Target to buy grocery delivery service Shipt for $550 million

  • Target is planning to acquire same-day delivery service platform Shipt, a rival to Instacart, for $550 million in cash.
  • Target will begin to offer same-day delivery of groceries, home furnishings, electronics and other products via Shipt's platform, starting in early 2018.
  • Alabama-based Shipt, which also has an office in San Francisco, will continue to work with other retailers despite being owned by Target.

Target is finally making more aggressive moves to win customers who want to make purchases, including groceries, online.

The big-box retailer announced Wednesday that its plans to acquire same-day delivery service platform Shipt, a rival to Instacart, for $550 million in cash.

The news builds on the company's billion-dollar investment strategy and longer-term goals to catch up with rivals Walmart and Amazon, which have been making splashes across the industry for much of 2017.

While Amazon scooped up Whole Foods in August and Walmart purchased Jet.com in late 2016 to deepen their reach, Target has been focused on its turnaround efforts and pushing for growth internally. As a result, investors see Target as a comparatively weaker player in the food space.

"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," Target Chief Operating Officer John Mulligan said in a statement.

Target will begin to offer same-day delivery of groceries, home furnishings, electronics and other products via Shipt's platform, starting in early 2018. The service will be available for the majority of Target's stores before next holiday season. And by the end of 2019, Target plans to use Shipt for same-day delivery of "all major product categories."

Alabama-based Shipt, which also has an office in San Francisco, will continue to work with other retailers despite being owned by Target, Shipt CEO Bill Smith said on a call with members of the media. Those other partners include grocers Costco, Kroger, Meijer and HEB.

Meantime, Target's Mulligan said the company hasn't yet had discussions with Instacart about their future. The retailer has been working with Instacart for a number of years for grocery delivery in certain markets.

Instacart didn't immediately respond to CNBC's request for comment.

Talks with Shipt began midsummer, Mulligan said, and moved quickly down a path toward an acquisition rather than a partnership.

"We'll continue growing our marketplace and membership base, working with a variety of retailers to drive scale and efficiencies," Shipt's Smith explained about the deal. The company will keep its offices and employees in Birmingham and San Francisco, he said, and it won't share any information about Shipt's other clients with Target.

Over time, the hope is Target will be able to strengthen its supply chain and last-mile fulfillment capabilities, having recently acquired transportation technology company Grand Junction. Target will also be able to service those customers who would rather order their groceries online and have them delivered to their home, using Shipt's personal shoppers.

Shipt differs from other delivery services in that its personal shoppers, who are vetted by the company, stay in touch with a customer as they pick up items in the store, texting if an item is out of stock and alerting them en route to delivery.

"The new platform will allow Target to offer same day delivery on a wide selection of non-food items," GlobalData Retail Managing Director Neil Saunders said in a statement. "This makes the grocery service more attractive to consumers, and will also increase the profitability of the Shipt business model."

"Running the service from stores will ultimately strengthen the operational performance of Target's physical assets," Saunders added.

To begin, though, a Target customer must first become a Shipt member, paying a $99 annual fee, in order to use the service on Shipt.com. In time, Target's Mulligan said there will be integration with Target.com and with the retailer's app.

"Right now, we're focused on getting on the Shipt marketplace," he said.

The deal, which marks one of Target's biggest to date, is expected to close before the end of 2017, Target said, and should be immaterial to the retailer's near-term financial results. Over time, Target said the acquisition will boost its digital and overall sales growth.