Instacart recently announced that it will end its relationship with Whole Foods in early 2019. Many grocery analysts and industry experts such as Phil Lempert, were not surprised by the announcement. Lempert wrote an interesting article about the breakup that raises questions about the future of Instacart.
I believe the breakup with Whole Foods is just the beginning for Instacart. Here’s why.
In 2013, I wrote a research paper titled A Beautiful Way to Save Woolworths where I became one of the first individuals to recommend that Amazon should acquire Whole Foods. The Texas-based grocery chain HEB was also named by me as a possible acquisition target for Amazon. HEB is arguably the best grocery retailer in the U.S.
The response to the article was fast and harsh. Grocery executives, retail analysts and the general public all had a similar opinion: Amazon will never buy a physical grocery retailer. Ever. Discussions with grocery executives revealed a mindset that grocery retailing was too hard, too complicated and too far outside of Amazon’s capabilities.
When I raised the possibility that Amazon could disrupt the grocery industry and eventually become the largest grocery retailer in the U.S. not one grocery executive agreed with me. When I stated that I thought it would be in the best interest of the grocery industry if Kroger, Albertsons or Walmart acquired Whole Foods to ensure that Amazon couldn’t swoop in and acquire the company, the idea was dismissed as being “foolish.”
I vehemently disagreed with the mindset and lack of concern on the part of the senior-level grocery executives I spoke with. I knew for a fact that Amazon embraced “Thinking Big” and the company understood the value of becoming a major player in an industry worth over $800B. I also understood that if Amazon did indeed acquire Whole Foods, it would position Amazon for long-term success.
On June 16, 2017, Amazon announced that it was acquiring Whole Foods for $13.7B. I described the announcement in an article as being similar to the infamous 1929 stock market crash that caused a massive panic and ushered in the Great Depression. Grocery executives who believed Amazon would “never” acquire Whole Foods or any other grocery retailer realized they were wrong.
A senior executive with one of the largest grocery retailers called me and stated “What I wouldn’t give for a time machine so we could go back in time and acquire Whole Foods like you advised us to do.”
In the days immediately after Amazon’s announcement, grocery executives huddled inside their companies to discuss strategy. Instead of remaining calm, showing leadership and identifying the optimal strategy for their companies, the majority of executives did the same thing – they panicked. They also made the same phone call to one company – Instacart.
Instacart was in the process of experiencing its own level of panic at the news that Amazon was acquiring Whole Foods, its biggest customer. Instacart executives clearly understood that sooner rather than later, Amazon would end the relationship. And then…the phones started to ring.
Grocery executives contacted Instacart with the intent of signing the company to an agreement to provide online grocery order fulfillment and home delivery of groceries. Two things Instacart does very well. Instacart, to its credit, was able to rapidly respond to the needs of grocery retailers looking for a savior. To state that Instacart took full-advantage of the opportunity is an understatement; that’s a compliment, not a criticism.
Instacart CEO Apoorva Mehta, who used to work at Amazon, positioned himself as an expert who understood exactly how Amazon would blitzkrieg the grocery industry and take market share from independent grocers and large grocery chains alike. Mehta wisely used media appearances and interviews to fan the flames of fear by stating how dangerous Amazon had become to all grocery retailers. Unless of course a grocery retailer was able to provide the same services as Amazon – online grocery fulfillment and home delivery.
An executive with a major consulting firm in an off-the-record conversation about Instacart said it best “Grocery retailers were convinced that Amazon was going to launch a scorched earth campaign and burn their stores to the ground. Instacart was more than happy to come forward to put out the fires. For a price.”
Mehta’s strategy worked: grocery retailers flocked to Instacart.
According to Lempert, Instacart now serves over 4,000 cities, delivers from 15,000 stores and partners with more than 300 retailers. It employs close to 800 full-time workers and its gig workforce is comprised of over 70,000. (Instacart relies on contract workers to fulfill grocery orders inside retail stores and make deliveries of groceries).
Wall Street analysts I’ve spoken with have stated to me that they believe Instacart is a classic Wall Street play where investors inflate the value (and importance) of a company to maximize value from an IPO. I don’t have an opinion on the topic.
Welcome To Reality
Instead of jumping on the Instacart bandwagon when the news broke that Amazon was acquiring Whole Foods, I raised the alarm that no grocery retailer should sign an agreement with Instacart for one simple reason: Amazon wasn’t an immediate threat.
I stated it was foolish for a grocery retailer to sign an agreement with Instacart only to teach Instacart its business model, as well as allow Instacart to learn its strengths and weaknesses. Why? Because Instacart could easily become a future competitor. (Instacart denies it has plans to ever directly compete against its customers. Many retail analysts believe otherwise).
In addition, I was skeptical of Instacart’s model for how it pays and manages its gig workers. For example, not reimbursing delivery drivers for all miles driven during a shift. Some of the hardest working and lowest-paid associates in the gig economy work for Instacart. I was concerned grocery retailers could incur reputational risk for contracting Instacart. (I was right to be skeptical as Instacart is facing massive backlash from its associates).
Grocery executives, however, were convinced that since Amazon acquired Whole Foods, its customers would suddenly defect to Amazon and Whole Foods, and its customers would all suddenly want to order their groceries online for delivery to the home. To protect market share, executives contracted Instacart.
Reality is finally beginning to set in for grocery executives. Amazon shows no signs of being able to take market share any time soon. (I have stated since June 2017 that it will be 2020/2021 at the earliest before Amazon will be in a position to impact the grocery industry. It could even take longer.)
Faced with the reality that they had panicked, grocery executives are now reevaluating their relationship with Instacart.
Because I was against Instacart from the beginning, grocery retailers and consulting firms have begun to contact me with each asking the same questions: How do we replace Instacart? What do you recommend we do?
Based on multiple off-the-record conversations with grocery executives, strategy consultants, retail analysts, Wall Street executives, and current and former associates, it appears 2019 is shaping up to be the year when grocery retailers begin to abandon Instacart.
Third-Party Vendors Don’t Make It Easy
Third-party vendors like Instacart and other service providers have a reputation for doing everything possible to make it difficult for a customer to end the relationship or exit out of a contract early.
Tactics used often include launching whispering campaigns to undermine a decision to replace the 3rd-party; reducing fees; leaking to the media that a client wants to end a relationship and that doing so will have negative consequences on customers; speaking with suppliers to convince them to intercede on behalf of the 3rd-party; and withholding customer and operational data to make it difficult for the client to implement its own program or replace the 3rd-party.
A complaint I often hear is how “sneaky” and “unprofessional” vendors and service providers can be. For example, negotiating agreements with major CPG/FMCG suppliers or making decisions that impact a grocery retailers business with no input from the executives at the retailer.
Grocery retailers should not be intimidated at the thought of replacing any 3rd-party.
Specifically as it applies to grocery retailers currently using Instacart, I am fully aware of the issues and concerns on the part of grocery executives. My advice is to explore a strategic partnership with Mercato, Shipt, GrocerKey or Mercatus as these companies are among the best in the business and they come highly recommended. Step back and evaluate all available options. Explore owning the process. If Instacart is strategic, retain the relationship.
Delivery Solutions offers options for grocery retailers to utilize a crawl, walk, run approach for last mile delivery. When ready, the retailer can take complete command and control over its last mile delivery needs using its own resources. Many analysts and industry professionals recommend Delivery Solutions.
Farmstead has introduced an AI-powered operating system (Inventory control, food waste management, order picking, last mile delivery) that gives margin back to grocers vs. taking it away. The platform allows grocery retailers to run its own fulfillment centers or repurpose its stores to pick orders and deliver groceries. The platform easily integrates with a grocer’s technology. In addition, Farmstead gives grocery retailers the option of using its delivery drivers, the stores drivers or a hybrid model of using both. Farmstead is generating a lot of interest in the grocery industry.
Mercato has been the beneficiary of two grocery retailers recently abandoning Instacart for the reasons I outlined. Local Foods in Chicago, IL and Reading Terminal Market in Philadelphia, PA both replaced Instacart with no disruption to its customers or business.
I know of five major grocery retailers with plans to be the next in line to make the switch from Instacart. Will they? Only time will tell.
Jeremy Neren, Founder and CEO of GrocerKey, raises an important point when it comes to using a marketplace:
When retailers power their own branded eCommerce experience, they can sell advertising to brands. Retailers that choose to list their products on a marketplace like Instacart, Shipt or Google Express lose the ability to monetize their digital assets. Many grocery executives have failed to understand this fact. Advertising is a major source of revenue in Instacart’s model. Advertising revenue that retailers should be capturing, not Instacart.
I agree with Neren. I continue to find that many grocery retailers lack a solid understanding of how to incorporate a digital strategy into its business model. I also understand that not all retailers can or should implement a digital strategy. I advise all grocery retailers to at least assess going digital.
What needs to be made clear to grocery executives is that it doesn’t make sense to try and copy Amazon and its strategy for Whole Foods. You’re not Amazon or Whole Foods.
Instead, executives need to understand that the best strategy it can implement is to identify and leverage its company’s differentiating capabilities. The most powerful growth engines are made up of a handful of capabilities providing real differentiation in the market, not copying a competitor. (Many executives struggle with accurately identifying the differentiating capabilities of their companies).
Own The Customer Experience
Executives can be forgiven for making a rash decision to sign an agreement with Instacart out of fear of Amazon. However, executives that retain a contract with Instacart without validating that Instacart is strategic to the long-term success of the company have failed to carry out their executive responsibilities. A strategic review may identify that neither Instacart, or any other provider of online grocery fulfillment and home delivery is needed.
I believe grocery retailers should place its focus on Click and Collect whereby customers can order groceries online for pickup at the store. This is not my favorite model but in 2018, it is a service many customers enjoy. My argument is this: grocery retailers must get customers in its stores and get customers to see the value of ordering groceries and food online for home delivery. Food is a higher margin business for grocery retailers than shipping center store items.
Grocery retailers should also focus on using its own associates and managers to design, implement and manage online fulfillment and last mile delivery of groceries.
If a grocery retailer wants to offer order fulfillment and home delivery, I strongly advise against using contractors (gig workers) without an agreement for the retailer to have a level of management oversight.
Grocery shopping is personal to consumers. I coined the term ‘Inspect and Select’ as a way to express that when it comes to meat, milk, fruits, vegetables, eggs, dairy and baked goods, consumers want to inspect those items so they can select the freshest items. Consumers don’t trust gig workers to care as much as they do to pick the best items which is why so few consumers order fresh food online.
Where I continue to see issues is in the failure of gig workers to pick fresh food free from defects or products soon to hit the expiration date. The delivery of groceries to a customer by a gig worker that fails to meet the needs of the customer and who fails to be courteous, is one of the biggest complaints of customers. Grocery retailers must be involved in the management of all customer-facing engagements. My advice is own the experience end-to-end.
Based on my own research and results of research I conducted for consulting firms, there is massive variance in the ability of gig workers to pick groceries. Gig workers are told to pick and fulfill orders as fast as possible. (It’s not a coincidence that most grocery gig workers in grocery stores are young with an ability to run fast).
The idea that a “personal shopper” will do as good a job as a consumer to pick the best products is simply false based on my research and research from multiple firms. (Chris Walton, a Forbes contributor, has an interesting perspective on the topic of needing to touch and feel groceries. Walton raises valid points. However, I understand why consumers remain concerned about fresh food.)
Grocery retailer can’t assume that Instacart, or any other 3rd-party fulfilling online grocery orders, is providing customers with the best experience. The entire process must be managed, measured and reviewed closely by grocery retailers.
I believe grocery retailers should improve the customer experience for grocery delivery. This includes introducing products like the eDOR. Kroger, Walmart, Amazon and other retailers can and should offer the eDOR (or a similar product) to its customers for a low monthly fee. Leaving groceries on a porch or in front of a door is a disgrace. Customers deserve better.
Should gig companies be avoided? No. In addition to the companies I mention in this article, I am a supporter of the company Deliv primarily because the Founder and CEO, Daphne Carmeli, has a well-earned reputation for providing exceptional customer service and doing an admirable job ensuring all associates are trained with a “customer first” mindset.
Grocery retailing is hard. Really hard. Companies like Instacart often appear to be saviors when in fact what’s needed is something else entirely different. Grocery retailers who believe it can’t implement its own in-store programs, leverage its own labor to fulfill online orders and delivery groceries are making a strategic mistake. There are much better and more strategic solutions available than using gig workers to fulfill orders.
Where possible, grocery retailers should own the entire customer experience including order fulfillment and delivery. Grocery retailers should power its own branded e-commerce platform and utilize strategies to monetize its digital assets like selling advertising to brands and engaging with customers. Grocery retailers should not give away advantages to Instacart, a company that can one day become a competitor.
Mehta and his team of executives continue to the make the argument that Instacart adds value to grocery retailers by providing a service that retailers can’t or shouldn’t want to duplicate. I dispute the assertion. Instacart creates the most value for Instacart.
I remain incredulous that Walmart/Sam’s Club hasn’t leveraged its associates, Walmart Labs, and industry-leading position in grocery sales to design and implement a best-in-class online order fulfillment and last mile delivery solution for groceries and general merchandise to its customers. Totally unacceptable and easily corrected with the right leadership.
I frequently assess the grocery industry looking for ways to introduce new ideas and innovative business models. An online grocery auction and a Direct To Customer In Office business model that I recently designed has generated tremendous interest from Silicon Valley and Wall Street. It has also raised concerns among grocery executives resulting in the same level of fear that was felt when Amazon acquired Whole Foods. Executives shouldn’t panic.
Grocery executives underestimated Amazon before the acquisition of Whole Foods, and they have overestimated Amazon’s ability to move rapidly and disrupt retail since the acquisition was completed. Executives must identify their differentiating capabilities and implement a capabilities-based strategy, that’s how you grow a company and delight customers.
Grocery retailers can and should adopt new technologies, enter new channels, embrace innovative ideas and expand business models when its strategic to the retailer to do so. Making decisions out of misplaced fear or engaging in “Keeping Up With Amazon Syndrome” is a recipe for disaster.
The best qualities a grocery retail CEO should posses are leadership, having a backbone and strategic vision. Those qualities are going to be tested severely over the next few years.