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Instacart Looked Like a Savior. Now Stores Aren’t So Sure

E-commerce arrangements are squeezing the bottom lines of grocers.
(OasisMuel)
(OasisMuel)
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“Grocery-delivery service Instacart Inc. once seemed like the perfect partner for supermarkets looking to break into e-commerce. After several years together, though, some grocers are starting to question the relationship,” WSJ writes.

Why It Matters: The pandemic made it very clear just how important e-commerce is to the future stores across many different industries. Instacart’s technology had previously offered a ready-made solution in a space that didn’t have many options, which ballooned even further due to Covid-19. Now, supermarkets say they aren’t making money through Instacart because of the high 10% commission.

“We don’t think we make money from an Instacart order,” said Mark Skogen, CEO of Skogen’s Foodliner Inc.

  • Retailers say Instacart holds too much power over customer interactions and that the online service will continue to take an increasing share of the money food makers spend on marketing.
  • Skogen says his company continues to work with Instacart because it allows for more significant revenues even if it means no profit.

Instacart’s list of arrangements continues to grow. It added or expanded partnerships with more than 150 retailers in the U.S. and Canada during 2020. That puts it in collaboration with more than 500 firms, including Kroger, Walmart, Aldi, and 7-Eleven.

  • After initially struggling through the pandemic’s start, Instacart has since caught up and seen its orders rise around 500% annually this year.
  • It has also doubled its predominantly gig worker workforce to about 500,000.

By The Numbers: Instacart, founded in 2012, had its first profitable month in April. Since March, the company has raised about $500 million, giving it a valuation of $17.7 billion.

  • It expects to IPO but hasn’t said anything about the timing yet.

In the meantime, grocers are figuring out ways to fire back. Instacart keeps adding new features, so companies like Kroger offer incentives to order delivery through their own website. There are also other alternatives, like Uber, Target’s Shipt Inc., and in-house delivery services Peapod and FreshDirect.

  • However, there’s an element of brand loyalty to online delivery services, and “Instacart might remain just one of many ways to shop for groceries online.”

Justin Oh:

I am not convinced that every industry can sustain middle-man delivery services that will take meaningful market share and become huge businesses. 

I am 50/50 on whether restaurant delivery will continue to gain ground against in-person dining and takeout. But we can be certain that, given the scattered nature of restaurants, middle-man companies like DoorDash ($DASH) will be the ones to facilitate delivery.

I am much more skeptical about whether people truly want grocery delivery post-pandemic. I still enjoy going to Whole Foods and selecting my own groceries even though I have an Amazon Prime delivery option. 

Furthermore, given the consolidated nature of the grocery industry, why would giants like Kroger ($KG), Albertsons ($ACI), or Whole Foods ($AMZN), which already operate with razor thin margins, give economic profits to a third-party delivery company when they can own distribution themselves?

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