grocery delivery

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Commerce


A little more than a decade after the first generation of grocery-delivery companies collapsed, the industry seems poised to finally take off. And two-year-old Instacart is accumulating a war chest to fuel the first nationwide expansion in this new wave.

The San-Francisco based company is announcing this morning that it has raised a giant new $44 million round of equity financing, with Andreessen Horowitz leading the investment. Existing investors Sequoia Capital, Khosla Ventures and Canaan Partners all participated.

Instacart currently operates in 10 cities, and says it will be in 17 by year’s end. CEO Apoorva Mehta says the company could launch in an additional 24 to 36 cities next year.

The company’s model is a big reason why.

Unlike food delivery competitors Amazon Fresh, FreshDirect and Peapod, Instacart runs a grocery delivery business without holding inventory. Instead, the company hires a group of contractors in each city who accept orders through their smartphones and drive their own cars to grocery stores where they pick up customer orders before shepherding them to customer homes.

The model lets Instacart shoppers place a single order that can include groceries from several stores, including Whole Foods, Costco, Safeway and some local and regional grocers as well. Customers pay a delivery fee or an annual subscription. Instacart also marks up the prices on some items.

The company operating with the most similar model is Google, which partners with grocery and clothing retailers to collect customer orders placed online through Google and deliver them to their doors that day or the next day.

Google launched the service partnering with retailers from the start; Instacart largely began taking orders without cooperation, but has since looked to the grocers it buys from for help promoting the service, and has discussed volume discounts and other ways to work together more closely.

There are a few differences, though: Google works with courier services to handle deliveries and not individual contractors. Google also operates a sorting facility in the regions in which it operates — right now just New York, Los Angeles and the San Francisco Bay Area — which serve as consolidation points for orders after pickup from stores and before delivery to customers’ doors. Each argues that its model is more cost-efficient.

Is there room for both approaches to succeed? Perhaps. Instacart is focused exclusively on groceries, while Google Shopping Express also delivers apparel and electronics. On a call last week, new Instacart investor Jeff Jordan even acknowledged that he had placed an order for a dog toy from Google Shopping Express that very day.

But over time, there’s the possibility grocers will only want to work with one delivery company. Instacart is stepping on the gas to prove its worth to as many grocery chains — and shoppers — as possible across the country. If Google wasn’t already on notice, it should be now.



4 comments
Ian McHenry
Ian McHenry

 Two great points in here:


1)  Google Shopping Express is a worse experience because of the consolidation centers.  EBay Now and Instacart are much, much faster.  People willing to wait 4 or 5 hours are probably okay with waiting for 1 or 2-day delivery from Amazon.


2)  All of the on-demand services popping up (DoorDash, Instacart, Shyp, etc.) rely on couriers. In order to retain couriers, they need to pay an hourly rate that is competitive with other options for drivers, like UberX and Lyft.  They will have to either do batching of orders (leading to slower service until they reach density), markup prices for the goods being delivered (like Instacart does), or benefit from bulk pricing like Shyp does.

sirrix
sirrix

My issue with Instacart is the huge price markup. In Chicago, I ordered from Trader Joe's and then took my receipt to the store to compare prices. This article suggests that only "some" items are marked up - on my order, every single item was, and on an order of $62.82, $11.90 was marked up fees on top of the delivery cost. When you factor that in, that order was 31.2% higher than if I had gone shopping myself, and in fact would have been cheaper if I had taken a taxi to the store each way from where I live. 


I don't mind paying for delivery, but that markup is enormous and on a big grocery order it simply doesn't pay to order from Instacart if you have Peapod or another service in your area. 

Old Europe
Old Europe

It seems that the lagging segment of online groceries is taking off. This business model is easy to scale and asset-light , but there are couple of drawbacks...


- Obviously, this model operates without any limits in SKUs on stock. What happens if in one or more partner stores the desired items are out of stock?

- Quality controll over multiple supply chains, especially during summer and for ultra-fresh products seems to be questionable


- There is no additional cost synergy created by this modell. Most likely, the products are sold with no or almost not mark up. Lack of purchasing power and additional logistic expenses will increase total costs. So either the offline shop owner reduces its price or the end-consumer pays a mark-up. Those kind of customers with repeating purchasing will tend to have a one-stop shopping. Sooner or later they will switch if they are given the opportunity


- Customer demand and the supply side must be well-balanced. I am curious how this model should work during peak times, especially during the X-Mas season or during severe weather...



extrenergy
extrenergy

Used Instacart for the first time yesterday. The convenience and customer service is outstanding, and the operation literally delivers. However, upon chatting with the deliveryperson, it seems that there is a potential deal breaker in the system, mentioned briefly in this article. The folks hired to shop for and deliver the groceries are burdened with the expenses of their own vehicles, gas, smartphones, health insurance and taxes. All for about $10 per hour pay as an independent contractor. 

It won't be long before the government steps in to correct labor practices that border on, and are possibly, illegal.