Instacart May Emerge As The White Knight For Grocery Retailers

Instacart May Emerge As The White Knight For Grocery Retailers

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“We’re not trying to take away their customers,” Instacart founder and CEO Apoorva Mehta told Forbes in January, addressing the company’s tense relationship with some grocery retailers. Mehta added that Instacart has no plans ever to sell groceries directly. But while news about the tech platform this week caused speculation that Instacart could be building its own distribution centers and strike out as a retailer themselves,  Instacart has a far more lucrative opportunity in front of it: offering a white label tech solution for embattled retailers. 

The Financial Times on Monday reported that Instacart is exploring use of robot-driven warehouses, a move that the FT says is likely to revive fears among its grocery store partners that the company may one day attempt to go it alone. 

Celia Van Wickel, eCommerce Insights Leader at The Coca-Cola Company
KO
, said in a post on LinkedIn that this could result in several outcomes. In one scenario, Instacart creates a fulfilment-as-a-service model that is sold to retail partners. This could be achieved through Instacart building its own warehouses, partnering with existing micro fulfillment companies, or even acquiring a micro fulfillment company.  The outlier scenario is Instacart extending through the full value chain and becoming a retailer itself. The latter is the scenario that I believe is the least likely, but certainly the one that retailers should be the most concerned with. 

Why retailers are leery of Instacart

Instacart has been described as a trojan horse for retailers who have so far delayed developing their own digital strategy. In our forthcoming book Instacart For CMOs, my co-author Stefan Jordev and I argue that there are reasons for retailers to be wary of hitching their wagon to Instacart. These include:

  1. Losing the customer connection: personal information, product information and household info all sits with Instacart. Retailers lose both their current and future direct relationship with the customer.
  2. Margin erosion: Instacart charges a five to eight percent platform fee to retailers. Some choose to pass this on as a markup; others absorb it and lose margin. 
  3. Instacart may put vendor allowances and retail media spend in jeopardy as brands shift their marketing budgets online.
  4. The quandary of servicing both in-store “gig” shoppers who need to find items and exit the store quickly and the end customer shopping for themselves. Each has vastly different preferences and measures of value for retailers. 

Several grocery retailers have indeed pursued a path to build their own platforms rather than rent the infrastructure from Instacart.  Kroger
KR
, as the US’s largest grocer, is the most notable in their plans to deploy 10 fulfillment centers for online grocery delivery. These customer fulfillment centers are being built in partnership with Ocado, a back-end software solution.

Meanwhile, grocer Erewhon has partnered with ECRS to roll out its own delivery platform. 

But the cost of building out a comprehensive front-end ordering system, as well as the back-end delivery routing software, is in stark contrast to the minimal setup costs that Instacart currently charges retailers.

Two different business models, two separate platforms

Instacart’s existing consumer-facing app has several monetization streams, including membership fees and a take-rate that it charges to retailers. But the most attractive and likely significant revenue stream is advertising revenue from brands. National brands pay to advertise their products on Instacart, and their ad platform is very well regarded by brands. Of all the brands that my co-author and I have spoken with, it was a unanimous opinion that Instacart’s advertising solution offers the best return on investment compared to other retail media platforms. Instacart is investing in its ad platform, and will likely find a few more ways to successfully monetize the reliance that brands, retailers, and customers have on the platform.

But a white label tech solution that is deployed by retailers would likely have a different business model – one that could be even more lucrative. Taking the typical path of enterprise software solutions, Instacart would likely charge retailers to initially deploy the solution, customize it, and then maintain it each year. The retailer would then own and control all the customer data. Depending on the scale of the retailer and the deal struck, it could be a more profitable model. One thing is for sure, it would cost a retailer far less in both capital and time to white label Instacart’s solution than go out and build their own from scratch. 

I believe that Instacart building a white-label fulfilment solution for retailers is the most likely scenario to unfold. As I speculated in an earlier post for Forbes, fulfilment-as-a-service is a business model that Amazon
AMZN
has become extremely successful with in recent years. Building fulfilment infrastructure is incredibly costly, whether that is actual fulfilment sites or the technology that allows Instacart to increase route density to a point where they can be profitable. A white label fulfilment program from Instacart could aggregate orders and deliveries on the back-end for retailers, providing them with the scale that is required to serve customers in smaller cities. 

Instacart keeps pushing forward

In an earlier article for Forbes, Instacart says that it is launching a new portal this spring that will allow retailers to access even deeper analytics. 

And the company continues to add retail partners to its ranks (a Walgreens
WBA
partnership was announced this week) , further aggregating demand from customers and becoming a one-stop-shop for consumables – beyond just grocery. 

There’s no question about Instacart’s ambitions in the world of online retail. The question is, will they choose the growth opportunity that helps traditional retailers adapt to the new online economy, or hammer another nail into the coffin of in-store grocery shopping?



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