and Walmart's $3 billion deal last year to take over Jet.com, as retailers have hustled to keep up with the fast-changing landscape.

Wednesday's announcement of Target's deal, which sent its shares up 3 percent, answered many analysts' questions about what Target's chess move would be in response.

In August, Target made a smaller acquisition of San Francisco-based technology firm Grand Junction, which also focuses on same-day delivery.

"This certainly ups the game for Target and shows they're serious about this," said Leon Nicholas, an analyst with Kantar Retail, adding that it's another way Target is leaning into its network of stores to fulfill digital orders.

At the same time, he noted that Walmart has also been moving quite aggressively to roll out its apparently successful click-and-collect grocery program outside its stores.

"A lot of consumers view curbside as more convenient because it's on their own terms," he said, adding that a retailer doesn't have to make sure customers are home for a delivery or worry about deliveries being left on their doorstep.

Neil Saunders, an analyst with GlobalData Retail, said Target's purchase of Shipt is "sensible and logical." But he also noted that groceries have been a weakness for Target and it needs to do a better job in differentiating its offerings to fuel more growth.

Target's largest acquisition in recent history was in 1990 back in its Dayton Hudson Corp. days when it paid $1 billion for Marshall Field's. The company later divested its department store division and focused on growing its discount Target chain.

In the past couple of years, Target has partnered with Instacart on same-day delivery of groceries in a handful of markets — the Twin Cities, San Francisco and Chicago.

But while Instacart, which has been valued at more than $3.4 billion, is in more than 100 markets, Target had not expanded the partnership further, providing a hint that it had other plans in mind for same-day delivery.

"We've had a great partnership with Instacart over several years, learned a lot along the way," Mulligan said Wednesday. "Eventually we will have conversations with them about where to go next with them."

He added that the key differentiator from Target's perspective was Shipt's focus on providing a great customer experience.

Shipt, which was founded in 2014, was also likely a cheaper acquisition for Target. Bloomberg recently reported that Shipt was expecting to reach $1 billion in revenue by next year.

Today, Shipt has a network of 20,000 personal shoppers in more than 72 markets, up from 30 last year. It has not yet set up shop in the Twin Cities.

The company raised $40 million in a Series B round of funding earlier this year to help support its expansion.

Shipt will be a wholly owned subsidiary of Target and will continue to run its business independently out of its offices in Birmingham and San Francisco.

Shipt CEO Bill Smith said Wednesday that Shipt has already spoken with a number of its existing retail partners about the deal with Target and has received positive feedback about it. He noted that Shipt will not share customer data of other retailers with Target.

But analysts wondered whether that assurance would be enough to keep other retailers from leaving Shipt.

Target began discussions with Shipt over the summer. The deal is expected to close before the end of the year and is expected to be modestly accretive to Target's earnings per share in 2018.

Mulligan said Target was interested in purchasing Shipt, instead of just using its services, in order to provide additional resources so it could scale up more quickly. It's important to Target, he said, that other retailers continue to partner with Shipt in order for it to be more cost effective.

While consumers have a growing appetite for same-day delivery, it has been a challenge for companies to find a way to make it profitable.

Target's same-day delivery via Shipt will initially focus on grocery, household essentials, home goods and electronics and will expand to other categories over time.

Target will become an option on Shipt's app. Plans also are in the works for it to become embedded into Target.com and on Target's mobile app, but details about fees or memberships have not yet been worked out.

Wednesday's announcement builds on other work Target has been doing in the last year to improve its supply chain and fulfillment options.

It has used its acquisition of Grand Junction to expand a test of same-day delivery in Manhattan in which customers can get their purchases delivered to them after picking the items out in the store.

It has also launched a curbside pickup service called Drive Up in which employees bring orders out to customers' cars outside its stores around the Twin Cities in recent months. Plans are to roll it out in other markets next year.

Kavita Kumar • 612-673-4113