How Target's $550 million purchase of Shipt has shaped up

The most recognizable brands in retail are making substantial investments that connect digital and offline channels, with results that have been encouraging enough for Target to get on board.

The retailer just integrated grocery delivery Shipt — which it acquired for $550 million in 2017 — into its mobile app and plans to add more merchandise beyond Shipt’s base of supermarket fare.

Target wants to cover online shopping, digital payments, fulfillment and the use of Target’s physical stores to create a network effect that counters Walmart and Amazon. Even given the reports of the general decline of stores in favor of e-commerce, Target sees its stores as the key way to reach consumers.

Mark Kauzlarich/Bloomberg

“Our stores are essentially the center of how we reach out guests,” said Jill Lewis, a communications lead at Target. “That includes guests in our stores and shopping online.”

Target’s 1,800 stores are part of the retailer’s same-day services, which include in-store order pickup, drive-up and same-day delivery through Shipt. Target reports sales through these three services doubled over the past year and drew nearly three-quarters of the 34% of Target’s business that comes via digital channels.

Target says its stores are within 10 miles of 75% of Americans, and its stores handled 80% of the retailer’s first quarter digital volume, including the same-day pickup options and more traditional digital orders shipped to consumers’ homes.

Amazon became a heightened threat to Walmart, Target, Kroger and other big box stores with a supermarket component when the e-commerce giant acquired Whole Foods and its network of about 500 stores in 2017. That gave Amazon access to a range of locations, and an entry to groceries that was more robust than earlier attempts to enter the space, such as Amazon Fresh and Dash in-home order buttons.

Amazon in 2018 began scouting larger locations for Whole Foods franchises to support its fulfillment business. And Amazon recently expanded its Whole Foods two-hour food delivery service to counter Walmart's moves.

Amazon also plans to open its own network of supermarkets, and reportedly plans to open about 3,000 checkout-free Amazon Go stores over the next several years. In addition to giving Amazon a brick-and-mortar presence, these stores provide a launching pad for delveries that are closer to consumers than traditional warehouses, and also enable Amazon to expand its online order/pickup combination in line with Target and Walmart. Outside of groceries, Amazon has opened bookstores and has partnered with retailers such as Kohl's to support pickup and returns.

In the battle against Amazon, Walmart uses a similar strategy, relying on its vast store network to counter Amazon’s same-day delivery, which at this point for Amazon is more warehouse-based and lacks the brick and mortar scale of an existing store network.

Walmart has started several delivery services over the past few years, using collaborations with firms such as Instacart and its own internal service to offer same-day delivery.

Target’s delivery enhancements come as it promotes more use of its payments technology, including access to incentive marketing when buying from Target’s third party site and a discounts for using REDcard.

“We can fulfill orders fast, and we can be really efficient, saving costs and time in how we put orders in our guests’ hands,” Lewis said.

For retailers, using physical stores to execute parts of digital shopping and payments activity can improve traffic in both channels, according to John Bennett, vice president of operations and corporate development at Signifyd, a San Jose, Calif.-based e-commerce technology company.

“The big chains are locked in fierce competition, and many are counting on online orders as a main driver,” said Raymond Pucci, director of merchant services at Mercator Advisory Group, adding Albertsons and Kroger have also made bets on warehouse technology and delivery networks. “Meanwhile third party delivery companies are vying for grocers’ delivery business…expect some rationalization to occur among delivery firms as they bear the heavy cost of last-mile fulfillment to homes and office[s].”

The strategy also extends to smaller merchants. New York-based startup Ohi just received an investment from Flybridge Capital Partners, River Park Ventures and Afore to build out its model. Ohi connects with local landlords to use unleased properties as micro-warehouses, and Postmates and Doordash to manage “last mile” fulfilment in competition with the larger retailers.

“Micro warehousing is the future of same-day delivery. You have to have inventory close to the consumers,” said Ben Jones, the founder and CEO of Ohi, adding the average cost of same-day delivery via Ohi in Manhattan for the past month is about $5.40.

Like Target and Walmart use their extensive store networks to offset the cost of warehousing for e-commerce transactions and delivery, Ohi’s model uses the apps and temporarily vacant stores to reach small businesses that want to offer digital ordering and payments.

“To use existing warehouses in places like Louisville or Memphis to reach a location on the coast would be too expensive,” Jones said.