On Thursday, Target is rolling out same-day delivery at its stores in Washington, D.C. and Baltimore, thanks to Shipt, the online same-day grocery delivery service the retail giant bought in December for $550 million, one of its largest deals yet. With Target already offering the service in a number of cities, including New Orleans and Phoenix, the retailer is aiming to offer same-day delivery from half its stores by early 2018.
Being acquired for hundreds of millions of dollars is the dream exit for any company. But Shipt's story isn't one of immediate sky rocketing success and it doesn't take place in a start-up mecca like Silicon Valley or even Seattle, where monster competitor Amazon was born. Instead it starts in Birmingham, Alabama with Bill Smith, a high school dropout and serial entrepreneur who had perseverance — and a particularly grueling grocery-store trip.
From high school dropout to serial entrepreneur
"My father was an entrepreneur, so I grew up and saw him doing different businesses, and literally from the time I was 5 years old, I wanted to understand business and how it all worked," Smith tells CNBC Make It, adding that his father was in the cell phone industry.
"So I was kind of able to hang out around businesses and learn a few things at an early age, and that's really where the desire came from."
Inspired by his dad and eager to start making money, Smith quit school when he was about 16, much to his dad's dismay.
"My father was not supportive at all," Smith recalls, laughing. "He actually thought it was a horrible idea...and I remember him coming to the school and meeting with the counselors about this, and the counselors actually told my dad, 'We are not worried about Bill. He is going to be just fine.'
"At that point he [my father] said, 'Alright he's going to do what's he's going to do,'" Smith adds.
It was the early 2000s, and Smith began selling cell phones to small businesses. Eventually, he opened up two retail cell phone stores and was making $4,000 to $5,000 a month.
While working, Smith received his GED and even did a brief stint at college. But he quickly realized a traditional education just wasn't for him. Entrepreneurship, he thought, was something that could not be learned in a classroom.
"I think that business is all about just getting out there and solving problems, and I don't know if you can really teach entrepreneurship," Smith says. "I think that it's kind of a flaw to think that you're going to go to a school, and someone that's never been an entrepreneur is going to teach you how to be an entrepreneur, you know? So, I just tell people you've got to get out there and start making it happen."
Smith spent his early career as a serial entrepreneur — after running his cellular business for three years, he built a company that issued small loans. Then, in 2009, he founded Insight Card Services, a company offering re-loadable, prepaid Visa cards.
The business of prepaid credit cards, Smith says, was extremely complicated, but he learned the ropes simply by figuring out who the big players were in the space, doing the research and having conversations with other companies to learn more about the core product. His first big win came in 2014, when GreenDot Corporation, a financial technology, bank-holding company acquired Insight for an undisclosed amount, although Smith notes it was in the millions.
Fresh off the heels of the acquisition, Smith was already looking for his next opportunity. The on-demand economy was hot, with Amazon Prime slowly starting to build a cult following and Uber making waves as the darling of Silicon Valley. Smith knew that for his next venture, he wanted to do something in the sizzling, on-demand economy.
Then came the idea for Shipt.
Finding inspiration in the grocery aisle
The initial plan for Shipt, Smith says, was to build a business around same-day delivery for big box retailers. He personally hated shopping and wanted to figure out a way to get out of the dreaded task.
"I said, 'Gosh, there has to be a way to buy anything from any store and get it delivered the same day,'" Smith explains. "And I was also seeing companies in the ride-sharing space and seeing that new model and thinking, man, this new model is out there, and it's allowing services to be offered that were not really offered at that scale before. And I wanted to figure out how to apply it to my problem."
Smith wanted customers to be able to go to a retailer's website, place an order and have it delivered to their door that same day. To make that happen, Shipt would use a network of independent contractors, or "shoppers." Smith invested $3 million of his own capital into the company, which started with a $100,000 check, gradually investing more over time.
For the first test version of Shipt, which launched in November of 2014 in Birmingham, Smith used $250,000 in capital to hire a few engineers. Since Smith had a hard time convincing retailers to let his home delivery option be integrated into their website, he had to think of another way. The team cobbled together a system in which the customer would go to the retailer's website, place an order for in-store pickup and then go to Shipt's platform to place an order for a shopper to pick up the product.
It didn't work.
"We launched that, and what I figured out really quickly…was that people don't want a dis-integrated experience. They want to be able to go to a site and do everything in one place and checkout and be done," he says.
"That was an important lesson," says Smith, if a needlessly expensive one. "I could have really tested my initial idea by using a Google Sheet and a form and posting on Facebook and saying, 'Hey I'm delivering from these retailers, fill this form out,' and we could have built a manual process.
"The lesson learned is test the ideas first in the lowest cost way and just take a simple approach," Smith adds.
At that time, in December 2014, Smith says the company was on the brink of shutting down. The model wasn't working and people were telling him there was more of a demand for groceries than anything else.
"I kept getting emails from people that tried the service that would say, 'Hey, it's cool that I can buy a pair of Beats headphones and get them delivered the same day, but what I really want is my groceries delivered,'" Smith says.
The idea of a same-day grocery delivery service didn't initially connect with Smith until early January 2015, just a few days after his second baby was born and he experienced a stressful shopping trip with two infants in tow.
"[My wife and I] went to the grocery store for the first time with a 1-year-old and a newborn and it was such a huge pain. Both kids were crying in the store, and we just had to get the heck out of there.
"Literally in the parking lot of the grocery store I told my wife, 'You know a lot of people have been asking for grocery delivery and I want to figure out a way to solve this problem.'"
The Monday after his epiphany, Smith walked into work and told his team they were going to pivot and put all efforts into grocery delivery and focus on building a fully integrated experience, where customers could do everything from purchasing the product to getting it delivered, all on one platform.
"At the time, nobody even had an in-store pickup option. That did not exist in grocery at all like it did with general merchandise retailers like Best Buy," Smith says.
To validate that the service was indeed in-demand, he told his team not to write the first line of code until they had sold 1,000 memberships to the service. For the first time, he awarded all of his employees, roughly 10 of them, stock options in the company.
"I said, 'Look, we're going to try this. If you guys are in, awesome. If you're not interested, it's cool.' And everybody stayed on board," Smith says.
The team rolled up their sleeves and got to work, cataloging all the items in the grocery store that they were offering delivery service from, which was no easy feat.
"We literally sent people into the store to scan all of the items that were for sale and collect pricing data and do all that manually," Smith remembers.
Hesitant to shell out a lot of money on marketing, Smith says they just took a couple thousand dollars, shot a low quality, 60-second video about the service and put it up on Facebook with a landing page. In three weeks, Shipt sold 1,000 memberships in Birmingham.
"It was at that point that I said, 'Okay, this is real, people really want this.' And you know Birmingham is just a normal, middle-America type city," Smith says. "This is not San Francisco, so to be able to have that much early adoption, I thought, man there's real demand."
The new, re-vamped version of Shipt launched the following May.
What made Shipt stand out
Shipt currently offers unlimited, same-day delivery service for its members for $99 a year, or $14 a month. After signing up for a membership, users can shop on its app or online, choose a delivery option and then checkout. Shipt's "shoppers" then go to the store, pluck the products from the shelves and deliver them to customers' homes. Delivery is free for orders over $35.
Shipt now operates in over 80 U.S. markets and has a network of 40,000 personal shoppers, with plans to have around 100,000 shoppers by the end of the year (who Shipt says can make up to $25 an order, with each order taking around an hour to fill). It offers many retailers on its platform, including big names like Kroger and Publix.
Smith says Shipt really started to see some success in late 2015.
At that point, "we kind of flipped the approach," says Smith, and decided the company would "build this and figure it on our own. Once customers started using the service, [that's when] retailers started to call us," Smith explains. "Instead of waiting around for the retailer to drive the business, we let customers drive the demand, and then retailers were more interested in working with us."
By December 2017, Shipt orders had surged 60 percent from that June, Bloomberg reported, and the company was expecting to hit $1 billion in revenue in 2018.
At the time Shipt launched in 2014, other same-day delivery start-ups were also cropping up. Instacart, another same-day delivery grocery service based in San Francisco, had been in operation since 2012 and was serving up customers in major metro areas like San Francisco, New York and Los Angeles. Amazon Fresh, launched in Seattle in 2007, was also expanding its reach at the time.
But Smith believes Shipt being based in the South played an integral role in its success.
"When we started Shipt, we were really focused on what I call mainstream American families. We started in the South [and] we focused on really a lot of secondary type cities," Smith says, like Birmingham, as well as Tampa and Orlando, Florida.
"We were the first ones to bring the service [there], so people viewed us as the ones creating the market," he adds.
Now, the rivals operate in overlapping markets: Instacart serves shoppers in many smaller areas and Shipt has expanded to larger metro areas, like Chicago and Dallas. Since acquiring Whole Foods, Amazon has pulled the plug on some AmazonFresh delivery areas but is still available in cities including New York, Philadelphia and D.C. And there are of course new competitors. For example, Walmart announced plans to expand its grocery delivery service to 100 metro areas by the end of 2018.
Instacart, despite courting some controversy, continues to be financially successful — the company recently partnered with six of the top seven grocers in North America and raised a new round of funding, which values the company at $4.2 billion.
But Smith says there's something that still makes Shipt stand out.
"The fact that [the shoppers] go above and beyond is really the key to this," Smith says. "For example, a member will order a children's cough syrup, or some item that indicates the customer has a sick child at home, and our shopper will pick up a balloon for their child and deliver it with the order."
The future of Shipt
While Smith says he had been actively pursuing Target as a partner retailer since Shipt's inception, it wasn't until the summer of 2017 that a Target team member reached out.
"The conversations moved from partnership to a potential investment, to all-out acquisition," says Smith. "I met with some of their senior leaders and it was clear they were very supportive of what we were doing. And they would be a really great match."
In December, Target acquired Shipt for more than half a billion dollars.
"Same-day delivery is a service that our guests are asking for more and more often. 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," John Mulligan, Target's chief operating officer, recently said in a Q&A in December.
Since then, Target has begun rapidly rolling out the service, offering same-day delivery of groceries and other products on Shipt's platform in a slew of locations in Florida. Along with the latest roll out in Target stores in Washington, D.C. and Baltimore, Shipt is expected to be available in the majority of Target locations by the end of 2018.
Shipt will remain a wholly owned Target subsidiary, run its business independently, will still offer its services at other retailers and will continue to operate its businesses from its current offices in Birmingham and San Francisco.
For Smith, that's important, because he says Shipt's success is rooted in a simple concept: treating people (both his employees and customers) well. That, he says, can make all the difference.
"I think that's a really simple way to be successful in just about anything," Smith says. "And a lot of people miss it."
Like this story? Like CNBC Make It on Facebook!