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“Deal of the Week” Target to buy Shipt for $550 million in challenge to Amazon by Ryan Campbell

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Target Inc., the eighth largest grocer in the US, recently acquired Shipt – an internet-based grocery delivery service – for $550 million in an all cash deal. With recent industry shockwaves still stemming from the Whole Foods acquisition made by Amazon, many analysts viewed this deal as a positive step for
Target as it faces Amazon and Walmart (partnered with Google Express) in the future of online grocery. Shipt offers a pure membership service with customers paying $14/month or $99/year for free deliveries on any online order greater than $35 from many grocery and big box partners. Target eventually plans to fully integrate Shipt into its website and mobile app, but for now will still require Shipt and Target customers to pay $99 for the service. While Shipt focuses mainly on groceries, Target will also offer a selection of other products from electronics and home categories – and expand that selection over time.

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“Deal of the Week” Target to buy Shipt for $550 million in challenge to Amazon by Ryan Campbell

  1. 1. “Deal of the Week” Target to buy Shipt for $550 million in challenge to Amazon Short Summary Target Inc., the eighth largest grocer in the US, recently acquired Shipt – an internet-based grocery delivery service – for $550 million in an all cash deal. With recent industry shockwaves still stemming from the Whole Foods acquisition made by Amazon, many analysts viewed this deal as a positive step for Target as it faces Amazon and Walmart (partnered with Google Express) in the future of online grocery. Shipt offers a pure membership service with customers paying $14/month or $99/year for free deliveries on any online order greater than $35 from many grocery and big box partners. Target eventually plans to fully integrate Shipt into its website and mobile app, but for now will still require Shipt and Target customers to pay $99 for the service. While Shipt focuses mainly on groceries, Target will also offer a selection of other products from electronics and home categories – and expand that selection over time. Why this is interesting: I believe this is interesting for three different reasons: 1. Target admits they need help in ecommerce and last mile logistics – it is clear from the decision to purchase Shipt that Target sees ecommerce and last mile logistics as a weak area and a place where they need to develop capabilities quickly (thank you Amazon). The articles cite that Target has never been known for a robust supply chain and has a history of struggling with operational issues such as inventory management (i.e. Target Canada). Target seems to be admitting a major weakness or inability to develop these types of services and tools internally (and quickly enough). This does make a lot of sense though as Shipt provides immediate technical capability along with a track record of success across several partners (which is valuable to Target). Target also provides tremendous scale for Shipt as it expands their customer base dramatically and moves them well outside grocery. The question remains though does Target’s culture and resources allow Shipt to continue to meet the needs of the market. Clearly, this hasn’t worked before for Target – and not for lack of effort, so this will be crucial for the success of the acquisition. For now, it appears Target will leave Shipt as an independent, wholly owned subsidiary – which I believe is the right move. 2. Paying a premium when risks are realized on Shipt’s value proposition – Ben Thompson articulates in his article that the valuable part of Shipt’s business model lies in its three-sided market – consumers, grocery stores, and shopper-contractors (people who pick up the groceries). The more consumers, the more stores – and the more consumers/stores, the more shoppers. Here lies the problem: Target is a direct competitor from one of the three legs of that market. Therefore, can Target realistically expect a majority of Shipt’s existing partners to stay on the platform knowing they would be contributing to a competitor not only financially but also in trade secrets, customer data, etc. The question then becomes what is the appropriate valuation for Shipt if you take away one of the three legs. I am sure their latest round of VC financing was done with the assumption that the product would remain a three-sided marketplace. This begs the question – did Target overpay? The more Target ‘overpaid’ the harder it will be for this acquisition to be accretive. Early signs point to partners staying on the platform, but how long can this be expected to last once Target fully integrates the service.
  2. 2. 3. Same day delivery still seems to be ‘too early’ so why buy Shipt – finally the Forbes article brings up a tremendous point around people’s willingness to pay for same day delivery. Although the service is tremendous, it remains incredibly expensive and something people have not shown a tremendous willingness to pay for on a consistent basis. Therefore, did Target buy Shipt too soon? I don’t think so. I believe they saw an opening in the market and wanted to buy something before the valuation got too steep. Instacart, a Shipt competitor, is a little further down the road than Shipt and have recently been valued at $3.4B. I think Instacart has served as proof that online grocery delivery is real and that the market is there. Target made a smart decision to buy the number two player and pour a ton of resources into it to try and scale the model as quickly as possible. Another factor impacting the timing is the competitive space – and frankly, I don’t think Target could afford to wait much longer given the capabilities of Amazon and Walmart. Article Links: 1. https://www.bloomberg.com/news/articles/2017-12-13/target-to-buy-shipt-for-550-million-in-bet- on-same-day-delivery 2. https://www.forbes.com/sites/forrester/2017/12/18/target-buying-shipt-wont-make-same-day- delivery-any-easier/ 3. https://www.recode.net/2017/12/13/16771646/target-shipt-acquisition-price-550-million-grocery- delivery-same-day 4. https://stratechery.com/2017/target-buys-shipt-why-target-the-expansion-of-amazon-basics/ Three discussion questions: • Was the decision to buy versus partner the right decision for Target given same day delivery’s market maturity? Would you have tried to partner first? • Does the notion of allowing Shipt to continue to serve other retail and grocery partners serve as a conflict of interest? • Was 3x ($550M) their latest valuation (Series B/$200M) too big of a price to pay given Target’s current offering?

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