Should retailers just say ‘no’ to Instacart?

Discussion
Photo: Instacart
Feb 17, 2021
Kiri Masters

By special arrangement with the authors, here is an excerpt from the forthcoming book “Instacart for CMOs,” launching on March 10th.

Many traditional retailers are living on borrowed time, with their own ecommerce efforts lagging far behind online marketplaces. But is the current reliance on Instacart to handle the notoriously challenging “last mile” of retail fulfillment really all that bad?

Instacart solves several thorny challenges for retailers, like:

  1. Providing the required technology, which many retailers are lagging behind on.
  2. Avoiding the profit-sucking “last mile”. Delivery costs are the biggest hurdle to profitability, particularly in online grocery. Instacart has already done the hard work to figure out factors like “route density,” optimizing routes and scaling nationally;
  3. Instacart is a demand aggregator. The farther behind retailers get with meeting customer needs with a native solution, the more appealing it is to simply join the shopper where they are already transacting.

While it may be easier to join Instacart than beat them, there are also compelling reasons for retailers to be wary of ceding control.

  1. Losing the customer connection: personal info, product info and household info all sits with Instacart. Retailers lose both their current and future direct relationship with the customer.
  2. 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. 
  3. 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. 
  4. Instacart may put vendor allowances and retail media spend in jeopardy as brands shift their marketing budgets online.

These challenges beg the question, should retailers build their own in-home delivery platforms?

Retailers could leap-frog both their competitors and Instacart by investing in next-generation technology. While Instacart’s current business model limits their efficiency to traditional store layouts and locations, retailers could flip the script through new concepts like dark stores and micro-fulfilment.

Ultimately, more revenue for Instacart is more revenue for the retailers that sell there. For retailers who do not have their own mature last-mile delivery play, they would otherwise be losing home-delivery sales right now. Larger retailers who are thinking strategically are likely to believe that they should eventually own the fulfillment process, or at least white-label it. And even with the hefty price tag of building a last-mile delivery capability, retailers could make that investment back with online advertising revenue — a highly profitable revenue stream.

DISCUSSION QUESTIONS: Do you expect to see pushback from retailers over fees associated with third-party fulfillment services or the collection/sharing of customer information? Should retailers working with Instacart or other third-party delivery services plan to transition to fulfilling orders on their own?

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Braintrust
"For those who believe life has changed irrevocably either get your game on now or give up and go to Instacart. Different story for those who think life will go back to normal."
"Retailers should absolutely use Instacart if they are digitally behind and unable to meet the (COVID-19 accelerated) expectations of their shoppers."
"It’s simply a business decision: take what you get with a plug-in solution–good and bad, or forgo the dependency and own the entire experience."

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22 Comments on "Should retailers just say ‘no’ to Instacart?"


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Neil Saunders
BrainTrust

For many retailers Instacart and similar platforms represent a quick way of moving into the e-commerce arena without massive capital costs and logistical investments. For others, Instacart is a way of managing increased e-commerce volumes alongside their own online operations. Both of these things are particularly important in food.

The downside is a loss of control, sometimes a lack of data from transactions, platform fees, and having lost of third-party shoppers coming into store to pick orders.

How retailers balance these things depends on their financial status, size, proposition and so many other things. Trader Joe’s ditched Instacart some time ago and has not really suffered as a result. Sprouts has partnered with Instacart and is pleased with increased reach.

There is no one-size-fits-all answer, though on balance I think developing internal capability is probably better if scale allows for it.

Dr. Stephen Needel
BrainTrust

The bigger question may be, “What do we expect will happen if/when the pandemic ends?” For those who believe life has changed irrevocably, either get your game on now or give up and go to Instacart. Different story for those who believe life will go back to normal. Think less about delivery and more about curbside pickup.

Suresh Chaganti
BrainTrust

It’s not an easy situation that retailers find themselves in. At one level, Instacart and other delivery services are like payment methods. Retailers are expected to support various methods, or customers will go to those retailers that Instacart supports. Services like Instacart are not merely delivering, they are actively building a customer base of their own by giving consumers incentives to shop in participating retailers.

The largest of the retailers probably can build their own last-mile delivery network, but it is not going to be their core competence and will be a huge distraction, even if they are otherwise capable. For regional and local retailers, they don’t have much choice.

Retailers have to move up in the value chain to build their private label brands, sourcing, and assortment, to find a level of differentiation that customers are willing to pay a premium for and absorb these additional costs.

Steve Dennis
BrainTrust

There are many strategic issues to sort through in deciding whether to outsource home delivery or maintain more control–and there is no one-size-fits-all answer. But clearly Instacart can offer scale and scope advantages that most retailers can never match. The big issue, though, is all about margin. So long as most home delivery involves human beings picking and packing products and then driving them to someone’s home or office in a vehicle, it will always be materially more expensive than consumers doing the work themselves. During COVID-19 many retailers did not price this in, so it remains to be seen the degree to which pricing will become “more rational,” both to the end consumer and from Instacart (and others) to their clients, how much demand will persist at higher levels and how retailers will merchandise their way to better margins.

Jeff Weidauer
BrainTrust

Instacart offered an easy solution for retailers to engage in e-commerce – but at the cost of shopper relationships and margin. What appeared to be a quick solution for retailers may lead to their demise as Instacart gains power with both customers and suppliers, and stores become little more than fulfillment centers.

Bob Amster
BrainTrust

There are many functions that retailers should not take on if they do not have a dedicated team to manage them. For many retailers, e-commerce order fulfillment is one of those functions. Measuring the benefits of outsourcing a function against the benefits of building it in-house and then measuring the true costs is where the answer lies.

Ken Lonyai
BrainTrust

This is the same old make or buy technology question retailers have faced for decades.

In the past, retailers vented at Amazon’s success when in reality they sat back and missed the opportunity to seize the moment and become digital destinations. Then they scrambled to do something.

It’s simply a business decision: take what you get with a plug-in solution–good and bad, or forgo the dependency and own the entire experience. The farther down the wrong fork in the road one goes, the more challenging it is to turn back. It’s a crucial decision with impact that needs to be considered 5-10-15 years into the future, considering that the wrong choice may be fatal.

Lee Peterson
BrainTrust

The four cons outweigh the three pros to me, easily. Having said that, many retailers are not in a strong enough financial or organizational position to jettison the margin suckers, so it’s a moot point. This is another example of how a lack of foresight or innovative fortitude cost many brands in the end. BOPIS and delivery were already a pretty big “thing” before COVID-19 but, lacking the aforementioned skill sets, just doing nothing seemed like a good idea. However the old retail mantra about the wisdom of being a “fast second” in terms of rapidly moving ideas was already out the window. As Les Wexner used to say, “I’m afraid to stop and smell the roses — I could get hit by a truck.” Exactly.

Paula Rosenblum
BrainTrust

I think Instacart has done a really good job improving its software platform in the past year or two.

I also know (as they clearly disclose) when I’m paying “higher than in-store prices” for my groceries. So the question arises, “Is it worth $20 on a $200 order to avoid going to the grocery store?” For me, generally yes. I am about to start shopping again, I think, as the grocer I would now prefer to use is not available on Instacart,

I think grocers can do a fine job replenishing their products based on what leaves the building. Have they lost control of their customer base? Well, I would argue they’ve never done too much with loyalty data anyway, so what? It’s one segment of retail where you find out quickly what’s selling and what isn’t whether you “know your customer” or not. Localization is not the same as personalization anyway.

Gary Sankary
BrainTrust
I believe that Instacart is a legitimate strategy for retailers who are trying to stand up home delivery fulfillment capabilities quickly. It gives them an opportunity to gauge actual demand for delivery services in their stores, and it offers them a chance to learn some best practices in providing those services. And initially at least, at far less investment that trying to start from scratch. My opinion is that the primary detriment to retailers using these services is the dilution of their brand. Customers will associate the last mile provider, no matter who it is, with their shopping experience, not the retailer. And given how easy it is for customers to shop around on these platforms, the retailer gets demoted to just another source for products, one that’s easily swapped out with no connection to their brand. When you look at costs and the issue with branding, I would strongly recommend that retailers who use third-party shopping and delivery services do so as a bridge to get them to a better model. To start, they… Read more »
Jeff Sward
BrainTrust

For many retailers, it would be impossible to develop their own fulfillment and delivery systems that would achieve the scale and efficiency necessary to be profitable. The first couple of players in the delivery game had the advantage of being the only game in town, and charged what the market would bear. Now fulfillment and delivery are becoming table stakes and more competitive at the same time. I like the quote that I think is attributed to Jeff Bezos: “Your margin is my opportunity.” The competitive market will find or create a fulfillment and delivery process that recognizes fees have a role. If the U.S. Postal Service was run by a true entrepreneur, that person would recognize that the existing USPS infrastructure would lend itself perfectly to the LOCAL delivery of something other than bills and parcels.

Ananda Chakravarty
BrainTrust

Instacart has done a great job with their platforms and in turn serviced a critical delivery need for retailers. Larger retailers will have the choice to build their own systems, but pushback is inevitable as many retailers need to integrate customer engagement in the store with online experiences. The natural evolution of the model will be sharing of customer information as this is the critical piece for retailers. The other factors including price hikes and delivery fees will be distributed back to the consumer over time as part of the service cost, and this will become standard. The retailer can only absorb these costs for so long. The second question of build vs buy depends on the retailer’s focus on tech and size. The question for them will be “is there any advantage in reinventing the wheel?” For a few retailers the answer will be yes but, for the majority, Instacart or similar services with shared data and customer engagement will be sufficient.

Steve Montgomery
BrainTrust

The short answer is it depends. It depends on the retailer’s desire and capability to replicate the information systems that Instacart already has in place. Working with Instacart is easy. Creating your own system and adapting your fulfillment model is not.

The one advantage to doing it in-house is the retailer maintains a direct relationship with the customer. This may not seem that important now but will when we are able to exit the pandemic. When we do, Instacart is not going to go away. It will take the information it has gathered and use it to create its own source of product and compete with its former customers.

Richard J. George, Ph.D.
BrainTrust

Instacart is a good example of buying versus building expertise. While the concerns regarding Instacart are real, the solution is not simple and in the end, it will require a build decision, which as noted is expensive. The tradeoff is the capital investment and operational management of a dedicated system versus the fees and limitations noted of an Instacart relationship.

Jason Goldberg
BrainTrust
Retailers should absolutely use Instacart if they are digitally behind and unable to meet the (COVID-19 accelerated) expectations of their shoppers. It’s better to outsource a service to Instacart and keep the customer, than to lose the customer to a more digitally savvy grocer. But retailers should be very careful about outsourcing digital as a long term solution. For most retailers Instacart isn’t a service provider who is simply filling in capability gaps with a white-labeled solution for the retailer. They are a marketplace trying to earn their own consumers/customers and trying to extract as much profit from the grocery shopping experience as they can. If you believe that digital shopping is going to be a core part of the grocery experience moving forward, it would be inadvisable to outsource that experience to Instacart. When/if you ever do decide to bring that digital expertise in-house, you won’t be able to bring those Instacart customers with you. Instacart will certainly take all those customers they acquired (under your brand banner) and try to sell them groceries… Read more »
Andrew Blatherwick
BrainTrust
The seismic change that has taken place in the last twelve months projected a number of retailers into having to make decisions they may not have done for a few years. The speed has changed and they have not had the time they thought they had to develop technology solutions to address the even faster growing online market. So Instacart or other third party providers offer an immediate solution to meeting fast changing customer demands. Is it the best option or one they should look at as a long term solution? Probably not. In fact, if they are serious about being a strong retail brand then certainly not. Retailers need to have contact with their customers, the ability to provide a seamless brand identity and service to their customers and manager and control their full supply chain. To own only a part of that is not a route to long-term success. What does this mean for Instacart and the others? Probably a massive growth initially and then a decline in the long term. They are… Read more »
Cynthia Holcomb
BrainTrust
It is difficult after months and months of the dark days of COVID to imagine the days and years ahead beyond COVID. It will take some time to get over and past the COVID hangover, but in time we humans will be excited to venture out. And when that happens, I predict a great renaissance of happy, out-of-home exploration driven solely by human nature. In this use case, human nature inspired by the opportunity to pick and pack one’s own food. There are dozens and dozens of cooking shows on TV, cable, and online touting the sumptuous experience of cooking. How many new cookbooks line Amazon and local libraries’ shelves? Wholesome, organic ingredients selected by time-constrained 3rd party professional shoppers kill the culinary buzz. Yes, I am optimistic about the “new normal.” When the sight and smell of hand-selected, fresh ingredients cooking in one’s kitchen will create new memories of the joy of cooking. As in most human experiential experiences, the pendulum of human nature is inspired by the act of re-discovery. Grocers should take… Read more »
James Tenser
BrainTrust
Instacart has proven to be the “gateway drug” of choice for grocery operators to rapidly establish a turnkey ecommerce solution. Some retailers have elected not to renew. At least one influential operator has kept the platform, but “white-labeled” the service with its own brand. This is far more than a “build-versus-buy” decision, in my opinion. It’s really about finding the best path to adopt a complex of technology and operations innovation that is demanded by today’s shoppers. Instacart handles order acceptance and fulfillment but also inserts itself between the retailer and shoppers at a cost. Incidence of missing and substituted items is higher than it should be. This adds friction to the experience which may be attributed to the retailer, not Instacart itself. There are a number of other grocery ecommerce platform vendors out there who provide tech and knowhow, but leave the fulfillment, staging, BOPIS and delivery responsibilities to the retailer. This makes grocery ecommerce accessible to regional and even single-store operators. The largest chains have the means and will to build their own… Read more »
Ananda Chakravarty
BrainTrust

Ditto for Ms. Masters….

Yogesh Kulkarni
BrainTrust
Yogesh Kulkarni
Chief Operating Officer, Antuit.ai
7 days 15 hours ago
Instacart, with its vast coverage of store network and delivery associates, has already become TBTF (too big to fail). Most retailers that aren’t capable of owning the last mile technology and logistics have to opt-in because consumers want them to. Very few retailers have the cache of a Trader Joe’s or the Amazon muscle behind Whole Foods to do this entirely on their own at least in the short term. The biggest loss for retailers is the loss of consumer data. Tesco, Kroger and many others have shown that ownership of consumer data is what makes them successful in the way they assort the stores, manage promotions and derive long term share of wallet from every family they serve. The Instacart platform will lead to more and more convenience for the consumer and increased amount of split shopping for the retailers as offerings become commoditized with a flip of a switch. Besides the service fees, Instacart will definitely start to attract CPG media and trade spend dollars, which will squeeze retailers further. Post COVID, retailers… Read more »
Craig Sundstrom
Guest

Is it better to own your own fleet of cargo planes? How ’bout your own ad agency … or TV network? Sure, it’s always “best” to be a big company, able to do everything in house, developing SOTA and/or proprietary solutions while simultaneously saving money, but few are. Most are smaller, and have to choose between using outside providers, for technology and economies of scale, or trying to do things in house, with lesser tools … or not doing things at all.

That having been said, there are probably companies that could go out on their own, but are still “making do” … while their IT and logistics departments spend their time making excuses.

Patricia Vekich Waldron
Staff

While Instacart gives retailers a quick start fulfilling and delivering orders, the ultimate costs (fees, loss of customer touch-points and a glut of in-store pickers) are too high. Retailers need to control their own destiny and implement their own systems and processes for online order and delivery.

wpDiscuz
Braintrust
"For those who believe life has changed irrevocably either get your game on now or give up and go to Instacart. Different story for those who think life will go back to normal."
"Retailers should absolutely use Instacart if they are digitally behind and unable to meet the (COVID-19 accelerated) expectations of their shoppers."
"It’s simply a business decision: take what you get with a plug-in solution–good and bad, or forgo the dependency and own the entire experience."

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