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Analysis: Shipt will help Target grow its online grocery market share

Target's plan to acquire Shipt signals a clear intent to capture a much larger slice of the online grocery market. In our view, this is a sensible and logical move for a number of reasons.

First, it gives Target the infrastructure and operational capacity to grow its market share in the online grocery channel. This is currently a segment where Target underperforms -- a position that is not sustainable given the increasing popularity of buying food online.

Second, bolstering growth in grocery allows Target to improve sales volumes, which are necessary to support economies of scale and margins. This has become particularly important because of Target's focus on low prices.

Third, and perhaps most importantly, the new platform will allow Target to offer same-day delivery on a wide selection of non-food items. This makes the grocery service more attractive to consumers, and will also increase the profitability of the Shipt business model.

Running the service from stores will ultimately strengthen the operational performance of Target's physical assets. While we do have concerns that the service might cannibalize some existing store sales, we believe that it will ultimately result in higher overall sales.

As positive as the news is, it does not change the fact that Target has a lot more work to do in developing a clear proposition in grocery. In our view, while improvements have been made, the position and points of differentiation are still not refined. Getting these right is the real key to growth.
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