After a year of explosive growth, can Instacart keep its lead in grocery home delivery?
In the battle for online grocery supremacy, Instacart leveled a swift and decisive blow last year. It expanded to more than 150 new markets, inked deals with dozens of retail chains and proved all the naysayers who said it would suffer following Amazon’s acquisition of Whole Foods wrong.
Despite a banner 2017, the food deliver company hasn't eased up. By the end of this year, Instacart expects to offer home grocery delivery to more than 80% of U.S. consumers, making it a truly national grocery brand.
"Billions of dollars of groceries are being served through Instacart, and the growth is tremendous," Nilam Ganenthiran, Instacart's chief business officer, told Food Dive. "So the opportunity is right in front of us. We want to keep it going."
But competitors are hot on the company’s heels. Amazon recently began offering Prime Now delivery from Whole Foods stores in several cities and plans to rapidly expand that program, while Walmart recently announced it will expand home delivery to 100 cities — a service that complements its popular store pickup program.
And then there’s Target, which will soon offer nationwide delivery through Shipt, the close Instacart rival Target purchased back in December.
So while Instacart may have jumped out ahead of the pack, its toughest months lie ahead as it works to gain and retain customers while proving it’s a good value for retailers.
Building on the foundation
After Amazon bought Whole Foods last summer, some industry observers speculated that Instacart would soon be on the ropes. Whole Foods was, after all, an early investor in Instacart and a large client. But grocers nervous about Amazon's move proved to be a boon for Instacart, which offers an online platform and crowd-source delivery they can easily plug into.
The tie-ups were convenient and cost-effective, and they leveraged the supermarket's most valuable asset: their stores. But are they built to last?
Neil Stern, senior director with consulting firm McMillanDoolittle, points out that some retailers aren’t thrilled with outsourcing a key customer experience to a third party. Instacart offers white-label web platforms to assuage any concerns over brands clashing, but ultimately it’s Instacart’s drivers who deliver the products to shoppers.
“For retailers, there is certainly a risk/reward to aligning with Instacart,” Stern wrote in a recent Forbes column.
Ganenthiran says many of Instacart’s retailer partnerships were in the works before Amazon swooped in to buy Whole Foods. The deal just put everything into hyper-drive.
“We’d been working on these partnerships a long time,” Ganenthiran said. “We built a lot of the underlying technology and tooling to be able to scale pretty dramatically, pretty fast.”
He characterized Instacart’s relationship with retailers as a partnership. Retailers set online prices for products and look to Instacart for expertise in technology and logistics, while Instacart hones its services through retailer input.
To that end, Ganenthiran said Instacart is focused this year on deepening those relationships by developing additional services. Earlier this year, it acquired Unata, a digital grocery provider that offers digital circulars, coupons, list builders and other website capabilities that, according to Ganenthiran, can help Instacart round out the online shopping experience. Reports last month noted Instacart has filed a patent for a scan-and-go technology that would allow its personal shoppers to skip the store checkout — an indication the company wants to speed up its service.
The decision to firm up its existing relationships is an acknowledgment that Instacart can’t keep up the breakneck growth it saw last year. It’s also a nod to competing companies that seek to knock the online ordering and delivery giant off its perch.
“Last year was laying the foundation where we brought the entire brick and mortar industry online,” said Ganenthiran. “Now 2018, I would call this the fun part where we drive a lot of sales through that foundation. We’re representing these retailer brands, and it’s really important that we nail it.
Prime Now muscles in
Investors certainly have confidence in the company. Instacart’s most recent funding round raised $350 million, putting its total valuation at $4.4 billion. The company plans to go public eventually, but has not indicated when that might take place.
So far, its competitors aren’t fazed by its aggressive expansion. Amazon Prime Now delivery from Whole Foods stores is price competitive with Instacart, and offers free two-hour delivery for more than 70 million Prime members in the U.S.
Barclays analysts surveying the Cincinnati market found a basket of Whole Foods products ordered using Prime Now’s two-hour delivery was cheaper than the same basket ordered from Kroger through Instacart, despite Whole Foods’ products being on average 14% higher.
Walmart, in comparison, offers home delivery for $9.95 after a $30 order minimum. The service doesn’t offer one- and two-hour fulfillment like Instacart does, but with a large built-in customer base and prices that match those found in-store, the mega retailer is sure to find a sizable audience.
Ganenthiran said Instacart is taking both retail giants very seriously, but maintains the company’s strength comes from the retailers it serves.
"I think Instacart is differentiated first and foremost by the breadth of assortment that we have," he said. "Amazon will never partner with the retailers we partner with."
Another direct threat is Shipt, which has experienced slower growth than Instacart, but by the end of 2018 will deliver products from Target stores nationwide. Shipt has remained an online fulfillment and delivery provider for chains such as Meijer and H-E-B, but Ganenthiran believes other grocers are unsettled by the idea of using a service that’s now owned by a major retailer.
Since its acquisition, Shipt has signed on with Rouses stores in Louisiana, and as a delivery option for several regional grocers through a deal with digital firm Mercatus.
“Last year was laying the foundation where we brought the entire brick and mortar industry online. Now 2018, I would call this the fun part where we drive a lot of sales through that foundation.
Chief business officer, Instacart
In a sign of just how cutthroat grocery e-commerce has become, Bloomberg reported that Instacart workers at one San Francisco store were forced to fill orders in cramped quarters after Prime Now employees took over their work space. Instacart workers in other cities told the publication they're worried about getting similarly pushed out of Whole Foods stores.
Asked to confirm these incidents and describe its relationship with Whole Foods, Ganenthiran would only say that the customer experience has remained unchanged for Instacart and Whole Foods shoppers.
"While Whole Foods remains a valued partner, they represent a small and declining portion of our revenue," he said.
‘The store is front and center’
Instacart appeals to retailers, Ganenthiran said, because it utilizes their existing stores and product assortment to fill online orders. Pricey fulfillment centers aren't necessary, and neither are technology upgrades that can cut further into margins.
As e-commerce demand grows, however, analysts predict stores will struggle to fill orders.
“You only have so much space to maintain inventory in stores," Keith Anderson, senior vice president of strategy and insights at e-commerce consulting firm Profitero, told Food Dive. "It’s not a big issue with low velocity items. But it’s a very big issue with highest velocity items that are popular with both in-store and online shoppers."
As orders increase, so do the number of personal shoppers inside stores, analysts point out. For locations that don't have voluminous back rooms, this means workers could eventually crowd aisles, speeding along as they jockey with customers to fill orders.
According to Ganenthiran, online demand is a long way away from disrupting the store experience. In the meantime, he said, stores offer some crucial advantages for online grocery selling.
“The fixed cost is already in the ground. Those stores exist,” he said. “The other beautiful thing of those stores is they’re located within a 20-minute drive of the customer. They sell the assortment that customers in the area want to buy, and it’s at the price she wants to buy it at.”
Still, he admitted stores will have to adapt in the future to accommodate increasing demand. Nielsen and the Food Marketing Institute estimate that grocery e-commerce will achieve 70% consumer penetration and rack up $100 billion in sales annually in as little as four years.
“Today, we believe the store is front and center,” said Ganenthiran. “Whether the store looks the same inside or not, I think it’ll continue to evolve. There will be more automation brought into the store, space allocation will change, but the store is front and center.”
Some retailers are already thinking along these lines. Whole Foods is reportedly seeking out larger stores that can house expanded e-commerce fulfillment stations.
Since Amazon has upped the technology ante, grocers and vendors also are looking to a future where automation plays a larger role in e-commerce fulfillment. British e-grocer Ocado, which uses vast warehouses and scores of robots to fill orders, is circling the U.S. market, while companies like CommonSense Robotics want to bring automated fulfillment to small spaces, including store backrooms.
Will Instacart eventually replace its personal shoppers with robots? Will it build separate fulfillment facilities? Ganenthiran said the company is looking at all options right now.
There's plenty of speculation swirling around Instacart, including that it might get acquired, or that it might even open its own grocery stores. Ganenthiran said the company wants to stay independent, and that there are no plans to open its own stores. Instacart, he said, is focused on doing what it's always done — filling online grocery orders in partnership with retailers.
"For better or worse that's the bet we've made," he said. "The bet we've made is that we will win together with brick and mortar grocers."
Follow Jeff Wells on Twitter