Online grocery shopping is widely regarded as the fastest growing segment in the overall grocery retail market. A recent report by FMI-Nielsen projects that online grocery spending could increase from 4.3 percent of total U.S. food and beverage sales currently to as much as 20 percent by 2025 – a $100 billion market opportunity.
In an edited transcript of their recent podcast discussion, Profitero’s SVP Strategy and Insights Keith Anderson and Nilam Ganenthiran, Chief Business Officer at Instacart, discuss the state of online grocery in the US and how it compares to other more mature markets like the UK, some of the economic realities and challenges of online grocery overall, and whether click and collect or delivery is the more effective grocery model.
KA: I’ve been following retail for 15 years and eCommerce and online grocery specifically about 10 years, and it feels very clear to me that we’re at an inflection point in the US. Where is online grocery from a maturity perspective in the US and how do you think it compares to markets many consider to be more mature, like France or the UK?
NG: I think the best way to describe where we are in the US related to grocery eCommerce is that we’re definitely at a tipping point. I would say when Instacart started, when our founder and CEO, Apoorva, started the company in 2012 in San Francisco, it was the first at bat for grocery eCommerce, despite grocery eCommerce having existed for 12 to 15 years at that point. It was something that was very niche, very expensive, very focused on large cities, but what we’ve seen happen over the last four to five years is a few dramatic shifts, some of which we’ve helped drive for the industry, but a lot of it has also been driven by Amazon.
The dynamic shifts that we’re seeing and why I think we’re at a tipping point, is that first and foremost, grocery eCommerce is a top three strategic priority of every grocer in the country. I’m not talking just about the large kind of Supermarket News top 75 grocers. I’m talking about even the local mom and pops. If you go and talk to them about what’s important to them in 2017, eCommerce will be on their top three list. When we started this journey, we were first met with chuckles from brick-and-mortar retailers related to grocery eCommerce and a lot of, ‘Hey, didn’t people try that 10 years ago and didn’t it fail?’. Then we were met with, ‘This will never work with my economics and my business model’. Today, it’s very different. It’s very much, ‘How do we make it work? How do we reach our consumers who are clearly online?’ I think from a state of maturity perspective, we’re in the first inning. We’ve got a lot further to go relative to other categories, but also just relative to delivering on what the customer needs.
I would say in comparison to other markets, everyone talks about the UK being a highly developed grocery eCommerce market. That’s true from a share perspective, but I think what’s interesting is in the United States, the models that are developing and largely what we’re trying to develop for the industry is something that’s more economically sustainable than what has happened in the UK. We believe channel pricing strategy should be at the sole hands of the grocery retailer. We believe that you don’t need to erode margin to offer this to your customer.
I think one of the most interesting aspects of this journey, and frankly one that was very surprising to us at Instacart, if I were being completely candid, is the customer demand for a service like ours is not constrained to the big cities in the US. I think when we first started we thought this model was viable in maybe 10 US cities, then maybe 25. The year later we thought 50. Today, we’ve launched cities like Evansville, Indiana and Rockford, Illinois, Brownsville, Texas. These were places that were not on our hit list when we started the company, let alone over the last three years. That has been a big surprise and almost a real eye opener for us at Instacart.
KA: A lot of people are interested in the economics of the model from from the perspective of the operator, and I’d love to drill in a little bit on that discussion in terms of where this is viable and what drives viability.
NG: The three factors that drive the economics on same-day grocery delivery are largely as follows. First and foremost, how long does it take for one of our shoppers, and we call them shoppers, they’re the folks that complete the order for us, to pick an order in a store environment? The second big factor is how long it takes and how many orders they are able to complete and batch on the drive side, how many orders they’re able to bring home to various customers’ stores within a one-hour period? Then, the final factor is on the technology end, operational overhead side, how many orders were able to amortize our cost over?
We at Instacart are obviously obsessed with all three. Our fundamental premise and why we’re different than a lot of the folks who tried this before and why we’re different than a grocery retailer who might try to build something themselves, is we’re able to drive intense localized density by working with multiple retailers within a geography. What does that mean? That means within a specific zip code in a city, we might have anywhere between two to 10 different grocers, depending on share and their store footprint, with whom we work with and with whom we are able to pull volume and kind of spread out those fixed costs.
KA: Can you talk more around some of your guiding principles on economics?
NG: This is something we’re actually quite passionate about at Instacart because one of the biggest fears that retailers first have when they think about a service like Instacart is, ‘Am I going to get disintermediated and is this going to be what happened to Borders and Toys R Us, etc. in the late ’90s?’. As a philosophy, we are building a company that does not want to be a retailer ourselves. We’re building a company that wants to be a software and logistics layer to enable brick-and-mortar retailers to compete in an increasingly Amazon world.
What does that mean in terms of guiding principles on economics? The first guiding principle is merchandising is at the control of the retailer. We do not believe in models where we can go price up whatever we want on the retailer’s products and we’re just offering a concierge service. Pricing with Instacart is in the sole discretion of our retailer partners. How it works is they sign a contract with us with clear economic rates. They price the product on the platform any way they want. They can apply micro-merchandising strategies to the zip code level or store level, to basically have channel pricing strategies. Many apply a strategy of having the same price online as in store. Many others apply various things in between, in terms of honoring in store specials, in terms of pricing slightly higher than in store to cover our fees. There’s a variety of strategies depending on what the retailer’s own overarching channel strategy is. We think that’s really important because we don’t want to be merchants. We don’t want to be the one setting price. We think that’s a key guiding principle.
The second guiding principle we have is we want to enable our grocers to interact with their customers any way the customer wants to interact with them. What that means is we want to enable our grocers with eCommerce services that are not just same day delivery, but also things like click and collect that we’re powering for more and more retailers every day, and we want to enable our retailers to interact with customers on their own front end. If you go to something like a delivery.publix.com or schnucksdelivers.com or delivery.wholefoodsmarket.com, those are all properties that Instacart powers on behalf of the grocer, allowing the grocer to have the same fantastic UI and technical capability that they have on the Instacart marketplace, but on their own domain.
KA: What is your point of view on whether click and collect or delivery is the more effective model? What do you make of some of the experimentation Amazon seems to be doing with their pick up model?
NG: This has been an area of fierce debate internally at Instacart, and an area where our point of view has sharpened over time as we’ve developed more data from working with our partners on one service or the other or both. At a macro level, the answer is it depends. Where a customer is able to have same day delivery or click and collect offered to them, the majority of customers are choosing same day, but there’s a proportion, a non-significant portion, that will choose click and collect. It varies greatly by market.
What’s interesting is market to market, this looks very different. There’s parts of the country where driving is just more prevalent, where the ratio might not be 90:10, it might be 70:30 or 60:40 delivery to click and collect. Economics are a part of it, so obviously it’s more expensive to pick and deliver something than just pick and stage something, so it’s more expensive to the customer as a result, but we also think there’s something around behavior. Click and collect is something that we’ve not been able to have work in any sort of dominant fashion in a city like San Francisco where not only is delivery so prevalent, but also people don’t have cars and it isn’t a driving culture to drive and pick something up. In more rural communities, obviously that ratio looks a little bit better for click and collect, but we think it’s a mix.
I think the industry at one point wanted the answer to be just click and collect. I think today, the industry wants the answer to be both. That is actually what we think the right answer for the customer is, but only time will tell. I think the customer’s expectations are actually changing by the month, by the week, by the hour here. As someone launches new services that are offering them a new level of convenience, they seem to be voting for that convenience. I think we’ll all be learning as time goes.
Then on the question of Amazon, I think what they’re offering is actually a natural extension and natural next step for them as they look to solve the $800 billion part of the retail landscape that they currently have not solved. That is groceries. I think they are taking a novel and thoughtful approach of basically trying a lot of different things and tailoring things for different markets. Prime Now in some cases with groceries, Fresh as a core offering, click and collect in some places, and they’re basically trying a lot of things. I think that’s what the overall industry can learn, in my opinion, from Amazon is just how nimble they are, how open to experimentation and how innovative they are. They’ll try any way to offer something to the customer that’s relevant. We have a high degree of respect for them. We believe it’s important for us to be a way for brick-and-mortar retailers to be able to offer a lot of those capabilities, and more, to compete with Amazon.