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On-Demand Food Delivery Goes Mainstream, Part One: Instacart

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During the first quarter of 2018, local on-demand food delivery achieved mainstream status. In response to Amazon.com’s expansion of delivery on the back of its Whole Foods acquisition, WalMart announced that it would increase its delivery services to reach 40 percent of American homes in 2018. But it is Instacart, which today added 55 Fresh Thyme Farmers Markets to its service, which has leapt to the forefront of same-day food delivery.

Over the next several postings, we’ll examine the state of food delivery, how the competition has played out, consolidated, and morphed into several distinct flavors of food-to-the-doorstep. Groceries, pre-packaged foods for preparation, and prepared foods have each spawned intense experimentation to conveniently reach, by our estimate, more than 65 percent of the U.S. population. Compared to only two years ago, when I assessed the availability of on-demand services in the U.S. for BIAKelsey, at a time when only densely urban areas were served, the accessibility of grocery delivery and other on-demand services has increased by twelve-fold from 5.1 percent of Americans.

In 2016, the U.S. American Time Use Survey found that 44.6 percent of Americans (40.3 percent of men and 48.6 percent of women) spent part of each weekday purchasing goods and services, and about 10 percent more time during weekends. The average time a week spend shopping by women that year was 6.35 hours and 4.45 hours among men.

Taking the total employed adult population, approximately 126.4 million people as a base, the time spent on shopping by people who could pay for delivery to use their time in other ways represents 2.17 billion hours of addressable service time for food delivery companies.  We feel this is a conservative estimate, as the partly employed (those working in the gig economy) and retired may be able to trade reasonable delivery fees for additional free time.

Instajuggernaut

Fresh Thyme Farmers Market added Instacart delivery this week.

Although Amazon and WalMart are poised to make significant expansions into grocery delivery, both have struggled with logistics and coordination. WalMart has activated its employees to make deliveries on their way home from work and recently partnered with Uber, while Amazon’s Fresh delivery service has taken strides forward and reversed course several times in the last year as the Whole Foods acquisition’s implications are analyzed.

Instacart has stayed a determined course, refining its home delivery and shopping experience to establish delivery services in 4,500+ U.S. cities and towns, from Alabaster, Alabama, to Waunakee, Wisconsin.

Instacart raised $200 million in February 2018 to bring its funding to date on a to $874.8 million with a valuation of $4.2 billion. Having started out as a Y Combinator company in 2012, Instacart has kept a small group of top-tier VCs engaged in each round, adding Sequoia Capital, Andreessen Horowitz, and Kleiner Perkins, followed in the February round by two private equity firms. These are patient investors who poised for a huge payday when the company goes public. Instacart remains quiet on its IPO plans.

Relative to other on-demand companies that continue to burn money to acquire market share, Instacart is an efficient operation because it builds on grocer partnerships that give it access to millions of customers, instead of relying solely on consumers to discover and use the service. The partners launch in-store marketing for Instacart, complemented by Instacart’s online outreach.

Ravi Gupta, Instacart’s CFO told CNBC on the latest funding that the company has “more money than we need” to compete effectively. The reason is simple: Instacart is the promiscuous delivery partner. Instacart has partnered with grocery chains large and small, including Safeway, Costco, Whole Foods, and many others. Amazon and Walmart, by contrast, must rely on their own chains’ traffic to get consumer delivery orders.

Grocery delivery is repeating an earlier platform economy pattern, the walled garden. Amazon and WalMart are seeking to enclose their shoppers in a comfortable but closed garden of consumer delights while Instacart can burst through brand limitations to shop multiple stores, if necessary, to cater to exactly what the consumer wants.

Personalization also brings us to the challenge we see for grocery delivery in particular. Instart has limited promotional capabilities and suggesting products to a shopper using their phone to repeat an order can be perceived as interruptive, using their time to say “No” to things they don’t want.

Traditional marketing by grocery stores tended to rely on weekly pricing cadences supported by mailers and inserts in local papers. Effective though it was, it also produced over-stocking of some items and understocking of others, delivering waste and dissatisfaction among shoppers who couldn’t get what they wanted when visiting the store. Rain-checks for sale prices still take time at the cashier counter, and food rots in bins behind the store when it turns out shoppers didn’t want as much produce or specially priced bread as planned.

Instacart’s challenge will be how to provide their shopping staff insights into suggesting products to consumers to anticipate their willingness to try a new fruit or a different, more sustainable packaging for meat, milk, or other wasteful containers. Marketers will also need to understand how to use sampling — dropping “Try Me” products into an order with a simple mechanism for adding it to future orders if the consumer likes it. Searching for a new product will not be attractive. If a customer wants a sample flatbread pizza they received as a promotion, it must be suggested the next time they pick up their phone to shop.

This brings Instacart back to an element of traditional groceries which keeps people coming in to query the butcher, the produce staff, and in-store experts about how to prepare a meal or a new ingredient. Instacart will need to enable its delivery staff with contextual information to help improve the shopper’s experience politely and successfully. The oceans of transactional data already piled up in grocery chain systems will need to be analyzed and linked to the conversation Instacart has with shoppers through its app and when the Instacarter is standing at the customer’s front door.

On-Demand Economy Notes, February 12, 2018

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Although Uber and Waymo settled there intellectual property case last week, the status of workers as independent contractors took a new twist in a California court. Worker payment, training, retention, and earnings drove much of this week’s on-demand news. During 2018, worker retention will be a major issue for on-demand companies.

Wirecard, a German payment card vendor, is bringing pre-paid cards for on-demand work to the United States, Payment Source reports. As we noted recently, payment cards are a lever for bringing the unbanked out of the gray economy.  The technology avoids engaging with the payee’s bank account. Direct-deposits add costs to payments while prepaid cards are easily distributed, Wirecard argues. Kate Fitzgerald writes: “Wirecard’s ability to function as both an issuer and acquirer enables customized disbursement programs ranging from reimbursements to rebates and rewards, is a positive, but not entirely unique.”

Waymo-Uber Settlement: After months of tense preparation, an appearance by former Uber CEO Travis Kalanick, and a couple days of courtroom testimony, the Battle of Autonomous Cars Case came to a close. Uber has agreed to transfer slightly more than one-third-of-one-percent of its shares to Alphabet, Waymo’s parent company, and to submit to ongoing reviews by Waymo of its autonomous car developments. That stock, valued at $244 million, based on Uber’s largely fictitous $72 billion valuation, which was deeply diluted by SoftBank’s recent investment, Uber settled for about a quarter of the damages Waymo had been seeking.

We believe the significant move in the case came from new Uber CEO Dara Khosrowshahi, who has made apologizing for, and improvement of, Uber’s behavior the hallmark of his leadership.“While I cannot erase the past, I can commit, on behalf of every Uber employee, that we will learn from it, and it will inform our actions going forward,” Khosrowshahi wrote in a statement. Again, this is Uber growing up.

Women see Uber pay gaps, despite algorithmic work assignments. The wage gap persists in the on-demand economy, partly due to the duration of their Uber driving career. Forbes’ Erik Sherman reports that researchers at Stanford University and the University of Chicago found in separate reports that women consistently earn seven percent less than men. Part of the difference is accounted for in shorter driving engagements by women generally — female drivers churn out of the fleet faster than men, reducing their compensation over their Uber earnings lifetime. However, the culprit appears to be in the cost and time involved in training to become a driver, use the Uber apps, and build a consistent practice of driving.

Grubhub gets Yum-y. The holding company that operates Kentucky Fried Chicken and Taco Bell, Yum Brands, is investing $200 million in Grubhub, by buying the stock on the open market. The company will also sign an agreement with Grubhub to deliver KFC and Taco Bell food from 5,000 locations in the United States. Yum will take a board seat. Grubhub shares shot up 27 percent on the news., and have given back much of the gain in the market correction.

Quartzy says hairstyling is all about relationships. In a piece that details the rise and fall of several on-demand beauty companies, Noël Duan details the travails of hair care in the jet set, suggesting it does not translate to the consumer needs of the average person needing a “blow out” at work or home.  She concludes that customers want to go to salons because it is a special occasion and that the relationsjip with the stylist is central to the perceived value of a beauty experience. That last element, the personal relationship is the deciding factor in most home and on-demand services: People want to know their preferences are understood.

Duan conflates in-salon experience, like the free glass of champagne proferred to guests, with the intimacy of the experience. The edge of the network is made of human relationships, not just the details of the engagements that justify an on-demand hairstyling that is twice the price of a salon. On-demand is poised to deliver the same experience as the salon for the same or a lower price, because there is no overhead for the A-list location of a high-end salong. But Duan is right that if the human connection is missing, the industry will fail.

Grubhub case points to worker classification as independent contractors. The U.S. District Court for Northern California ruled in Lawson v. Grubhub that the company satisfied the state’s Borello common law test when it treated Raef Lawson, a Deliveroo rider in Southern California, an independent contractor. Lawson’s behavior, such as setting his phone to airplane mode during work time, drove the decision. It is not clear this case will build a solid foundation for gig companies to treat all workers as contractors.

Deliveroo faces union showdown. The Independent Workers’ Union of Great Britain has requested a review of a November ruling that denied its riders holiday pay, the national living wage, and the right to bargain as a collective.  The case now revolves around a clause in the Deliveroo contract relating to the rider’s obligation to provide a substitute if they cannot make a delivery, which the union says was misinterpreted by the court last year. The disputed clause makes the rider responsible to vet the replacement’s right to work and conformity with health and safety laws, a role traditionally relegated to the employer. The outcome, along with the results of other British, European, and U.S. cases, continues the debate about the nature of work and employment.

Amazon’s attack on grocery stores ramps up. Building on its Whole Foods acquisition last year, Amazon has tapped the Dallas and Austin, Texas, Virginia Beach, Virginia, and Cincinnati markets for free two-hour delivery of groceries. Bloomberg Technology reports the twist is that the Whole Foods locations will provide the inventory instead of relying on a regional warehouse. Known as Prime Now (apps are available on Apple and Google devices), the service is the first to combine Amazon’s Prime program with grocery delivery. Philadelphia grocers are preparing for the Amazon Prime onslaught with Instacart partnerships, The Inquirer reports.

Shipping By Amazon, for Amazon. The news that Amazon will build its own in-sourced shipping capability shocked the shares of United Parcel Service and FedEx last week. This makes sense from a local perspective, as much of the last-mile delivery traffic is outsourced to the United States Postal Service, FedEx, and UPS today. However, Amazon’s inventory systems will be the ultimate driver of shipping strategy, and most inventory needs to be near big cities. Amazon’s extensive regional warehousing system is in place to support Prime two-day and other shipping. Getting inventory to the warehouses, however, if an inter-modal shipping problem that requires multiple carriers and alternative routes if one mode of shipping is unavailable. This is not the death knell for traditional shipping, but it does place the focus in traditional shipping on the longest hops in the supply chain.

Instacart ramps up its funding, again. On the heels of 150 percent year-over-year revenue growth, Instacart closed a new $200 million round last week. Now valued at $4.2 billion, the company has raised $874.8 million, according to Crunchbase.

Instacart is slashing delivery fees. The Buffalo News reports that Instacart drivers and shoppers in the region are seeing their compensation cut by more than 50 percent. Just six months after launching with a $10 payment for each order delivered, shopper/drivers now average $4.75 a delivery plus $0.40 per item. It would require an order of 13 items to reach the previous $10/delivery level. Instacart offered a rich bonus for early delivery staff, but has failed to explain why its fees to drivers appear to be falling. The company is hoping repeat orders will include more items, and that may be an erroneous assumption.

Facebook doles out $5 million to community leaders. The story of local markets, which Facebook would like to support through improved storytelling and local advertising, will get a big boost from its selection of as many as five people to receive $1-million grants to “bring people closer together.” We recomnmend starting with local news and that Facebook refrain from seven-figure contributions to kick-start community engagement; Instead, find 200 journalists in local markets who will cover those markets closely and with real engagement with the citizens, business, and government issues. Pay them $50,000 a year to launch local Facebook-hosted communities and the results will be better.

Agency workers account for more of the British workforce, the Independent reports. The number of “agency workers,” or temps, has risen by 40 percent over the last decade to 800,000 people now serving permanently as temporary staff, according to a survey by the Resolution Foundation, a non-partisan think tank.