Target's $550M purchase of Shipt buys time and talent
With two major acquisitions this year, Target massively expanded its same-day delivery fulfillment capabilities. Is this what finally gives its grocery business a boost?
Target last week scooped up same-day delivery platform Shipt for $550 million in cash, just four months after buying same-day transportation technology company Grand Junction for an undisclosed amount.
Both acquisitions show how serious Target is about strengthening its ability to provide customers with speedy and convenient fulfillment of online orders — a proposition that has been shaped largely by Amazon, but increasingly, Walmart too. And Target's customers have been demanding it, according to John Mulligan, Target’s chief operating officer.
"Same-day delivery is a service that our guests are asking for more and more often," he said in a blog post last week. "By acquiring Shipt, we’ll be able to take advantage of our network of stores and Shipt’s technology platform and shopper community to quickly offer same-day delivery to millions of our guests."
The mass merchant has little choice. The company lost 16% of its Thanksgiving/Black Friday traffic, some 5.7 million fewer visitors compared to last year, and has reduced its total retail traffic share by 1.5%, according to data emailed to Retail Dive from store traffic analytics firm SimilarWeb. But Target did see a major boost in mobile app usage, doubling their usage rate of installed apps over Thanksgiving and Black Friday, that data also showed.
Target and Walmart have each attempted to solve the last-mile puzzle piece by bolstering in-store pickup of online orders. Walmart has vastly expanded its pick-up services and is testing delivery by using store staff, while Target has piloted curbside pickup off and on and next-day delivery for REDcard loyalty members. But while many customers appreciate in-store pickup, it's Amazon that has managed to turn same-day delivery into a customer expectation, if not a priority. More than half of retailers are now offering same-day delivery, up from 15% last year, according to a recent survey.
"This is a competitive reaction which Target had to take to respond to what its main rivals, Walmart and Amazon are doing," Sam Cinquegrani, founder and CEO of digital strategy and services firm ObjectWave, told Retail Dive in an email. "Ultimately, it’s a good thing for consumers because it's all about convenience and a great user experience. Target is one retailer that has responded to the competitive threat [of] online retailers like Amazon. If they can do more to leverage their physical stores to their advantage, I think they will do just fine. To do that, they’ll need to look at other technologies like beacons and RFID to continue to [respond] to the customers' needs and wants. Bravo Target!"
What Target gets
Shipt, (which will be a wholly owned Target subsidiary, but will continue to operate independently under CEO Bill Smith), was founded in 2014 and operates in more than 72 U.S. markets. The online service enlists a network of more than 20,000 "shoppers" who pick out customers' orders. Grand Junction, founded the same year, bases its own operations on two essential ideas: that retailers know their inventory really well and that a slew of local and regional delivery companies already exist. The key has been to match those two things up, via technology. In both cases, Target is accelerating its same-day services by acquiring technology, infrastructure and talent from established players.
Shipt in particular will bring same-day delivery services to about half of Target stores by early 2018. The service will also be offered from the majority of Target stores, and in all major markets, before the holiday season next year. At launch next spring, Target will offer same-day delivery of groceries, essentials, home, electronics and other products; by the end of 2019, it will include all major product categories.
"Where Walmart made a platform acquisition when they acquired Jet, which brought on Marc Lore, Target is taking an incremental approach, trying to fill gaps as needed."
CEO and founder, Activant Capital
"We know Target has been trying to crack the last mile problem in logistics for some time, and clearly decided to acquire talent from the outside," Steve Sarracino, CEO and founder of Activant Capital, a growth-stage investment firm which specializes in commerce and direct-to-consumer businesses, told Retail Dive in an email. "Interestingly, where Walmart made a platform acquisition when they acquired Jet, which brought on Marc Lore, Target is taking an incremental approach, trying to fill gaps as needed."
What Target has
Target already has something that Amazon paid dearly for this summer when it forked over $13.7 billion for Whole Foods: an existing network of stores. That's a major advantage, provided its stores are well stocked, something that Target has struggled with in the past.
Target's Shipt move underscores not just the growing importance of same-day delivery, but also "the potential edge that store-based retailers have in some markets," Profitero Senior Vice President of Strategy and Insights Keith Anderson told Retail Dive in an email.
Running the Shipt service from its stores will ultimately strengthen the operational performance of Target's physical assets, GlobalData Retail Managing Director Neil Saunders told Retail Dive in an email. "While we do have concerns that the service might cannibalize some existing store sales, we believe that it will ultimately result in higher overall sales," he said.
Several analysts are impressed with Target's Shipt acquisition, including the nitty-gritty financials. The move is "credit positive for the company, and is an example of the speed with which Target is attempting to expand and enhance its online channel," Moody’s Lead Retail Analyst Charlie O’Shea said in an email to Retail Dive. "While it will not affect Target’s capability this holiday season, the fact that Target will have this service in place during 2018 will significantly improve its online competitive position as the service is integrated and rolled out to customers. This is yet another example of a brick-and-mortar retailer leveraging its physical assets to improve its online offerings."
"Amazon has massive head start and an unfair ability to take capital losses which the other grocery retailers will not be able to sustain. The deck is stacked."
CEO and founder, Activant Capital
That doesn't mean it will all be smooth sailing. For one thing, retailers, including Amazon, are still figuring the costs of these high-touch services and how much customers are willing to pay. Shipt's service right now is $99 per year, the same fee as Amazon Prime, which includes a host of perks like entertainment streaming and photo storage. But even the e-commerce giant's same-day delivery services, which are available only to Prime customers, cost an additional $5.99 per order for same-day delivery or "as low as" $2.99 per item for one-day shipping for orders under $35.
Another challenge, according to Sarracino, is exposing their in-store inventory to allow for same-day delivery. "At present time, doubtful," he warned. "Meanwhile Amazon is focused on same-day delivery through its Whole Foods network, and even Costco is now offering the same-day service — but Amazon has a massive head start and an unfair ability to take capital losses which the other grocery retailers will not be able to sustain. The deck is stacked."
Shipt's policy of crowd-sourcing delivery may also be a problem for Target. "The biggest challenge I expect to arise from this integration will be how Target addresses Shipt’s current business model, which relies heavily on 1099 employees making purchases from many different retailers," according to Drew McElroy, CEO and co-founder of digital shipping and trucking marketplace Transfix. "In order for Target to internalize Shipt and maximize value creation, it is likely that some changes to the service will need to be made."
But the crux of the matter could be Target's grocery operations, a sore spot for the retailer for a few years now. The services made possible at Target by Shipt could help ease that problem, which in turn could boost Target's sales. Target needs that — analysts' concern over the retailer's lackluster grocery offering is not so much because it's missing those low-margin sales but because it's missing the frequent footfall those sales bring.
Getting the groceries
The customer expectation of swift arrival of online orders, set years ago by Amazon’s free two-day shipping for Prime members and accelerated by expanding same-day delivery options for those customers, has moved solidly into the grocery market. Look for more such aggressive moves next year in the segment in coming months, said Maya Mikhailov, chief marketing officer of mobile retail app developer GPShopper.
"[The acquisition] signals a clear intent to capture a much larger slice of the online grocery market. This is currently a segment where Target underperforms, a position that is not sustainable given the increasing popularity of buying food online."
Retail Managing Director, GlobalData
"Partnerships with services like Shipt and Instacart foreshadow another 2018 retail trend — increasing reliance of same-day services in the grocery sector," Mikhailov said in an email to Retail Dive. "Modern, busy shoppers are flocking to time-saving options for routine chores and grocery needs to catch up to this consumer demand."
Legacy players like Kroger are also stepping up delivery efforts amid a brewing price war, making Shipt's grocery service a potential lifeline for Target. The acquisition "signals a clear intent to capture a much larger slice of the online grocery market," Saunders said. "It gives Target the infrastructure and operational capacity to grow its market share in the online grocery channel. This is currently a segment where Target underperforms, a position that is not sustainable given the increasing popularity of buying food online."
In turn, bolstering that growth allows Target to improve the sales volume necessary to support economies of scale and margins, particularly important because of Target's focus on low prices, he also said. "Perhaps most importantly, the new platform will allow Target to offer same-day delivery on a wide selection of non-food items. This makes the grocery service more attractive to consumers."
But it's no panacea, either, he warned. "As positive as the news is, it does not change the fact that Target has a lot more work to do in developing a clear proposition in grocery," Saunders said. "While improvements have been made, the position and points of differentiation are still not refined. Getting these right is the real key to growth."
Easy does it
Target — in contrast to Walmart, which has gobbled up a series of e-commerce players since its $3.3 billion purchase of Jet last year — has been judicious about its own acquisition strategy. That could be because it's still working off the debacle of a failed Canadian expansion. "They got hurt far more than people realize in Canada," retail analyst Nick Egelanian, president of retail development consultants SiteWorks International, told Retail Dive of Target's failed entry and swift exit out of that country, which registered some $5.4 billion in pre-tax losses. "They're not really building stores except for [a] small number of urban and college [stores], not enough to move the meter. They sold their pharmacy business. They're as good a company as they always were in terms of concept. I think they’re capital constrained and damaged."
Still, the purchases of Grand Junction and now Shipt show that Target is prioritizing its needs. Or, as Anderson said of the Grand Junction merger, are "a promising sign that Target at least knows they need to do more than they are."
And these investments are far savvier than buying mattress startup Casper, (which the mass merchant earlier this year reportedly considered for $1 billion), according to Michelle Grant, head of retailing at Euromonitor International.
"Instead of buying Casper, Target bought Shipt. This is a smart move to make sure Target stays in the grocery game," she told Retail Dive in an email. "It has long struggled in this category, but seems to be turning the corner. Its third quarter results showed an increase in comparable sales for food and beverage, especially in areas it has invested: fresh, organics, in-stocks and labor. Having an 'instant' delivery option, whether it's click and collect or hyperlocal, is tablestakes now for grocers."
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