UMD Research Details the Causal Impact of Delivery Integration on Retailer Sales Performance

Target’s acquisition of Shipt, a rapidly growing same-day delivery company, in 2017 for $550 million marked a major bet by the company to scale its same-day delivery capabilities nationwide for online shopping. 

Research authored by Martin Dresner, Dean’s Professor of Supply Chain Management at the University of Maryland’s Robert H. Smith School of Business, along with two graduates of the Smith School’s Ph.D. program, Kevin H. Park ’22 and Xiaodan Pan ’18, analyzes how sales at the big-box retailer were affected by implementing varying delivery options for consumers, whether through the Target website or by referring those seeking same-day delivery to another platform like Shipt. 

Dresner and his co-authors find that, in Target’s case, directing same-day consumers to a partner platform increases the delivery platform’s sales, especially in markets with fewer online grocery options. They also note that offering both same-day and standard delivery all in one place boosts the retailer’s online sales.

The paper, published in the Journal of Operations Management, reviews consumer spending data from Target and Shipt and analyzes the channel integration of Shipt’s last-mile delivery services with Target’s retail sales processes. 

They break down this integration into two distinct stages. The first is platform delivery access (PDA), which they define as when a retailer “continues to offer standard delivery through its own website but directs customers to the platform’s website for new same-day delivery.” Secondly, there is integrated delivery access (IDA), where customers can use a delivery platform’s same-day delivery services when purchasing products in a single order, with “both same-day and standard delivery options at the retailer’s website.” 

The relationship between a retailer and a delivery service, as exemplified by Target and Shipt, can often be mutually beneficial. Before PDA, Target facilitated orders for non-time-sensitive products through its website and outsourced delivery services to logistics firms like UPS and FedEx. Shipt’s value to the retailer primarily came from managing the delivery of time-sensitive products, such as groceries.

Despite a major retailer like Target possessing the resources and financial backing to develop same-day delivery for time-sensitive products, those services remain costly, and operational hurdles can be mitigated by forming partnerships with companies that specialize in providing that service. 

“Firms need to maintain the labor force required to pick and ship delivered orders, as well as to develop transportation routes with sufficient densities,” the researchers write. In turn, same-day delivery platforms like Shipt and Instacart “operate by providing a menu of items available for purchase on behalf of retailer clients, and by hiring independent contractors to execute shopping and delivery tasks.”

Together, the researchers employed difference-in-difference models with propensity score matching to measure the integration of delivery operations between Target and Shipt and to identify the causal impacts on sales performance at the PDA and IDA levels.

They find that PDA, in particular, tends to positively impact a delivery platform’s sales through increased transaction frequency, with observed sales being stronger in markets with lower online grocery penetration, suggesting that increased grocery purchases likely drove the effects.

“During the PDA stage, as transaction frequencies increase, it is crucial for retailers to closely collaborate with delivery platforms, which manage route planning and scheduling. Retailers should ensure that their inventory management and product assortment strategies are well-aligned with the operational capabilities of these platforms,” Dresner and his co-authors write. “This includes maintaining consistent product availability that matches the delivery schedules and provides accurate stock data to facilitate efficient order processing.” 

In assessing the IDA stage, they find that a retailer’s online channel sales increase, but ultimately have no bearing on the delivery platform’s sales. The positive effect on the retailer’s online sales was greater in markets where “the retailer has a greater loyal customer base and online grocery penetration is lower.”

Retailers operating in the IDA stage, they write, should partner with platforms to ensure that workers are trained to handle larger, more complex orders and that delivery routing algorithms are tuned to factors such as distance, order size and unloading times.

“By focusing on these strategies, retailers can enhance the customer experience from order to delivery, maximizing the benefits of integration for both the platforms and themselves,” according to the researchers.

Previous literature on this topic has typically focused on the integration of offline and online channels. But this study, Dresner says, investigates this integration in the context of last-mile delivery. It also reveals “critical operational implications” for retailers and delivery platforms alike.

“As more shoppers choose to use delivery services, it is incumbent on retailers to determine how best to serve their customers while gaining revenues. Integrating online delivery options into their own websites is a great way for retailers to do this,” says Dresner.

Read More: “Targeting online sales through last-mile delivery platform integration” in the Journal of Operations Management.