INSTACART’S RETAIL PARTNERSHIPS DELIVERING

By PYMNTS @pymnts

What's Next In Payments®

6:15 AM EST February 23rd, 2015

E-commerce. It’s become something of a double-edge sword for traditional brick-and-mortar retailers.

On the one hand, the big push is to get customers to step foot in the physical store — giving them a chance to snag impulse purchases and create a face-to-face customer relationship. Then, there’s also a drive to respond to the consumer’s desire to embrace mobile technology to buy anywhere, from anyone and at any time.

So, how should a retailer balance these two goals without cannibalizing one side of the business?

Merge both visions. 

And that’s where Instacart, the grocery delivery service, has found its niche in the brick-and-mortar product space — by bringing the in-store experience to the front door of the customer.

Its five month partnership with Whole Foods has already seen it deliver incremental sales. Here’s whatWhole Foods Co-CEO John Mackey had to say during the company’s fourth-quarter earnings call earlier this month:

“The early read is very positive, indicating a 100 percent increase in awareness for our target audience with increases in both value perception and intent to shop versus our measured competitors. We are now providing fresh grocery delivery options to more homes in America than any other food retailer. Since announcing our 15-market partnership with Instacart in September, our average weekly online delivery sales have already passed the $1 million mark,” Mackey said in the call with analysts. “With online delivery sales as high as 5 percent of total sales in some of our stores, we’re very excited about the future potential as we expand our reach to more markets, provide richer content highlighting our quality standard and broaden our product offering.”

But here’s the even more interesting news. Whole Foods executives have also reported that the basket sizes of these online shoppers are 2.5 times higher than the metal ones that shoppers push around the store. That could be because people are bulking up and buying more things since they don’t have to pack and unpack them from their cars. But Whole Foods seems to think that it is just easier to buy more when, well, shopping online takes the friction and the hassle out of actually going to the store, shopping and then returning home again with the goods in hand.

So, is Instacart disrupting the grocery retail market? Or is it saving it?

Consumers will always need groceries, of course, so it doesn’t face the same struggle for “discretionary” dollars as other retailers do. But what Whole Foods’ observations show is the power of an enabling software platform that brings the product quality and selection of a physical retailer to the convenience of a shopper who just wants to shop online. And, the delivery service could also help keep consumers in a retailer’s circle when there may be closer options.

“Whole Foods Market is not going to have a supermarket on every corner. And yet we have very loyal customers,” Mackey said. “So we’ll begin to get more of the convenience business through Instacart than we’ve ever had before.  …With Instacart, if they need to pick up a quart of milk and they pick up some berries for their cereal, they can just order from Instacart, they don’t need to go drive over to one of our competitors who might be closer than Whole Foods. So I think there will be some cannibalization of course, and there will be incremental sales that we get. …But all we can say is that it’s growing very rapidly, our customers love it and we’re really happy with it.”

Need a last-minute flower delivery? That’s what Whole Foods did on Valentines Day. And they coupled it with other products in their stores like chocolate and other delicacies the store offers — making the concept of a “one-stop shop” part of the mobile experience. That’s the experience Instacart, which is currently with 50 grocery retailers in 15 cities, wants to bring to other retail partnerships. One-hour delivery options are rapidly expanding with major e-commerce players like Amazon, so now is the time for traditional retailers to keep up with the trends.

Instacart’s partnership with Yummly also benefits Whole Foods in much the same way. This recipe aggregator makes it possible for a recipe’s ingredients, which might be missing from a consumer’s pantry, to be delivered in an hour. The theory of the case is that it’s easier – and even more fun – for people to cook at home if all they have to do is cook at home and not stop at the store to pick up ingredients beforehand.

“Instacart’s offering really resonates with customers,” Apoorva Mehta, Instacart’s founder and CEO, said about the benefit of the company. “We’ve got robust processes in place to support category and geographic expansion. Our vision is to help all types of local retailers get online and offer their customers one-hour delivery.”

Outside of grocers, Instacart is also winning over shops like Petco, with partnerships recently formed in the chain’s Boston and San Francisco locations. Instead of a consumer having to pack up Fido and the kids in the car to pick up the 10-pound bag of dog food, Instacart will do the hauling for them. And the’ve offered a one-to-two hour delivery timeline, depending on the location of the delivery.

Starting to sound more like Amazon’s strategy?  Brick-and-mortar shops have upped their digital game by incorporating e-commerce-focused strategies to connect both sides of their business models.

Nilam Ganenthiran, Instacart’s head of business development and strategy, said they’ve taken its delivery expertise and focused on retailers because of the expertise in merchandising. Partnerships bring out the best of both sides of both business models, he said, and that’s what Instacart wants to focus on.

“We are absolutely not a retailer; we are absolutely not trying to be Amazon.com,” Ganenthiran said in an interview with Quartz. “We are a retailer’s best friend.”

And, a pretty powerful platform that isn’t trying to out-retail the retailer, but simply trying to bring the power of the retailer’s physical store to their front door. Instacart’s partnerships work directly with retailers they serve so customers are getting the same products they’d be getting if they were to shop at the store themselves (but without the trip).

“Because they have their own warehouses (of groceries), Amazon is limited in their selection,” Mehta said in an interview last year. Mehta is a former Amazon logistics software engineer who said he learned from his experiences to create his own vision.”Imagine if you ordered your groceries and one truck leaves a warehouse two hours away and comes to your door to do one delivery of groceries. It just doesn’t make sense,” he added.

Instead of having to deploy a warehouse-style delivery system, Instacart uses the structure of grocery stores to deliver goods from independently contracted drivers so they are paid by hour. This employs a low cost structure for Instacart, but keeps valuable relationships with its retailer partners. That business model seems to be paying off for Instacart, which was given a $2 billion valuation last month, and the philosophy seems to be catching on. Similarly to Whole Foods, Fairway Market, a New York City-based grocery chain, has seen a same-store sales boost from its Instacart partnership.

“Our goal was to increase same-store sales by enabling customers who didn’t necessarily have convenient access to a store to still shop with us,” Jackie Donovan, Fairway’s marketing vice president, said in an interview with The Wall Street Journal. “Instacart told us we could see a 50 percent increase in incremental business, per store, and that’s what we’ve seen.”

And that right there is, as Ganenthiran said, the recipe to be every retailer’s best friend. Based on Instacart’s most recent valuation, it appears as though its decision to become an enabling platform has become its best friend, too.