How Instacart plans to keep delivering growth
Food retailers whose operating models were built and refined during a pre-digital era have been racing to improve digital engagement with shoppers and execute new forms of fulfillment. In recent years, many turned to San Francisco-based Instacart, founded in 2012, and Toronto-based Unata, founded in 2011. Instacart rose to prominence as a provider of grocery delivery services while Unata emerged as a digital experience company with technology solutions focused on making e-commerce seamless. Now the companies are one following Instacart’s acquisition of Unata in January 2018. Retail Leader spoke with Nilam Ganenthiran, Chief Business Officer at Instacart, and Chris Bryson, Founder and CEO of Unata, about the future of food retailing.
Retail Leader: Let’s start with what the Instacart network looks like today.
Nilam Ganenthiran: We are operating in 190 markets across the United States and Canada. We serve about 63% of the households in North America and plan to cover about 80% of households by the end of 2018. We work with 189 retailers from large to small and have about 30,000 personal shoppers who pick, pack and deliver millions of dollars of groceries on behalf of our retailer partners. We work with some of the largest grocers in North America including Costco, Kroger, Albertsons, Publix, Ahold/Delhaize, H-E-B and Loblaw. We also work with large and high quality regional players such as Wegmans, Stater Brothers, Supervalu, Heinen’s and Homeland.
RL: What’s the appeal to a retailer?
NG: We have a heritage of being a technology-first company, and our founder Apoorva Mehta’s background is in fulfillment engineering and logistics. That was something he focused on while he was at Amazon. Store to home logistics, batching, route planning, those are not skill sets for traditional grocers who are great at the logistics to get stuff to the store. We help solve the hard technology problem of how to do last-mile fulfillment from a store in a very cost-effective way and we also help solve the problem of building a great front-end experience because the way a customer interacts with groceries is very different than other segments of e-commerce.
RL: How so?
NG: We had to figure out how do you make sure shoppers can pick, pack, and deliver groceries in a very fast and efficient, but also very accurate fashion, in stores that are actually designed for customers. Stores are designed for browsing and people taking their time and our model is dependent on people picking groceries really fast and really accurately. It is a technology problem. As we started talking to retailers, they realized there must be a better way than the way that everyone has tried to do it before. You can get pretty far trying to do it yourself, but there are challenges around having the technological expertise in-house. The bigger challenge is having the localized density and scale to be able to make the economics work. Because we work with multiple grocers within a city, we’re able to batch orders across stores and keep our personal shoppers highly utilized. What matters to our personal shoppers is how much they’re making per hour, meaning they need a lot of volume of orders every hour. These are some of the challenges that we’ve been able to take off the minds of retailers.
RL: You referenced your founder’s background at Amazon. Now that capabilities like the type you offer are available to retailers, is the threat from Amazon overblown?
NG: We have the utmost respect and humility when you think about Amazon and what they’ve been able to achieve. They’ve got an engine for innovation and passion for customer service that many organizations just haven’t historically had. Their relentless focus on the end customer has allowed them to win in things as disparate as cloud computing, to online e-commerce, to electronic e-readers and everything in between, which is pretty fascinating. That being said, we think that brick and mortar grocery is very hard and it is a very localized relationship that customers have, between the purveyor of food and their family. If you think about a busy mom, the choice of what to feed her family is one of the most important choices that she has throughout the day. When we talk to her, and it’s usually a her, there are a lot of psychological benefits she gets from feeling in control of what she feeds her family.
Why does that matter, related to Amazon? That means that she has developed relationships with the H-E-Bs and Publix and Wegmans in her community over a period of decades and there is a great level of trust. It’s actually going to be quite challenging for Amazon to break that relationship. Brick and mortar grocers are also advantaged with great real estate that enables them to have easy access to customer’s homes. Not only have they built the stores where the demand is, but the assortment in these stores is tailored to what people in these communities buy. That level of customization, matching price, assortment, and brand to the local consumer is something that’s very hard to replicate by an e-commerce technology-only company.
RL: How has Instacart’s financial model evolved?
NG: Instacart has three revenue streams. We collect fees from retailers, typically on a revenue share basis. In exchange for picking, packing, delivering groceries, developing their catalog, taking pictures, building their site, answering customer service calls related to e-commerce – all of that package – they pay us a percentage of the transaction or a fixed dollar amount per delivery. The retailers maintain full pricing and merchandising control, and pay us a fee for the service. The next revenue stream is the customers who pay us a delivery fee or buys an annual membership and gets free deliveries for the year. The third revenue stream is the CPG community. If you think about it from an advertiser’s perspective, they are hungry to find a way to get closer to the customer’s purchase. While being retailer agnostic, CPGs are able to connect with the customer all the way from discovery down, not only to purchase, but repurchase, on one platform. We can drop a sample in the bag, and track whether the person who received the sample actually came back and bought the product.
RL: How about on the cost side?
NG: Our largest bucket of cost is our personal shoppers and their commissions or wages. Beyond that, we’ve got, obviously, our insurance cost, our customer support cost, customer service, we’ve got costs related to our technology and our hosting, all of that stuff, and the credit card swipe fees, we pay the credit cards money every time a customer transacts.
RL: Have you achieved the scale to be profitable?
NG: We are profitable in all our mature markets and profitability for us follows a predictable curve. For the longest time, Instacart had been in somewhere between 18 to 30 markets and we were conservative about expansion. Last year, we went from 30 to 190 markets and the reason 2017 was such a big expansion year is because in 2016, we were focused on profitability and, most importantly, having predictability around profitability. For example, what type of volume and density mix does it take to turn a market, in our language, from red to green on a profitability perspective? The improved predictability of profitability enabled us to add 160 markets last year.
RL: What did you learn in the process?
NG: Last year taught us about market dynamics. We learned the demand for our type of service in places like Buffalo, New York, or Evansville, Indiana, or Rockford, Illinois, on a per capita basis, is actually greater than the demand in places such as San Francisco, Chicago or D.C. Some of that’s competitive dynamics, and some of that’s just about having the opportunity to work with great retailers. What’s really interesting, and it’s neat to be part of this change, is that regardless of where she lives in the heartland of the country, this consumer seems to want this type of service, so we’re meeting her across the country today. I would like to say that we knew this, but we really didn’t, so it’s been fascinating to see, and very exciting to see that the model scales and that the demand scales across the heartland of the country.
RL: Let’s back up to CPG revenue stream because one of the concerns CPG companies have about the migration to online shopping is that it just turns into a replenishment model. If I’m Brand A and a shopper always buys Brand B the opportunity to persuade someone to switch is greatly diminished compared to what it would be in the store.
NG: The biggest dynamic with CPGs is the value of being first in the basket. In the old world, I actually started my career at Procter & Gamble as a brand manager, and they trained us incessantly on this idea of the first moment of truth. The first moment of truth used to be the shelf, and every time she was at the shelf, she had the opportunity to switch. In an online world, the dynamic is so different. The value of getting in her basket the first time is so high, because essentially, what we’re finding, is customers have a very much “set it and forget it” dynamic to most of their core grocery shopping.
RL: Right, so how do CPGs break that cycle?
NG: Some categories lend themselves to more thrill-seeking or trialing than others, of course, but generally, that first basket is very sticky. So the challenge for CPGs is how do you get discovered in this world where, once the customer makes a choice, she doesn’t want to rethink that choice because she’s using e-commerce to simplify her life? How do you allow her to discover your brand if you’re not already in that basket and do so in a way that isn’t intrusive to her journey? We offer tools for CPGs to do that, like offering the ability to stock up and save. Things like buy a quantity of a family of brands to receive a discount or free delivery have been among our most successful programs. Other examples include targeted coupons or generating awareness of promotions via what we call ‘the hero’ in aisle. Featured search is another area where if she is searching for cereal, what shows up first? It is a very real problem for CPGs, but it’s also a very real opportunity, because if you think of the return that comes from getting into the customer’s first basket, it’s tremendous.
RL: When the acquisition of Unata was announced you guys talked about the combination with Instacart “enabling the future of online grocery shopping.” Elaborate on what that means.
Chris Bryson: The future of the grocery experience is a more convenient one and Instacart is part of what is enabling that future. Their value proposition of being able to get groceries to your door, sometimes as quickly as 60 minutes or less, is a game-changer that falls in line with the consumer focus on convenience. We are all so digitally dialed-in now, you can order your coffee ahead of time before you walk into Starbucks. Why can’t you do the same with your groceries? There are so many opportunities to make the current grocery experience more convenient, to save more time, to make it more personal, to make it easier for consumers to pick the right product based on their own personal goals. Anything that reduces clicks, that makes it easier for me to convert my inspiration into an actual product decision, that takes away the burden for me of having to do research, of having to spend too much time. It all comes back to convenience.
RL: Some retailers view convenience as picking up at store, the click and collect model. What’s your view of click and collect versus home delivery or is it not an either or situation?
CB: Many of our retailers provide both delivery and click and collect, and we’ve had the benefit of being able, courtesy of the loyalty programs that many of these retailers have, to also see what the adoption is. What we’ve noticed is that the shoppers who buy online, whether it’s delivery or click and collect, continue to come into the store almost every single week. Shoppers will pick the method of shopping that is most convenient for them at any given time based on context and circumstances. We recently surveyed 1,000 U.S. shoppers and confirmed there is a strong desire for both delivery and pickup although delivery has a slight edge.
RL: What did the survey tell you about shoppers’ desire to engage with voice?
CB: The data reinforced that shoppers value two way communication with personal shoppers. As Nilam knows, customers on Instacart get to know their personal shoppers, and there is two-way communication all the time around product preferences and substitution possibilities. Beyond that, Unata last fall integrated voice capabilities with our platform and we are beta testing with a few of our retailers. The idea is the second that moment of inspiration hits, that I realize I’m in my kitchen and I’ve run out of orange juice, or pasta, or whatever it might be, because that so often happens in the kitchen and I might have my hands full, I could very quickly vocalize to my smart speaker to add to the grocery list.
RL: That takes convenience to a new level.
CB: It becomes an effortless customer experience. Instead of having to pick up my phone and open up the app or write down on a piece of paper which I may forget to put in my pocket, voice is a much better customer experience because. It is effortless, it’s tracked and it’s saved. That’s one use case, but certainly there are a lot of other use cases that I could ask my smart speaker about. And by the way, it doesn’t need to be just the Google Home. It could be all kinds of other different chat bots. It could be something that runs on the Amazon Alexa, it could be Facebook Messenger, all those things are possible. What we are in beta with is the Google Home. I can ask to add an item to my order or is there any gluten-free beer on sale at my local grocer and have those results sent to my phone. The possibilities are incredibly endless.
RL: So voice is the future for grocery?
CB: We did ask those 1,000 shoppers in our survey whether they were embracing voice technology, and we found that one in five North American shoppers already owns a smart speaker and that about 30% of them had already used it to build their grocery shopping list. So not only is the device highly adopted, but the adoption toward the grocery experience is strong, and we expect that to grow. It comes back to the theme of convenience. If it is a more effortless customer experience, why wouldn’t you use it? RL