Target announced yesterday that it acquired a startup in the grocery delivery space called Shipt for $550MM.  If you’re familiar with Instacart, you get the gist of Shipt.  If not, think Uber for groceries—consumers place an order through Shipt and a marketplace of drivers shops for your items and delivers it to you on your schedule.   What concerns me is that many of the challenges with same-day delivery are the same ones we’ve talked about for years. The truth remains, most consumers don’t use it:  the vast majority of shoppers say they never use same day or even expedited delivery.  Why? Most shoppers don’t want to pay for it.  Delivering same-day online grocery orders can cost up to $20 per transaction and over two-thirds of consumers say they would rather wait longer for a package in order to get free shipping.  Because of this, online grocery delivery is almost always in the red unless shoppers (or marketers, which is another unexplored discussion topic we’ll talk about in 2018) pay for it.  These financial challenges are exactly why even Amazon pulled the plug on a number of its Fresh markets. The prevailing mantra for now is that people like “free over fast” with respect to all their eCommerce orders.

Given that, what is Target likely to do with Shipt? One of three things:

  • It will keep the current Shipt model. Shipt’s current model of managing professional shoppers and shopping multiple stores has a big number of challenges, not the least of which is managing disparate and inaccurate inventory systems, particularly around fresh produce.  There is also the non-trivial issue of Target now having access to competitor trade secrets like shopper preferences .  Shipt now works with many of Target’s competitors and given that there are alternatives like Instacart, we think many of these relationships will cease for much the same reason that most big players eventually stopped using Amazon’s eCommerce platform: no need to let the fox in the henhouse.  Prognosis: The current model isn’t long for the world.
  • A new Target-only delivery model. The grocery industry seems to be leaning into click-and-collect which is about half of all online grocery orders, and is more profitable for retailers and cheaper for customers than delivery. That said, there is a percent of affluent, busy shoppers who are willing to pay more to outsource grocery and general merchandise shopping and have their items delivered to them, expensive as it may be.  To make rapid same-day delivery work, we know firms like pizza companies benefit when they have certain key success factors:   tight delivery zones, small store footprints with limited inventory to consider and delivery people who are substantially compensated in tips.  Target has some of these elements but would also need dark stores or “warerooms” to have the best shot at success (which may very well be in the works).  We’ll also closely watch Walmart’s experiment with having store associates take items home at the end of their shifts.  That may create a new cost-effective model altogether for local delivery but for now, same-day delivery is a luxury for a wealthy niche of the population.   Prognosis: Modest traction with affluent customers.
  • A new logistics player to support local delivery. There is quite possibly, room for a local delivery model that omits grocery.   After all, once you remove perishable goods, you liberate delivery people from the hassle of being on schedule.  If Target uses Shipt to go down this path, they won’t be the first (and companies like Uber may be better positioned to do it better anyway).  Companies like LaserShip consolidate packages in small geographies and have workers dispatch items in bulk.  Google Express also does something similar with unfortunately negligible performance, in spite of substantial subsidies to retailers and shoppers.  Furthermore, this would be a pretty major pivot of Shipt’s current model which would require even more investment and take Target far away from its core.  Target unlike Walmart has been less reknowned for its supply chain or operational strength, as its very late foray into self-checkout and disastrous entry into Canada, demonstrated. Prognosis: Unlikely to happen.

All this said, I’m not bearish on Target.  One of the most interesting parts of the business is the Media Network which essentially allows the company to monetize its store traffic, much like Amazon Marketing Services.  Stay tuned on that as we’ll cover that more in 2018.  But for now, in a world where the majority of shoppers say that they are generally satisfied with the amount of time it takes for packages to get delivered, we don’t think anyone should get their hopes up that Target or Shipt will transform the delivery of digital orders.