Shipt, a grocery delivery startup, has closed a $40 million in Series B funding led by Greycroft Partners, with participation from and e.ventures and Harbert Venture Partners. This brings the company's total financing to more than $63 million.

Founded in 2014, the Birmingham Ala. company allows customers to shop at national and regional retailers like H-E-B, Meijer, Costco, Whole Foods and ABC Fine Wine & Spirits through its app. Items are then hand picked from store shelves and delivered by a Shipt shopper in as little as an hour.

Shipt finds itself in a crowded markets with well-funded adversaries. While interest in the overall food delivery space has waned, as their models have failed to prove out, grocery delivery has attracted an increasing amount of venture capital year-over-year since 2013 with it peaking last year at $1.4 billion, according to CB Insights.

Among the highly capitalized in the grocery delivery market is Instacart, which has raised a total of $674.8 million at a $3.4 billion valuation. "Capital alone will not win in this business," said Bill Smith, founder and CEO, Shipt. "...In grocery, the execution and building a great customer experience is really critical."

But perhaps an even bigger threat than competition are the realities of the industry. Food is a low margin business, and the grocery industry has average net profit margins of around 1.7 percent. But Shipt believes its model will allow it to build a sustainable business with healthy margins.

Where some competitors allow for one-off transactional orders, Shipt's service is only available to members for an annual fee of $99. A membership model can be a barrier to entry for customers, but it helps companies build a predictable revenue model. "Although we have grown really fast, we could have grown faster if we would have allowed transactional use," said Smith. "But over the long-term, we are building a much more valuable base of customers that are sticky and use our service regularly and are committed it."

According to Smith, on average customers spend $110 on each order and use the service 42 times per year.

Shipt created an additional revenue stream by partnering with consumer packaged goods companies to promote products tailored to customer's tastes based on purchasing behavior. It also works with brands to provide exclusive offers to its members. "It is a win for us because we drive really high margin marketing revenue, and over the long-term we will be able to drive much higher profit margins," said Smith.

At present, Shipt offers service in 47 metro areas and over 20 million households. Since launching its first market in 2015, Shipt has grown 520 percent and all its current markets are profitable. With this latest round of funding, the company plans to expand to 100 metro areas within the next year. To further support the expansion, the company also plans to forge partnerships with additional brands and retailers.

Published on: Jun 6, 2017