Yesterday, Amazon and Whole Foods ruined a perfectly slow news day on a Friday in June with the announcement that Amazon intends to buy Whole Foods for almost $14 billion.
The most obvious victim of the deal was Instacart, in which Whole Foods invested and with whom Whole Foods has a five-year contract.
But after talking to a few Instacart investors and other sources close to the company, Instacart may have a real opportunity in the wake of this acquisition.
Not not a big deal
Amazon is a shark. The company has evolved over the past 25 years to become one of the greatest operational successes in the business world to date. And when a shark swims into your waters, it’s undoubtedly dangerous.
People with Amazon Prime memberships who have yet to venture into online grocery delivery were just given a trusted reason to buy groceries with Amazon. Whole Foods represents credibility for folks who like to see and touch their food before they buy it.
Amazon has invaded Instacart’s waters, but Instacart is not alone. Walmart, Kroger, and Target shares were all down yesterday as the news broke. Indeed, Amazon has invaded their waters, too. And this may make Instacart’s proposal all the more inviting.
Here’s what an Instacart spokesperson had to say about the deal:
From the beginning, we’ve been committed to helping grocers compete online. That’s more important than ever given Amazon just declared war on every supermarket and corner store in America. We already work with over 160 retailers across the country and look forward to partnering with many more.
Them’s fightin’ words.
The Opportunity
“No doubt, there is huge shark in the lagoon,” said Semil Shah. “This is obviously a concern for Instacart, yet is also an opportunity. In the lagoon, Instacart is like a school of fish — specifically, they are on the verge of launching in cities nationwide, not just in locations that have a Whole Foods.”
Instacart is built to support hundreds of grocery chains in markets big and small. The ‘last mile’ is built into the structure of the business. And it already has deals with 159 retailers that aren’t Whole Foods, including Publix, Ahold-Delhaize, and Wegmans most recently.
One source close the company said that Whole Foods represents less than 10 percent of Instacart’s revenue, and Whole Foods has less than 1 percent equity in the company. The source also said that Instacart will be able to service 80 percent of U.S. households by 2018.
“As far as Instacart’s partnership with Whole Foods is concerned, their business is far diversified away from any single grocery chain,” said Instacart investor and Canaan partner Hrach Simonian.
Instacart cofounder and CEO Apoorva Mehta came from Amazon before starting Instacart. He knew that this was coming — that one day, he’d be in direct competition with Amazon.
“Obviously it’ll pose a challenge to the company, but knowing the early team, they’ve already thought through all this,” said Shah.
“Apoorva has known he’d have to compete with Amazon,” said another source close to the company.
In other words, it’s game day.
And, there is always the chance that Amazon/Whole Foods include Instacart in their little takeover party and offer Apoorva Mehta a deal he can’t turn down.
Metha hasn’t said one way or the other how he feels about an Instacart acquisition, but from what I’ve learned about him, I don’t think he’d sell to Amazon as part of this deal. He’s ready to compete against the ecommerce giant, and an offer from Amazon would only open up more lanes of opportunity with Amazon’s new grocery store competitors.
After all, it’s not like Amazon hasn’t lost before. Just look at the Fire Phone.
The Counter Attack
So what does Instacart have to offer that Amazon + Whole Foods don’t?
For one, the timeline for big grocery chains and retailers has just shifted based on Amazon’s pace. It only follows that the C-Suite executives at these massive companies are adjusting their plan of action, and may be particularly interested in signing a deal with Instacart.
“I think it lights a fire under Walmart to make a big move here,” said Simonian. “This is bad news for brick-and-mortar grocery chains that don’t have an online partner or eCommerce solution, and the stock market agrees — nearly every grocery chain is down 5-15% on the news.”
While Simonian is depicting an investor’s ideal scenario, it’s not hard to imagine Walmart executives including Instacart in their discussions. It’s also not that to imagine retailers considering shoving more SKUs through the Instacart channel. In short, it’s feasible that this deal actually provides a bump for Instacart in its quest to grow its network of grocery chains and retailers.
And then there’s the consumer experience.
Amazon will undoubtedly pull potential customers and existing Instacart customers over to Amazon Fresh. But will the experience live up to Instacart?
AmazonFresh offers both attended delivery (hand-to-hand drop-off) or doorstep delivery. Doorstep deliveries arrive same-day as long as the order is placed before 10am, and orders placed after 10pm are delivered at ‘breakfast time’. But doorstep delivery means that your food could be waiting outside all day while you’re at work, or could be delivered after you leave for work in the morning and sit out all day.
Instacart, meanwhile, has been refining its web and mobile experiences to cull repeat behavior, while offering direct hand-off delivery for groceries that were just purchased.
“For the last 5 years, consumers have created a habit of using the Instacart interface (web and mobile),” said Shah. “There is a massive ton of repeat usage. That behavior won’t just wash away. Similarly, it’s not a given Prime Shoppers will join Fresh en masse (it’s been around for a while).”
And, finally, we can’t forget about data.
AmazonFresh has been up and running for a while, but Instacart has been collecting data about how customers shop for groceries for five years now. Instacart knows what I order from Whole Foods through the app, but Whole Foods has no idea what in-store shoppers are buying week to week.
Amazon is a monster, and this shouldn’t be taken lightly by Instacart. But at the same time, Instacart has a few pieces of the puzzle working to its advantage.
Long Story Short
Instacart is still in this. With a vast network of grocery chains and retailers, a quality customer experience, and an industry-wide pressure to get into delivery, Instacart finally has the final piece of the puzzle: validation.
“This is extreme financial and strategic validation that this is a very important category,” said Shah. “From afar, this is huge validation for the size of the market and the strategic value of owning the customer experience around providing groceries to households.”
The company knew that this day would come. Amazon, the player that no one wants to compete with, has entered the game in a very real way.
And so it’s up to Instacart to leverage this situation in their favor. Preparation can only get one so far. So now, we wait to see if Instacart is ready to go to war.
Grab some popcorn. I hear you can order it online.
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