The current technological revolution is progressing at a dizzying pace, forcing countless industries to undergo complete overhauls. Traditional newspapers have watched circulation and advertising numbers plummet as real-time social feeds like Twitter, Facebook, and LinkedIn become the default news outlets for many. Financial advisors are feeling the heat in the wake of robo-advisors like WealthFront, Ellevest, and Wealthsimple, all of which offer consumers robust portfolio management at annual fees of less than 0.5 percent on account balances. Ride-sharing services like Uber and Lyft are pushing taxi companies to the sidelines. Traditional television is exiting the scene as Netflix, Apple TV, and Amazon own more of our entertainment dollars.
Until recently, technological innovation in food and grocery has lagged behind these categories. In fact, most of us still get in our own cars, shopping list in hand, to travel to and from the grocery store each week. If you think about it, it’s kind of shocking that we STILL do this. However, sweeping changes to the world of food and grocery are happening—and fast. Meal-kit subscription boxes like HelloFresh and Blue Apron, grocery delivery companies like Instacart, and, of course, Amazon are providing new alternatives to the ways we meal-plan, shop, cook, and consume.
Groceries have lagged behind other categories in building online sales.
Source: Felix Richter, “Groceries Trail Other Categories in Transition to Online,” Statista, July 25, 2018, https://www.statista.com/chart/14852/share-of-online-sales-by-product-category/.
One big change in recent years contributing to faster innovation in the food industry is the growing demand for organic products. As a result, the supply side has evolved and a new list of organic players has not only flooded the market, but led to intense competition. Initially, only Whole Foods, Trader Joe’s, and Sprouts Farmers Market were satisfying the demand. However, legacy chains like Walmart, Costco, and Kroger have now all gotten into the action, responding to the increasing consumer desire for healthier options at affordable prices. In fact, the category as a whole (pun intended) is no longer led by Whole Foods—instead, the new front-runner is Costco.
A second, and perhaps more important shift, is the rise of online grocery sales. Going back to my comment about our traditional shopping-cart behavior, the industry has to date been among the least affected by e-commerce, with only 2 percent of food and beverage sales in the U.S. being made online in 2018—but online sales are expected to grow about 20 percent each year and nearly double by 2025, as millennials and Gen Z use technology to find more efficient ways to shop.1 The same online consumer who’s buying stuff on Amazon and using Uber to get to work is quickly adopting direct-delivery options like Blue Apron and Instacart (among others) for all their grocery needs.
There are lots of reasons to like the long-term prospects of the newcomers to the food scene, but their success will depend to a significant degree on what Amazon does. Although Amazon has historically been thought of as an online marketplace for just about everything other than food, the behemoth has been in the food game since 2007, and its recent acquisition of Whole Foods is a sign it’s about to up the ante.
While Amazon is taking up plenty of media room when it comes to the next wave of food tech, credit for much of the recent innovation goes well beyond Bezos. Subscription-backed meal kits, for instance, have made small fortunes on their creative delivery models. Blue Apron, HelloFresh, and Plated, pioneers and leaders in the space, send millions of boxes directly to households each month, containing chef-designed recipes, along with all the necessary ingredients—allowing customers to eat well without having to meal-plan, portion, or grocery shop. While exact subscription counts are hazy, all three have surpassed half a million subscribers.
The meal-kit business model is said to have originated in Sweden, with either Middagsfrid (Swedish for “dinnertime bliss”) in 2007, or Linas Matkasse in 2008 being the first to market. As meal kits spread to several Northern European countries, a range of new entrants emerged, including the current U.S. market leader, HelloFresh, out of Berlin. And while still considered novel, the meal-kit industry is expected to reach $10 billion in the United States by 2020.2
Blue Apron and Plated, the first U.S.-based meal kits to make a real market splash, were both founded by Harvard Business School students. Matt Salzberg of Blue Apron and Nick Taranto and Josh Hix of Plated all attended the prestigious school in 2008, and after stints elsewhere (including Silicon Valley for Salz-berg, and the Marine Corps, of all things, for Taranto) Salzberg launched Blue Apron with Ilia Papas in 2012, and Taranto and Hix reconnected to launch Plated the same year.
Both companies started operations with nearly identical business models, offering chef-recommended recipes along with the required ingredients for a single meal, sent automatically a few times each week, depending on the customer’s chosen subscription plan.
Blue Apron, its name a nod to aspiring chefs around the world, initially packaged and shipped everything from a commercial kitchen in Long Island, New York. Salzberg says the origins of Blue Apron were a love of food coupled with frustration at the effort involved: “We liked trying new ingredients, new recipes, new techniques, but we found it really inaccessible to cook at home. It was expensive, it was time-consuming and it was difficult to find recipes that we trusted.”3 The first set of recipes was sent to Salzberg’s friends, the perfect beta test for meals that could have been a total flop. Luckily, the kits were a hit and the ball was in motion. As serendipity would have it, they raised their first big round, $3 million, from Salzberg’s former employer, Bessemer Venture Partners (you’ll recall they were also early investors in Shopify). By 2015 the company was valued at $3 billion, and in 2017 raised another $200 million through its IPO.
Plated got some PR rocket fuel shortly after its launch from a 2014 appearance on the TV show “Shark Tank,” where the guys struck a deal with billionaire Mark Cuban. The deal later fell apart during due diligence, but the appearance led to more business than Plated had seen in its two years of existence.4 Taranto and Hix had soon raised a total of $55 million, before Plated’s big sale in 2017 to U.S.-based grocery giant Albertsons for $300 million.
HelloFresh, originally founded in Berlin, spread across Europe and into the United States. By 2014, HelloFresh was delivering one million meals per month in markets across the globe. Founders Dominik Richter, Thomas Griesel, and Jessica Nilsson decided to go public in 2017, with an IPO on the Frankfurt Stock Exchange—then valued at €1.7 billion, twice the valuation of Blue Apron at the time. As of 2018, the company controlled roughly 36 percent of the market, edging past rival Blue Apron’s 35 percent.5
While meal-kit companies like Blue Apron and Plated compete for global market share, carving out a smaller niche in food subscriptions can also have a profitable upside. Oatbox, a Canadian company delivering healthy breakfast options, launched onto the scene after Marc-Antoine Bovet and his co-founders noticed a surge of subscription companies with names like Blue Apron, Dollar Shave Club, and Birchbox gaining popularity. Among other things, the guys noticed a gap in the meal-kit market—while several companies provided lunches and dinners, nobody offered breakfast, “the most important meal of the day, and the most neglected,” Bovet says.6
The breakfast industry itself is fascinating. For decades, old-school brands like General Mills, Kellogg’s, and Post have held a firm grip on sales of cereal through grocery retail. Anecdotally, customers have kept to their morning ritual of Cheerios and 2 percent milk. But as consumers focus on healthy eating and a slimmer waistline, sales of cereals are declining at the expense of whole-grain organics and a myriad of low-carb options.
Breakfast has also been the most hurried meal of the day, a good reason why hand-held foods like protein bars are booming. If quick isn’t an option, consumers will often skip breakfast entirely. Before starting Oatbox, Bovet recalls constantly missing his first meal. “I didn’t feel great when I missed breakfast. I wanted to make something tasty ... there was a big hole in the market.”7
Aside from the protein craze, healthy snack bars are exploding. Lärabar, from General Mills, has a fruit-and-greens bar that is “vegan-friendly,” with one-quarter cup of kale per bar. SaladShots Snack Bar offers the “goodness of a salad” with the “convenience of a bar.” Flavors like Choco Balsamic are formulated with greens and superfoods. Then there are bars called “That’s it.”—made of healthy ingredients like black beans, carrots, and kale. The self-improvement claims of various “brain boosting” ingredients are the focal point of bars like Zone Perfect’s Revitalize for Mental Focus, which uses green tea extract for an energy boost and choline to support brain health. The IQ BAR “Brain + Body” bar is fortified with medium-chain triglycerides to improve cognitive performance. The list goes on.
The recent market adoption of healthy snacks has helped subscription specialty food companies find a niche as well. UrthBox focuses on non-GMO, organic, and all-natural snacks. Keto Krate is a subscription box for those on a ketogenic diet; all snacks have five grams of carbs or less. The company delivers eight-plus keto-friendly products every month.
Since launching in 2008 in the U.K., leading subscription snack company Graze has expanded its product line to over 200 snack combinations through snack subscription boxes, an online shop, and selected retailers. Since its U.S. debut in 2013, the company has sold over $150 million worth of snacks in that market alone, and continues to expand its European presence. Over 5,000 people have signed up for Graze in Ireland; next on the list are Sweden, Germany, and the Netherlands.8 In a bid to continue its wave of niche consumer brand acquisitions, Unilever swallowed up Graze in early 2019. Unilever has a good track record of nurturing smaller food brands; in 2001, it acquired Ben & Jerry’s ice cream and it succeeded in expanding the brand globally.
Back to Canada, where Oatbox’s trajectory has been impressive. Since launching in 2014, the company has quickly grown its customer base, and now delivers hundreds of thousands of breakfast boxes each month.9 In mid-2017, Oatbox closed a seed round and plans to use the funds to support accelerated growth in the breakfast market.10 The company has also introduced new breakfast bars, oatmeal, coffee, and teas to its product mix to boost both average order size and operating margins.
Yet, despite the pace of growth, Oatbox still focuses heavily on customer service, answering inquiries wherever consumers choose to interact with the brand, be it via email, Facebook, live chat, or Instagram. Satisfaction rates have paid dividends in the form of reduced churn: although Bovet chooses not to share exact figures, Oatbox cancellations are low, and customer lifetime values remain high, between nine and twelve months per subscriber. That’s a healthy range for a food company in the subscription space.
In the wake of the changing consumer preferences that Oatbox and others have capitalized on, the strategy for legacy brands has been to swallow up the best of the bunch rather than innovate themselves. We saw this with Unilever’s recent purchase of Graze. In September of 2018, Hershey’s purchased the Pirate’s Booty line of snacks from B&G Foods for $420 million. In 2016, General Mills acquired Epic Provisions, a category-creating meat-snacks company and maker of EPIC Bars, EPIC Bites, and EPIC Hunt and Harvest Mix. General Mills is the same company that famously acquired Lärabar back in 2008, kicking off a frenzy in new snack/energy bar start-ups. Kellogg’s recently purchased Chicago Bar Company, maker of RXBAR, for $600 million. Kellogg Company CEO Steve Cahillane remarked, “With its strong millennial consumption and diversified channel presence including e-commerce, RXBAR is perfectly positioned to perform well against future food trends.”
The merging of upstart disruptors and legacy chains is giving birth to a new wave of omni-channel (a type of retail that integrates the different methods of shopping available to consumers) food options—and competition is heating up. The Albertsons’ acquisition of Plated means that Taranto and Hix’s meal-kit offering will now be available both in-store and online. Kroger’s swallowing of Chicago-based meal-kit provider Home Chef, for $700 million, means the company’s own program, Prep+Pared, will likely consolidate with Home Chef. Blue Apron recently inked a deal to sell its kits in Costco locations. And there are other challenges ahead for meal-kit companies, which suggest more potential M&A activity in the near future.
The leading meal-kit companies have done well to move the adoption needle, but the path forward is uncertain. Challenges in quality control, lead times, customer retention, and good old-fashioned competition plague the business fundamentals of these companies today.
When it comes to food quality, picking the freshest tomato or cucumber becomes essential, as one little bruise can ruin the entire experience. Ian Brooks, the CEO of HelloFresh Canada, told me that “customers are pretty patient; they’ll wait an extra day for their box. But, if you ship a red pepper with a black spot on it, the customer will mark your brand down hard.”11 While certain markets differ, such as Australia, where HelloFresh ships in the cold supply chain all the way to the customer door (without ice packs), markets like Canada are not quite as sophisticated logistically.
Canada is a huge market geographically, and aspects of the meal-kit business model differ drastically depending which area you’re in. With an expansive 3,400-mile-wide delivery area, direct delivery is a value-add for busy families in both urban and rural markets, but a logistical nightmare for companies wanting to reach them. This puts additional pressure on delivery times and food quality consistency. As customers increasingly get comfortable with next-day delivery courtesy of Amazon and Instacart, HelloFresh’s four-day average is a major problem.
And no matter what country you’re in, there’s the apparent environmental impact, which continues to be a big debate. Brooks, an experienced operations and procurement consultant from McKinsey and Co. who joined HelloFresh in 2015, was attracted to the company not just because subscription meal kits were on the rise, but because the senior leadership team was committed to reducing food waste. There are environmental benefits to meal kits—in the U.S. and Canada, as much as 40 percent of food bought in the grocery store goes to waste, but with meal kits that number drops to 1 percent.12
On the flip side, though, some consumers argue that the kits produce a pretty big packaging footprint. While most meal kits use either reusable, recyclable, or compostable packaging, there is still a bit of a gap between what’s possible and what’s practical. Some meal-kit services are attempting to take on the burden. Blue Apron, for instance, allows its subscribers to return a few weeks’ worth of packaging to be recycled for free, and Sun Basket, a San Francisco-based outfit started in 2014, recently launched a new 100 percent recyclable or compostable packaging system. In response to the consumer critique, Plated co-founder Josh Hix says the food we buy in grocery stores has just as much packaging as a typical meal kit; it’s just that “we don’t see it.”13 Another potential consideration is the carbon emissions caused by all the vehicles needed to deliver direct to the customer.
Beyond the packaging, meal-kit delivery times, food errors, and generally high price points, customer retention remains a challenge for most of the big players. Nearly 90 percent of Hello-Fresh’s American clients had stopped using the service one year later, and Blue Apron also faces similar challenges in hanging on to customers. To counter the attrition, companies like Blue Apron have to rely heavily on acquisition, using platforms like Facebook to sign up more customers at a faster pace than the rate at which they’re losing them. And recent estimates suggest CAC (customer acquisition cost) is going up in the meal-kit space. HelloFresh, for instance, is spending as much as $389 per U.S. customer—and CAC numbers are expected to climb, as increased competition means a proverbial bidding war for traffic on Facebook, the critical auction channel most are using to acquire consumers.14
These challenges are taking a toll, and meal-kit brands now face an uphill battle. Blue Apron’s trajectory has been especially rocky since its IPO—shares began trading just two weeks after Amazon announced its acquisition of Whole Foods, and as a result the company was forced to lower its share price estimates to $10 to $11 from the $15 to 17 range.15 In its first quarterly earnings report, Blue Apron lost $31.6 million, and saw its customer base drop by 9 percent. In the wake of revising its forecasts downward, the company blamed costs associated with automating its warehouses, where it had been experiencing errors and delays.16 The company has been hemorrhaging customers of late—by the end of 2018, subscribers were down to 557,000, about half what it had at the time of its IPO.17
Blue Apron, while innovative, has really struggled at nailing logistics and properly retaining customers once they’re on board, two critical aspects of its business operations. Recent attempts to label itself a technology company (to support the claim, it touts its sophisticated inventory software, which manages a large footprint of fulfillment centers) certainly won’t provide a solid win-back strategy it can present to shareholders.18
However, Blue Apron should get credit for its incredible branding and innovative core offering. In a way, Blue Apron has played the role of American meal-kit trailblazer. Moreover, the meals are delicious, and for many of its subscribers, the kits provide a true value-add. The technology infrastructure the company touts as its core competence is effective at managing work flows.
But, ultimately, the technology’s core function is to support a human-powered operation: thousands of men and women chopping veggies, placing ingredients in baggies, and packing boxes. Keeping customers happy month after month hinges on those very same people not screwing things up—a daunting task when software cannot, at least as of 2019, replace or automate the role.
It looks like investors agree. As of September 2018, Blue Apron’s stock price had closed trading at $1.87, way down from its IPO price of $10. And it could get worse—fulfillment struggles are superficial in comparison to what lies ahead: Amazon, the competition, and death by customer attrition.
When Amazon snapped up Whole Foods for $13.7 billion in 2017, the news sent shock waves through the grocery sector and retail landscape. Walmart still controls the biggest share of brick-and-mortar U.S. food and grocery business by far, with about 14.5 percent of all revenue in the sector, followed by Kroger at 7.2 percent, Whole Foods at 1.2 percent, and Amazon with a minuscule 0.2 percent share (though they are the category leader in online groceries, with an 18 percent market share).19 But the assumption is that the organics takeover signals that Bezos plans to dominate the category in the not-so-distant future.
The deal sparked all kinds of speculation into what strategy Amazon has in store. The move might be part of a broader logistics plan to get closer to the urban-household fridge. Although Amazon’s new brick-and-mortar footprint is small for now—Whole Foods has approximately 450 locations across North America whereas Kroger, for example, has almost 2,800—those Whole Foods locations are primarily positioned in urban centers, close to both current customers and potential customers with high disposable income. Proximity to the well-educated, and well-off, is an attractive plus for Amazon, whose fulfillment centers are mostly rural.
The acquisition might also mean a bigger data science play, as Amazon ropes in the countless customer records from its new organics entity and feeds them into other parts of the company flywheel, such as Amazon Fresh, Amazon Go, Subscribe and Save, and Prime Pantry.
Amazon has done well to create these ancillary food offerings, which each address a specific pain point. Amazon Fresh is great for those who don’t want to go anywhere but still want their groceries. The same-day home delivery service, which launched in 2007, has quietly expanded beyond its home base in Seattle, and now operates in most U.S. cities, as well as in international markets like London, Berlin, and Tokyo. Amazon Go—the cashierless stores where shoppers grab what they want and skip the checkout line altogether—is tailored to those who still want to shop and pick groceries, but hate the hassles of lines, checkouts, and payments. Subscribe and Save provides that perfect convenient option for those who want their basics sent to them regularly without thinking about it—consumers can sign up to have their favorite consumables (as well as many non-food items, like household cleaners, diapers, etc.) delivered regularly, at a preselected cadence, for a discount. And more recently, there is Amazon’s add-on subscription service, called Prime Pantry. Prime members pay an extra $5 a month for the ability to shop for non-perishable household items in “everyday package sizes” (one box of cereal, a box of Oreos, etc.) and have orders of over $10 shipped for free. Each of these offerings is sure to be part of Amazon’s bigger plans for food supremacy.
Less obvious, perhaps, are the company’s plans for leveraging Alexa, its virtual assistant, who will complement Amazon’s last-mile advantage. As Amazon uses its logistics and big data advantages to take over the fridge, Alexa could soon be the medium by which consumers request everything they need. (“Alexa, I’m running out of milk. Order more.”)
We’ve seen Bezos’s knack for understanding customer behavior and significant paradigm shifts before. His $13.7 billion bet on food signals his view that grocery is shifting, and Amazon is slated to capitalize as progressives ditch cars and shopping carts for technology-led efficiencies. Investor sentiment concurs—news of the Whole Foods acquisition prompted shares of a large group of rival grocers, including Walmart, Kroger, and Costco, to quickly sink by between 13 and 6 percent, while Whole Foods shares shot up nearly 30 percent.20 Investors look to be betting on Amazon to climb to the “top of the food chain.”
As Amazon throws its weight around in the grocery space, a close relative, Instacart, is making a name of its own. Instacart launched its grocery delivery service in 2012, around the same time as Blue Apron got into the meal-kit game. Users of Instacart simply pick the groceries they want through a smartphone app; its part-time workforce does the shopping and delivery, saving users the hassle of physically going to a grocery store. The company collects delivery fees from customers, related fees from grocery partners, and advertising income from brands like Coca-Cola, Unilever, P&G, and others.
By 2017, the online grocery market had reached a “tipping point,” according to Instacart founder and CEO Apoorva Mehta, where selling groceries online went from being a neat novelty to a necessary offering for grocery retailers. Instacart had soon partnered with seven of the top eight North American grocers, and received $200 million of Series E funding, which valued the company at about $4.2 billion.21 By March of 2019, Instacart was delivering to over 108 million households across the U.S. and Canada, and had partnered with over 300 local, regional, and national retailers.22
It may sound like a rapid rise, but Instacart was Mehta’s twentieth start-up. He grew up in Canada, studied electrical engineering at the University of Waterloo in Ontario, then worked for a variety of technology companies, such as Qualcomm and BlackBerry. Eventually he moved to Seattle to be a supply-chain engineer at Amazon, where he developed fulfillment systems to get packages from Amazon warehouses to customer doors—some early foreshadowing of what was to come. The two years at Amazon improved Mehta’s tech expertise and taught him how to tackle various logistics challenges, but something was still amiss.
After departing Amazon, Mehta played around with plenty of start-up ideas, including a social network for lawyers. “I knew nothing about these topics,” he says, “but I liked putting myself in a position where I had to learn about an industry and try to solve problems they may or may not have had.”23 He landed on the idea of Instacart by thinking about the problems he experienced in his day-to-day life—like buying groceries every week without a car. In a move to scratch his own itch, Mehta coded the first iteration of the platform himself, and did the grocery shopping on the app’s first test run.
The core idea of ordering groceries online and having them delivered wasn’t new. In fact, the business model was wrapped around one of the most storied failures to come out of the dot-com bust—Webvan.
Webvan’s idea to ship groceries directly to customers had technology bulls excited, but now the company is nothing more than a notorious cautionary tale from the dot-com bubble, carefully studied by business schools and venture investors alike. Founded by Louis Borders of Borders bookstores in 1996, the company raised a total of $394 million in venture funding from names like Sequoia, Benchmark Capital, and Goldman Sachs, before raising another $375 million from its IPO in November of 1999—despite reporting revenue of only $395,000 and losses of more than $50 million. As the company expanded, led by an executive team without any previous experience in the supermarket industry, things quickly got out of hand. Webvan proceeded to lose a total of $800 million before going bankrupt in 2001.
Mick Mountz, one of the company’s former senior executives (and another Harvard Business School grad), re-emerged out of the Webvan ashes in 2003. After studying the colossal failure, Mountz concluded that the company’s downfall wasn’t due to market timing, lack of funding, or a poor strategic vision, but an inflexibility of systems to support the high cost of fulfillment. Spotting an opportunity, Mountz launched Kiva Systems, a new order-fulfillment system using mobile robots for warehouse automation—in essence, a better way to pick, pack, and ship orders of stuff.
Kiva got a tepid reception from potential investors in its home city of Palo Alto, California, so Mountz cleverly moved the start-up to Massachusetts the following year. He soon landed investors, and Kiva quickly captured some big-name clients, including Staples, which installed a Kiva system at a Pennsylvania distribution center in 2006 and a second system in Colorado in 2007, as well as Office Depot, Crate and Barrel, and Saks Fifth Avenue. In 2012, Kiva was acquired by Amazon for $775 million. At the time it was Amazon’s second-largest acquisition ever, topped only by Zappos, which the company bought in 2009 for $1.2 billion.24 Post-acquisition, Jeff Bezos recruited four former Webvan executives into the new Kiva/Amazon, including Mountz, who would stay on as CEO.25
Mountz and his Webvan colleagues were tasked by Bezos with studying the archives of Webvan (again) in preparation for a more prudent rollout of “Webvan II”—this time called Amazon Fresh, which expanded beyond a few Seattle neighborhoods for the first time in 2013.26 Kiva Systems is now known as Amazon Robotics, the system that powers most of Amazon Fresh’s fulfillment operations.
In the years between Webvan’s bankruptcy and the rise of Webvan-inspired imitators Amazon Fresh and Instacart, grocery delivery was made more feasible by new technologies—especially smartphones, which could do things like process transactions and hire individuals to perform tasks. And there were plenty of use cases to back up the model, with apps like Uber and TaskRabbit sitting in the middle of supply and demand.
As Instacart grew, it established deeper relationships with grocers, giving them access to its growing user base in exchange for a listing fee. One of the most important of such partnerships was with Whole Foods—Instacart’s first big national partner, which it inked a deal with in 2014. Under the agreement, Instacart got its own cashiers and staging areas at the upscale organic retailer’s stores. In 2016, the relationship deepened, with Whole Foods securing an equity stake in Instacart and signing a five-year contract to make Instacart the exclusive delivery provider for most of its merchandise.
Things looked pretty good for Instacart, until the Amazon news broke in June of 2017. Whole Foods, arguably Instacart’s most important partner and the source of 10 percent of its revenue, had become a subsidiary of its biggest rival overnight. “Every major grocery retailer in the country was calling us,” Mehta says. “It really was like a thermonuclear bomb against the entire grocery industry.” He assembled his 300 staff and told them the deal meant a war. “When we look back, that may have been a turning point for Instacart,” he says.27 Unsurprisingly, in late 2018, Whole Foods and Instacart announced that the two parties would dissolve their partnership. About 350 Instacart shoppers who did the picking at Whole Foods stores on behalf of app users lost their jobs.
Since the Amazon deal, Instacart has reinforced, and in some ways, redefined its value proposition. Its fastest-growing markets, like Chattanooga, Tennessee, are not places where Whole Foods dominates, so there’s room to deepen penetration in these areas. Moreover, to fend off Amazon, Instacart has some additional short-term plays. First, it can deepen its relationships with existing partners, like Kroger and Costco, which still command a major share of the U.S. market. In this context, Instacart has carved out a new role as something of an Amazon hedge, emerging “as a sort of savior to traditional grocery retail,” according to one observer.28 In addition to serving as a key strategic partner to eight of the largest grocers in the U.S., it has added several prominent regional chains, like Aldi’s, H-E-B, Albertsons, Publix, Kroger, and Wegmans, to its arsenal. Costco, too, announced that it was deepening its partnership with Instacart.
Second, the company can continue to focus on food quality and technology. Food-wise, Instacart relies on its personal shopper network, which has the critical task of picking the freshest avocado of the bunch. On the tech side, Instacart is investing in different aspects of its offerings, including voice-ordering. Recently, Instacart acquired Toronto delivery start-up Unata to help develop its voice-ordering and coupon-circulation technology. Launched in 2011, Unata specializes in e-flyers, digital loyalty programs, and digital coupons for grocers. The company recently launched voice-ordering capabilities, allowing people to make orders or build grocery lists through devices like Google Home. “Unata and Instacart have long shared a vision of innovating the grocery industry and building the online grocery shopping experience of the future,” said Chris Bryson, Unata’s CEO.29
Instacart deserves kudos for nailing food delivery, a historically difficult business problem to solve. As a result, the company has gone on to raise a ton of well-deserved capital, to the tune of about $1 billion, much of which will be used to continue to expand. With more than 500,000 customers and approximately $2 billion in revenue as of 2018, the company that started as a big-city service has spread to smaller regional markets. Engagement is also improving—the average Instacart shopper spends about $95 an order, twice a month; Instacart Express customers, who pay $149 a year for free deliveries (a Prime-like subscription strategy), order twice as often, spending about $5,000 a year.30
Beyond expansion, Instacart is investing in smart innovation. The company recently filed a patent that reveals plans to release a mobile self-checkout system to bypass in-store checkouts. The mobile app would ostensibly let concierge shoppers fulfill orders without having to stand in line, all in the interest of making delivery faster and more efficient.31
Then there’s the growing portfolio of grocery partners, all of which are terrified of what Amazon might do next. Since Amazon has upped the food ante, legacy grocers are staring at a future where automation and direct delivery are critical for business survival. As a result, Instacart still represents the most viable option for those retailers not wanting to tinker with the daunting task of handling last-mile delivery themselves.
But as retailers outsource last-mile delivery to Instacart, what isn’t clear is whether or not these partnerships will deepen or wither. Instacart’s partner chains being forced to bring delivery back in-house is a realistic possibility if consumers demand a more streamlined experience from their grocer of choice. In the case of Amazon, customers get the one-stop-shop experience via Amazon Prime Now and Amazon Fresh delivery (including from Whole Foods stores), which is both price-competitive and efficient.
Amazon is not the only worry, of course. In Arkansas, Walmart U.S. (as of 2018, Walmart Canada has been using Instacart as its strategic partner) is attempting to play ball, offering home delivery for $9.95 on a $30 minimum order. While the service can’t yet guarantee one- and two-hour fulfillment, as Instacart can in some areas, its low prices and international reach make the retailer a possible threat. Target, too, is getting into direct delivery through its recent acquisition of Instacart rival Shipt.
Nevertheless, market fundamentals look good for Instacart. There is still room to grow, since only about 7 percent of Americans buy groceries online. The $850 billion market’s shift to web-only is certain to accelerate. And, since Americans generally fill their grocery bag with food from more than one retailer, Instacart’s brand-agnostic offering is well-positioned. Yes, certain questions hang in the balance, including whether Instacart will decide to replace its personal shoppers with robots; whether it will be forced to build costly fulfillment facilities despite its anti-Webvan, asset-light approach; or whether it will be strong-armed by Amazon. Time will tell.
Despite the differences between subscription-based meal kits like Blue Apron, Amazon’s suite of grocery offerings, and grocery delivery solutions like Instacart, a few overarching themes have propelled all these companies to the forefront of innovation—convenience, efficiency, and trust. Notwithstanding the challenges that lie ahead, each of these brands, along with tech trailblazers outside the food industry, have created value propositions that hit on all three.
What makes Amazon tick is not its product mix. There are plenty of comparable retailers selling the same stuff—Alibaba, Walmart, and eBay, to name a few. Yet only Amazon peddles one-day shipping for Prime members. With a third of the United States subscribing to Prime as of 2019 (and climbing), Bezos has shown the power of selling convenience and efficiency. As people become more comfortable shopping on Amazon and liaising with its customer service team, trust in Amazon is also rising.
Food innovators got the memo. Instacart’s differentiators are now more than just best-in-class logistics—speed, quality, and trust are now key. Its secondary value-add is selection—the more grocery partner options Instacart has in its network, the better the customer experience.
Meal kits have done some amazing things to remove the hassles of meal planning and grocery shopping, which appeals to customers wanting convenience and efficiency; but the sector faces more dire challenges. With direct delivery on the rise, from grocery stores as well as on-demand restaurant delivery services, the landscape is changing fast. Legacy chains can take advantage by plugging into Instacart, while restaurants can fire the local delivery guy and use DoorDash or Uber Eats instead. As direct delivery becomes ubiquitous, the meal-kit moat looks weak in the face of change. While at one point the offering was strong on both convenience and efficiency, other direct entrants have raised the bar. The newly defined value differentiator now defaults to the pre-portioning of ingredients, the removal of meal planning for busy families, and the reduction of food waste (which is still a question mark for some environmentalists). Is that enough to justify what its subscribers are paying? Considering the high attrition plaguing these companies, it doesn’t look like it.
With Amazon’s distribution system and new presence in brick-and-mortar organics, the company still remains the most viable threat to just about every player in the food space. Expect Amazon and the competition to increasingly leverage technology to transition consumers from physical to online stores, supported by a more robust supply chain. The rapid pace of innovation means direct delivery will be better, faster, and more efficient over time—both for Amazon, and those who intend to compete.
Then there’s the trend toward more personalization. As each company in the sector generates more data on the consumer, subsequent offerings will individualize. Bezos has the advantage here too, with a new list of Whole Foods customers to add to the mountains of data already on hand. As of mid-2018, the number of Prime members alone, over 100 million, is increasing at a rate of 40 percent per annum. Hey, I noticed you bought some Lärabars last month. Would you like us to send you a second box of their newest flavor alongside your next shipment?
The growth of Amazon’s Prime subscribers, combined with the company’s buying power and access to cheap capital, adds an important final layer to think about—a likely shift into a deflationary (lowering of food prices) food environment at the hands of Bezos, where high-quality food, typically reserved for the up-market consumer, becomes more easily accessible and affordable for the masses. This fundamental economic swing, which is yet to manifest, is sure to benefit Amazon, as well as its loyal consumers—yet hurt just about everyone else in the industry.