Target (TGT 1.55%) announced last week that it will acquire same-day delivery firm Shipt for $550 million. The latter has developed a national network of shoppers that it can serve with same-day delivery of groceries and other merchandise.

Though Target has lagged behind peers in its order fulfillment capabilities, this latest move will help the chain leapfrog back into relevancy.

Why Target bought Shipt

The big box store is paying for the acquisition in cash, the second such deal this year.

Over the summer, Target announced that it would acquire transportation technology start-up Grand Junction for an undisclosed sum. The goal was to implement the San Francisco-based company's software into Target's logistics and supply chain network. Same-day delivery was being tested in New York City.

Shipt, on the other hand, is a much more ambitious purchase. Same-day delivery will be rolled out to about half of Target stores by early 2018, with most locations offering the service by the time next year's holiday shopping season gets under way.

Target CEO Brian Cornell and Shipt CEO Bill Smith standing together in a hallway.

Target CEO Brian Cornell (left) and Shipt CEO Bill Smith (right). Image source: Target.

While same-day service will initially be available for groceries, essentials, home, and electronics, most other product categories will be in the Shipt network by the end of 2019. That makes good on Target's turnaround plan, laid out early in 2017, to transform its existing locations into a hybrid store and distribution center concept.

Keeping up with the competition

This latest move represents Target's attempt to stay relevant in the e-commerce arms race started by Amazon. Though the tech giant led the charge, Walmart quickly caught up with a string of its own acquisitions, and smaller retailers are also going online using services like those offered by Shopify.

That isn't to say Target has been a slouch in the digital department. Online sales have grown by double digits the last few years, and that channel continues to be a key area of strength. However, online sales were still only 14% of total revenue in 2016, and falling in-store traffic in 2017 has offset much of the digital growth year to date.

Target has its work cut out for it. Amazon has created a protective moat around its customers with its Prime membership service, and the reigning retail king Walmart has a huge lead in revenue and scale over both companies.

Target employees dressed in red cutting the ribbon for a new Target store grand opening.

Image source: Target.

The Shipt acquisition could be a game changer as it not only helps with fast order fulfillment but could also provide a new catalyst for growth. The small company will operate as an independent, wholly-owned subsidiary of Target, with plans to continue growing its network of retailers using its fast shipping services. Founder and CEO Bill Smith had this to say about the new relationship:

Partnering with Target and the national scale they provide allows Shipt to further accelerate our growth, bringing our service to more people, in more markets across the country. We'll continue growing our marketplace and membership base, working with a variety of retailers to drive scale and efficiencies. We look forward to introducing Target guests to the convenience of our same-day delivery services, with the level of personal attention only Shipt can provide. 

The purchase of Shipt is a big step forward for Target. Delivery times will be faster, giving customers another reason to choose it over competing retailers, but the acquisition could open up other possibilities as well. No other plans have been revealed for Shipt at this point, but a growing marketplace of small retailers across the country offering online shopping and fast shipping is now at Target's disposal. That could be a new secret weapon in the chain's fight for retail supremacy.