Is it time for retailers to reconsider Instacart?

Discussion
Photo: @AZ.BLT via Twenty20
Dec 30, 2020
Matthew Stern

Instacart’s ability to enable grocers to quickly implement or scale up delivery operations has been critical to meeting unprecedented demand throughout the pandemic, but some grocers are finding a weakness in the relationship — they’re not making any money.

While Instacart partnerships can increase revenues, the commission that Instacart charges — often amounting to more than 10 percent of every transaction — has been cutting into grocers’ margins to the extent that some don’t feel that they are making any profit on Instacart customers, according to The Wall Street Journal.

Other complaints include Instacart exercising too much control over customer interactions and its new advertising push that competes against grocers’ own co–op advertising programs.

Instacart has benefitted from a huge windfall during the pandemic, adding and expanding arrangements to a total of over 500 companies at present. The company has seen orders increase 500 percent at times and, in April 2020, had its first profitable quarter since its 2012 inception.

Some retailers have taken extra steps to protect profits in their Instacart partnerships. H-E-B, for instance, raised prices on items sold through Instacart when it first partnered with the firm in 2015, and Kroger incentivizes the use of its in-house delivery services over Instacart with digital coupons and fuel savings offers for loyalty members.

While some retailers have found Shipt and other third-party services to be better deals, Instacart has demonstrated market dominance as more retailers — even those offering competitive services — have continued to jump on board.

In May, Instacart’s share of online grocery had risen to 55 percent, outdoing Walmart’s efforts in the e-grocery space. By August, Walmart had announced it was piloting Instacart delivery from four U.S. locations. (The retailer was already working with Instacart in Canada.)

Even non-grocery retailers have entered into delivery relationships with Instacart during the pandemic. New partnerships this year include 7-Eleven, Best Buy, The Vitamin Shoppe, Sephora, Dick’s Sporting Goods and Five Below. Instacart also jumped into prescription delivery in a partnership with Costco.

DISCUSSION QUESTIONS: What factors do you think will influence retailers’ decisions to use Instacart vs. using other third-party delivery services or building in-house delivery? What do you think makes Instacart a good or bad choice for a given retailer?

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Braintrust
" Retailers need to seek alternative home delivery options or bite the bullet and develop their own delivery system."
"The biggest challenge in almost all businesses today is a growing aversion to SIMPLICITY."
"The pandemic has forced grocery stores to quickly expand their online and delivery services, without much time to think about the business model of these new services."

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23 Comments on "Is it time for retailers to reconsider Instacart?"


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Neil Saunders
BrainTrust

The rapid growth of online grocery has pushed a lot of retailers into the arms of Instacart. However, the continued rise of online could also persuade bigger retailers that they should invest in their own systems and logistics. The advantages of this are lower operational costs and more control over the customer experience. Of course, the disadvantage is upfront capital investment, disruption to existing operations, and the need to achieve scale for financial success. All that said, I don’t think Instacart is doomed: it is an efficient operation that will continue to play a big role in online fulfillment.

Gene Detroyer
BrainTrust

The structure of online is built for mass and efficiency. Smaller retailers will always be at a disadvantage if they are relegated to third-party delivery operations. And unless those third-party delivery operations can deliver with the same efficiency and at the same cost as the as the major players, business will naturally go to the big guys.

David Naumann
BrainTrust

The business model for grocery delivery is a challenging nut to crack. The key to profitable delivery may be leveraging in-house teams for picking and delivery, but it is very costly. Consumers must ultimately pay higher service fees. Using Instacart and current product prices makes it nearly impossible for profitable online grocery delivery transactions.

Gene Detroyer
BrainTrust

What do you think makes Instacart a good or bad choice for a given retailer?

For us, Instacart did such a poor job of getting deliveries correct that we will no longer use Instacart at all — therefore, we will not purchase anything from their retailers. That strikes me as a pretty important consideration for a retailer when they are choosing a delivery service.

Georganne Bender
BrainTrust

I have had the exact opposite experience with Instacart – service has been consistently good. I use it at home and to deliver groceries to a relative in New York. Weird, huh?

Paula Rosenblum
BrainTrust

Ditto. They’ve gotten better.

Richard J. George, Ph.D.
BrainTrust

Instacart has been a good option for retailers trying to figure out home delivery. However, as noted, there are shortcomings. While the fees are an obvious issue, I think a bigger concern is, who owns the customer? I have used Instacart with mixed results for Publix grocery shopping. Retailers need to seek alternative home delivery options or bite the bullet and develop their own delivery system. No doubt there are capital commitments and executional issues, but online is here to stay and these delivery issues are here to stay.

Cathy Hotka
BrainTrust

Instacart’s customer base has expanded well beyond grocery thanks to the pandemic, but it’s hard to imagine retailers shouldering these costs indefinitely. After another six months or so, you have to imagine that an alternative will have been found.

Dave Wendland
BrainTrust

Agreed Cathy Hotka. Alternatives will DEFINITELY emerge and new — more ROI friendly — options will come of age soon. Instacart has been an ideally-timed solution to fill an immediate need, but with time comes refinement, alternatives, and improvements.

David Mascitto
Guest

The pandemic caused many retailers to be caught on the back foot when it came to omnichannel options such as BOPIS, BOPAC, and delivery. Instacart and other third-party delivery services have been a stop-gap measure for retailers to allow business continuation in the face of limited options including capacity crunches from major couriers. The issue with outsourcing the last mile is that it means relinquishing control of your brand at a crucial step in the customer experience to companies that don’t live your brand values or want to impose their own. Once the market stabilizes, it would be in the retailer’s best interest to review the costs/benefits of owning their last-mile delivery.

Ian Percy
BrainTrust

Is it just me or does retail seem to be obsessed with self-inflicted wounds? All these “innovations” seem to be additional shots into the retail foot. The price-war race to the bottom, free shipping, the fastest shipping, and on and on. Customers will take anything retail wants to give them pretty well — until the cord breaks such as Gene describes in his post.

The biggest challenge in almost all businesses today is a growing aversion to SIMPLICITY. I don’t know who to credit but I’m fond the truism: “If it’s a simple idea it probably came from God.”

Xavier Lederer
BrainTrust

The pandemic has forced grocery stores to quickly expand their online and delivery services, without much time to think about the business model of these new services. Yet the sharply increased volume of these new activities makes their costs very visible: grocery stores now take over part of the job of many of their customers, for free. Will COVID-19 be the realization that online activities are not necessarily more efficient, and that convenience comes at a cost that the customer needs to pay for?

Paula Rosenblum
BrainTrust

Publix straight up charges higher prices when you buy through Instacart. So do many retailers. In my mind, elitist that I am, 10 percent is a small price to pay on my side for the convenience. Their software needs a lot of work (you’d have to go to my Facebook page to see what Instacart served up when I searched for “Plastic champagne flutes,” it’s a study in stupidity) but it has been getting better.

So if I were a grocer, I’d either have some kind of annual membership to cover the extra cost or just charge more. It also limits market size, really.

Jeff Weidauer
BrainTrust

Retailers have no one to blame for Instacart’s success but themselves. By allowing the Instacart Trojan horse inside, they’ve ceded the online business to what is essentially a competitor and set it up for success. The only long-term option now is to bite the bullet and start over – with an internal program.

Dave Wendland
BrainTrust

Very bold reality, Jeff, but absolutely true.

Ananda Chakravarty
BrainTrust

That sounds like the right direction, and I suspect most retail execs have been thinking exactly that, where Instacart was to be an interim solution. However it’s easier said than done. The delivery network, hiring and managing shoppers, building AND distributing an app that customers will download, etc. is a very different business than retail, and execs in this space are better off working with other fulfillment and delivery companies than building the solution internally. We’ll see costs go down over time as more players arrive in the space, some of the larger ones (e.g. Walmart, Kroger) build in-house, and retailers partner with other companies to service this customer convenience demand. I have no doubts some grocers will just abandon the store shopping concept altogether as it devastates margins. Restarting isn’t an option for many retailers with limited working capital.

FrankKochenash
Guest

I agree. Remember when Target, Office Depot, Circuit City, and TRU outsourced e-commerce to Amazon? A similar dynamic is at play here. Companies build competitive advantage by doing the difficult things. Everyone does the easy things.

Peter Charness
BrainTrust
I find Instacart at Costco for example to be verging on predatory pricing, the mark up and fees being so substantial that I have reduced my frequency of visits by at least 50 percent. So (until vaccination rolls around some time) it’s in Costco’s interest to find a more customer friendly model. In general the Instacart model is not process efficient – they have associates who work in a store, but perform a single task (picking only — they could be replenishing the shelves during that same walk down the aisles if the systems and stock organization was better optimized), and they do point-to-point delivery which is tragically wasteful compared to doing multiple deliveries along the same route. The advantage to the fulfillment model though is that compared to a store employee the Instacarters are gig workers — low pay, no benefits and bring your own car — a model which is not exactly based on fairness and equitable treatment. I think the grocers could find a way to provide this service in an overall… Read more »
Ananda Chakravarty
BrainTrust

The infrastructure and delivery mechanism that Instacart has put together are outside of the expertise of most retailers. The dominance of Instacart has made it an easy, logical step for most retailers. Only the larger ones will be able to develop their own in-house rapid delivery solutions, while most will continue to rely on Instacart (and other delivery options) to enable fulfillment. For the mid-size and regional players, Instacart remains a viable option. Expect to see a combination of the following:

  • More Instacart competitors (third party);
  • More in-house delivery;
  • More engagement with existing delivery companies including USPS,UPS,FedEx, DHL, etc.
  • More optimization at the retailer level (where retailers automate delivery selection based on timing or cost);
  • More continuation of Instacart services (combined with other services).

The big challenges for retail with tiny margins are cost and customer access. Instacart will be viable so long as retailers don’t lose their customers and can make money – and retailers (and Instacart) will continue to find the right balance to make this work.

James Tenser
BrainTrust

Supermarket chains adopted Instacart as a fast-track way to offer digital grocery ordering and delivery. Unintended consequences have included: margin erosion, intermediation of the shopper relationship, high rates of item substitutions and OOS.

I know of one instance where a powerful retailer has “white-labeled” the Instacart platform to mitigate these consequences, but there are other good alternatives out there.

Instacart deserves recognition for its impressive and rapid expansion. I have some doubts, however, about its long-term prospects. It’s software is not that special, and retailers can’t love having their people competing to fill orders at the shelves.

In sum, I view 3rd-party fulfillment and delivery as a transitional business model. Instacart has been its superstar in grocery. As retailers evolve their store operating models to enable more efficient at-store order fulfillment using their own resources, I believe Instacart’s sole remaining offering will be the delivery itself.

Ken Morris
BrainTrust

I think Instacart is a broken model. It does little for a grocery retailer as they sometimes lose money on an order. Instacart owns the customer not the retailer and that loss of lifetime value can be a death knell for them. Instacart people clog the aisles with long-running shopping trips elongated by constant online interactions with customers in a world where we have limited occupancy, one way aisles and 6 foot social distancing. Retailers need to use internal fleets or convince people via discount or promotion to leverage curbside pickup.

Shep Hyken
BrainTrust

If Instacart wants to expand its partnership opportunities with other retailers, they need to think of themselves as a partner, not a vendor. That means find a pricing model that works for both sides.

Christopher P. Ramey
BrainTrust

There’s little here that’s proprietary. Retailers will master the processes (aisle to kitchen) to eliminate costs. Instacart will adapt or fail.

Ultimately, customers will rely on the retailer to serve them properly. Woe be to those who focus on logistics rather than serving their customer profitably.

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Braintrust
" Retailers need to seek alternative home delivery options or bite the bullet and develop their own delivery system."
"The biggest challenge in almost all businesses today is a growing aversion to SIMPLICITY."
"The pandemic has forced grocery stores to quickly expand their online and delivery services, without much time to think about the business model of these new services."

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