Another domino just fell in the wake of the Amazon-Whole Foods acquisition.
Target announced on Wednesday morning that it plans to make one of its biggest acquisitions in recent history by purchasing Shipt, a startup that delivers groceries on the same day customers place an order, for $550 million in cash.
Like its chief rival, Instacart, Shipt partners with a network of brick-and-mortar grocery chains to pick orders off of their shelves and deliver them to customer’s doors on the same day they are ordered.
Target plans to join the Shipt online marketplace, while Shipt intends to keep serving its other retail partners. Eventually, Target will offer the Shipt same-day delivery service on Target.com and the Target app.
Shipt customers pay $99 a year for unlimited deliveries from a selection of partners that include Harris Teeter, Meijer and Texas grocery giant H-E-B. The company operates in 72 U.S. cities currently, and has said it plans to be in 140 markets, including most major U.S. metro areas, by the end of next year.
The announcement comes just a few months after Amazon closed its giant acquisition of Whole Foods, sending shock waves through the board rooms of big retailers and grocers who expect the move to push grocery delivery more into the mainstream. In the wake of that deal, Shipt competitor Instacart has signed up a string of major grocers as partners.
The deal also marks the latest move by Target to modernize its logistics and fulfillment efforts. The company recently launched its own curbside pickup tests at about 50 stores, after initially working with a startup as a partner in previous years. It is also expanding how many of its stores serve as mini fulfillment centers to source inventory for online orders.
Starting early next year, Target customers who want to order their groceries through the Shipt service will have to pay for a Shipt membership and order through the startup’s website or app. By summer, about half of Target’s 1,800 stores will have joined the Shipt platform; by next holiday season, all Target stores should be on board.
Eventually, Target plans to add the same-day delivery offering to its own website and app. But, in a call with reporters, Target’s chief operating officer, John Mulligan, said it is too early to offer details on how much Target will charge its customers for the service at that point.
Shipt was founded in 2014 by its CEO, Bill Smith, in Birmingham, Ala. The company has 170 employees between its Birmingham and San Francisco offices, and will be run as an independent subsidiary of Target. It has raised about $65 million in venture capital from investment firms, including Greycroft Partners, e.ventures and Harbert Venture Partners.
The company raised its $40 million Series B investment earlier this year at a valuation of $200 million after accounting for the new cash, according to a person close to the company. That means Series B investors saw a return of a little less than 3x their investment with the sale, while Series A investors saw around a 7x return.
Shipt’s momentum with big partners as well as customers — a source said the company will end 2017 with more than 250,000 customers paying $99 a year — had some investors favoring an independent path versus a sale. But, in the end, the deal was deemed by Shipt management to be too good to pass up.
While Shipt focuses mainly on the delivery of groceries, Target will also offer a selection of other products from electronics and home categories, and expand that selection over time.
“We believe that if you deliver groceries, you can deliver anything,” Smith said.
Smith said his startup has spoken to its big grocer partners about the deal, and that they were supportive — with some even extending their contracts with Shipt afterward.
“The perception in the industry of ... Target is very positive,” Smith said.
Asked if his partner grocers would basically be happy with anyone other than Amazon, Smith laughed and agreed.
Target’s Mulligan said one reason to buy Shipt instead of simply partnering with it is to pump resources into the platform to help it grow its customer and partner base quicker than it otherwise could have. The more volume that flows through the Shipt platform, the more sustainable the business will become over time.
Target has previously worked with Instacart on grocery delivery on a small scale, but it seems unlikely that partnership will continue. Mulligan said Target had not informed Instacart of the acquisition prior to the announcement.
Shipt had recently said it expects to do $1 billion in sales next year. But in addition to customer membership fees, that number also includes the total volume of orders that flows through its platform and into its partner grocers’ coffers.
Update: This post has been updated with new information about Shipt’s last valuation and the size of its customer base.