On December 13, 2017, Target announced plans to acquire the Birmingham-based grocery delivery service Shipt. The all-cash purchase totaled $550 million, a new high-water mark for Alabama startups.
“It was always a dream of ours to work with Target, ” says Shipt CEO Bill Smith. He had met with a Target representative at a conference the previous year, originally discussing adding Target as a retail partner.
“We reconnected after that initial meeting, and conversations progressed from there, ” says Smith. “They brought up the idea of acquiring Shipt, and we consulted with the board and began giving it serious thought.”
Target plans to use Shipt’s app-based delivery network, allowing online customers to order home goods, electronics and more, in addition to the standard grocery list. By the end of 2019, all the store’s major product categories will be included in Shipt’s same-day delivery capabilities.
At Shipt’s headquarters in the John Hand building in Birmingham, much will stay the same. Shipt joined Target as a wholly owned independent subsidiary, retaining the staff at its Birmingham and San Francisco offices and maintaining the services that appealed to Target in the first place. Smith will remain CEO, and Shipt will continue to deliver for its existing retail partners.
Customers can use Shipt’s services via shipt.com or the downloadable smartphone app. If Shipt operates in their area, they can pay $99 for a yearly membership, place an order for groceries, and wait for a shopper to deliver the order directly to their door.
The acquisition was a key part of Target’s larger plan to improve its digital capabilities and make the customer experience more convenient. Target began to experiment with next-day delivery last summer, starting with essential items. They also purchased transportation tech company Grand Junction to expand into same-day delivery. In addition, online shoppers now have the option to order their products in advance, then pick them up in the store or via drive-up.
Shipt, which had already distinguished itself nationally as a successful same-day delivery service, presented obvious appeal. “Shipt operates in terms of hours, ” says Smith. “You have to when you’re working with groceries.”
Shipt brings with it a user-friendly app as well as an established network of 30, 000 shoppers, a crowd-sourced workforce that has grown from 10, 000 over the last year. This existing presence within the e-commerce market added tremendous value to the company, prompting Target to invite Shipt into its fold rather than start from scratch.
Staffing such an endeavor would be a challenge in itself, and Shipt could easily tout the quality and reliability of its shoppers as an attractive selling point. “We put people first, ” says Smith. “The shoppers in our network create incredible experiences. That’s a big priority for Target.”
The acquisition was solidified in six months. “A deal of this size requires a lot of diligence, but both teams worked well together, ” says Smith. “It was very clear from our meetings that there was a strong cultural fit and that our philosophies aligned toward customers and employees. It was a great match from the beginning.”
Shipt began delivering from Target locations on Feb. 1. Birmingham and South Florida were Shipt’s first metros to incorporate Target as a retail partner, with more sites rolling out in the following months. The company plans to offer same day delivery in the bulk of Target’s markets by the start of the 2018 holiday season.
The alliance comes at a pivotal time for the retail industry, as online shopping plays an increasingly significant role in American consumer behavior. According to the U.S Census Bureau, e-commerce accounted for more than 9 percent of all retail sales in the third quarter of 2017. That represents a 15.5 percent increase over the same period in the previous year.
Major retailers must now analyze their consumer interactions and adjust to the easy availability of online shopping options. Online powerhouse Amazon purchased Whole Foods last summer, with a substantial amount of the investment allocated to future growth, and Amazon Prime members could pay an additional fee for their grocery delivery feature.
When he first conceived of Shipt in 2014, Smith had envisioned a big box delivery service but saw that customers wanted grocery delivery more than anything else. “We had to build the infrastructure for it, but we knew we were on to something, ” he says. “You need groceries every week or more. Everyone today is looking to leverage their time. That’s a huge need we could serve. It exploded overnight.”
By May 2015, Shipt had restructured itself to focus on groceries, based on Smith’s observations. E-commerce was a growing industry, but the ways that consumers would use it could change on the fly. “This business is about getting in the game and getting feedback, ” says Smith. “No matter what your original idea was, you have to respond to the new info that you receive and adapt to changes.”
Before the acquisition, Shipt had earned $65 million in investments. Its Series A round of fundraising brought in investors from coast to coast, with Greycroft Partners of New York and e.ventures of San Francisco. Birmingham’s Harbert Growth Partners was the startup’s first major in-state investor.
The acquisition by a major player like Target may elevate the profile of Birmingham’s emerging startup community. While attracting initial investors can be a grasp at straws, Birmingham is gradually becoming a more hospitable environment for ambitious entrepreneurs like Smith. Incubators like Innovation Depot provide startups with room to grow their potential, and local success stories should be willing to reinvest in their community. Smith himself recently contributed to the startup Planet Fundraiser, an app that allows users to donate to schools, non-profits and other worthy causes while shopping.
When Shipt first launched its grocery delivery app, Smith aimed to reach 100 markets by the end of 2018. In light of building momentum and Target’s support, he has adjusted his initial expectations upwards.
“We’re set to exceed that original number, ” he says. Shipt operates in more than 70 markets right now, with plans to continue expanding.
Smith and company remain focused on their partner retailers and may add more going forward. While Shipt was already proliferating at a rapid pace, he believes that the acquisition will further accelerate its market expansion.
“Target’s support will allow us to keep growing, ” he says. “They’re like an anchor tenant, and we’re able to give them these great customer experiences.”
Investor Take: 700 Percent Not Bad
Global venture capital firm e.ventures specializes in internet and software companies, and their portfolio includes ubiquitous names like Angie’s List and Groupon.
Shipt was the firm’s first investment in an Alabama-based startup, but Principal Brendan Wales was confident in the venture. “First, we realized that Smith had scaled the business rapidly on a relatively small amount of capital, ” he says. “Shipt already had an incredible trajectory by the time we invested, and they had proven to be remarkably capital-efficient for what they were building.”
By the time they were approached, e.ventures was already looking into the food market and was impressed by Shipt’s numbers. “Competition, although a concern, turned out not to be a major issue in the markets they served, ” says Wales, “so, it ended up being more of a green field opportunity than we could have hoped for.”
Shipt aced e.ventures’ checklist for funding, which focuses on potential and hard data. “We need it to play in an enormous market, ” says Wales. “It has to have the potential to be a public company. The team is mission-critical, and we want to build strong relationships with the leaders.”
Naturally, growth matters to Wales and company, as does the defensibility of a startup’s business model. “Shipt has subscribers, ” he says. “They have generated long-term relationships with customers by providing an elevated level of service.”
Customer retention played a big part in Shipt’s practical appeal, as the e.ventures staff had the opportunity to shop with Shipt early on and see the process firsthand. “Bill Smith built a company that is obsessed with customer service, ” says Wales. “Every interaction with a customer is partially done through a distributed network of shoppers, both adding risk to the business, but also providing more upside, as our shoppers represent the brand well and drive customer engagement.”
While e.ventures could have seen the startup eventually go public, they’re pleased by the ROI yielded by Target’s acquisition. “Shipt is a great success story, and for us only having invested in them for 18 months, this is a tremendous outcome for us, ” says Wales. “This was the right exit at the right time, and we know Bill and his team will continue to aggressively grow Shipt as a part of the Target family.”
Based in New York, Greycroft’s diverse markets include healthcare, cybersecurity and data among others. Previous notable exits include the digital payment service Venmo.
From the start, Greycroft was impressed by Shipt’s leadership and long-term growth potential within a new field. “We’ve been looking into different types of marketplaces, ” says Co-Founder and Partner Ian Sigalow. “Shipt checked a lot of boxes for us. We looked at their numbers, and they were growing incredibly fast, and Bill Smith is a repeat entrepreneur with a great record.”
While Shipt did not go public as Greycroft originally anticipated, the firm was not disappointed by its rapid acceleration and exit. “They consistently beat their plans, ” says Sigalow. “From a return perspective, it was great. We made over seven times our investment.”
With a focus on emerging companies in the Southeast and Mid-Atlantic, Harbert Growth Partners has an impressive track record with healthcare and information technology investments.
Harbert seeks companies that demonstrate proven leadership, potential in a large market and a clear plan for recurring revenue. Shipt had all three. “We learned about Shipt from passionate customers, ” says Managing Partner Wayne Hunter. “They said it was a life-changer, so we did some research. We were very impressed with Smith. He had a quality team, and they were already starting to grow.”
The timing of Shipt’s arrival couldn’t have been any better for Hunter and company, as the industry became increasingly active over the last two years. “We knew there was a large market for grocery delivery, ” he says. “We knew there was big appeal with millennials. Amazon’s acquisition of Whole Foods was an accelerant.”
Like other investors, Harbert anticipated that Shipt was bound for an initial public offering, but saw the Target acquisition as a logical conclusion given changes in the market. “Shipt really took off, ” says Hunter. “It wasn’t a surprise that Target was so interested.”
Operating in Birmingham, Hunter and company believe that Shipt has proven that other Alabama-based startups can attract serious financial support in state and beyond.
“Alabama has a lot of potential for companies in their early stages of growth, ” he says. “We like markets like Birmingham because they’re great for building businesses. The costs are relatively low and there’s a good quality of life.”
Tom Little and Joe De Sciose are freelance contributors to Business Alabama. Both are based in Birmingham.