Dive Brief:

• Target on Wednesday announced the acquisition of same-day delivery platform Shipt for $550 million in cash, one of the largest acquisitions in Target’s history, the company said in a blog post.

• Shipt, which will continue to operate independently under CEO Bill Smith, was founded in 2014 and operates in more than 72 U.S. markets. Shipt will be a wholly owned Target subsidiary, but its offices will remain in Birmingham, AL, and San Francisco. 

• 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, the company said.

Dive Insight:

Same-day delivery is the closest that e-commerce can get to an in-store purchase where shoppers walk away immediately with products. Shipt's model essentially takes that brick-and-mortar advantage and turns it into an online service, enlisting a network of more than 20,000 "shoppers," who pick out customers’ orders. The same person shopping also makes the delivery, and when a match works well (based on Shipt’s rating system allowing customers to give feedback in real-time) the same shopper and customer are likely to paired again.

The acquisition is a move to accelerate Target's digital fulfillment efforts. According to the company, it will help bring same-day delivery services to about half of Target stores by early 2018. The service will be offered from the majority of Target stores, and in all major markets, before the holiday season next year. Running the service from its stores will ultimately strengthen the operational performance of Target's physical assets, according to GlobalData Retail Managing Director Neil Saunders. "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 in an email to Retail Dive.

In a Bullseye blog post question-and-answer with Target Chief Operating Officer John Mulligan and Shipt CEO Bill Smith, Mulligan said the acquisition will help the retailer meet a rising customer demand for delivery that was already a priority outlined by the company early this year. 

Indeed, like the retailer’s earlier acquisition of San Francisco-based transportation technology company Grand Junction (also founded in 2014), the Shipt deal "accelerates its evolution and gives them another key omnichannel logistics capability," Profitero Senior Vice President of Strategy and Insights Keith Anderson told Retail Dive in an email. "It will improve customer experience starting in early 2018 [and] underscores the growing importance of same-day delivery and the potential edge that store-based retailers have in some markets," he said.

But the move isn't all about digital sales and fulfillment —it could also help Target with grocery, one of the worst thorns in its side. It's 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. “This is a smart move to make sure Target stays in the grocery game," she said in an email to Retail Dive. "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.” 

Target's underperformance in online grocery isn't sustainable, "given the increasing popularity of buying food online," Saunders said. "The Shipt deal gives Target the infrastructure and operational capacity to grow its market share in the online grocery channel."

In turn, bolstering that growth allows Target to improve the sales volumes necessary to support economies of scale and margins, particularly important because of Target's focus on low prices, he also said, adding that it all will also increase Shipt's profitability. "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."