Amazon’s $13.7 billion purchase of Whole Foods in the summer of 2017 ignited a grocery delivery arms race in North America. Walmart, Costco, and Kroger saw their share prices fall 4.5%, 5.9%, and 12.5% respectively on the day in response to the news that the US’s largest ecommerce player was moving meaningfully into grocery. In the 18 months since the deal’s announcement, US grocers have come to accept the inevitable - digital disruption was coming to their category and they must match it, either by building it themselves or partnering externally. Many have chosen the latter, leading to massive growth in the number of retailers, stores, and zip codes now available on the Instacart platform.
Dominating the home delivery landscape
The economics of online perishable grocery delivery are particularly difficult. Items with different temperature requirements must be picked and delivered at high speed, often within a scheduled delivery window. Instacart was one of the earliest and most successful platforms to pioneer a pick-from-store model that leverages a network of shoppers, a setup that results in lower upfront fixed costs than models built around fulfillment centers. This operational difference has enabled Instacart to launch rapidly in many more zip codes, and as it scales, Instacart’s data-scientist-developed software systems help pickers and delivery drivers shop stores and make multi-stop deliveries more efficiently. By 2016, it was revealed that Instacart was already operationally profitable on average orders in 10 of its largest cities. This has likely only expanded since.
Will 2019 be the year for Instacart?
Flash forward to 2019, and Instacart is officially unwinding its relationship with Amazon-owned Whole Foods after operating alongside Amazon’s own Prime Now delivery program since February 2018. Whole Foods was Instacart’s original grocery partner, but is no longer critical to the platform, accounting for only 1.5% of total sales by most reports.
This loss appears to have been made up for several times over in the incremental sales volume from a rush of new partnerships. Amazon’s acquisition of Whole Foods has driven powerful grocery players like Kroger, Aldi, and even Walmart (although just in Canada for now), in addition to many regional grocers, into the arms of Instacart. Adding so many grocers to the Instacart “marketplace” strengthens it as a destination for shoppers who are loyal to certain grocery chains, and has driven up Instacart’s valuation in 2018, with an eye to IPO soon. While Instacart only operates in North America, it represents a blueprint for how online grocery will mature in other geographies, particularly when a dominant online player forces competitors to quickly expand their own capabilities.
What does this mean for brands?
One of Instacart’s revenue streams is selling various promotional opportunities to brands. Instacart’s growth warrants additional investment by brands, launching promotions such as covering the delivery fee if the consumer orders a certain value or quantity of their products. Partnering with Instacart is also a strategic choice for many brands, serving as a growth channel alternative to the often-difficult Amazon supplier experience, and a hedge against Amazon’s uncertain end state in grocery. While Instacart predominantly focuses on grocery orders today, we expect it to continue to be increasingly relevant in other categories, like pet, where it already delivers from many Petco stores.
Predictions for what might be next for Instacart
- Launching its own dark stores or grocery fulfillment centers to contend with rising order volumes in lucrative areas, which would also open up an opportunity to directly source inventory from suppliers
- Enhance and improve its multi-store ordering system, allowing shoppers to build full-shopping trip baskets across more than one store
- Launch exclusive or private brand assortment, looking to inject higher margins into the low margin grocery delivery business
- Develop, buy, or invest in automation technology, both backroom and last mile, to lower costs, allowing expansion to previously unviable geographies
- Launch new targeting and advertising tools for brands, looking to further monetize the platform
- Expand its click & collect operating model, allowing shoppers to pick up their Instacart order utilizing both store employees and Instacart shoppers to deliver items to the shopper’s car outside the store
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