- Surge in online grocery delivery in the US amidst Covid-19
- Growth of Instacart
Thousands of businesses across industries are forced to shut down, work with reduced operations or announce partial closures due to outbreak of Corona virus in the US and around the world. Nevertheless, one sector that has seen an exceptional growth during these tough times is online grocery delivery. We have witnessed the adoption of online grocery market, that was once projected to take five years, has in fact been seen in the last few months of the lockdown. In the US, Amazon and Walmart were the leading players in the online grocery shopping over the past few years, but since the demand skyrocketed due to coronavirus, third party delivery services also got a chance to shine. The leading competitor of these services in North America is Instacart. Instacart has partnered with nearly every grocery delivery chain in North America. Given its footprint, large scale of operations and the partnerships that Instacart has associated itself with, it has established its reach to about 85% of all US households.
Instacart is an online grocery delivery service that charges a fee to connect local grocery stores and its shoppers. The personal ‘shoppers’ purchase the selected items from different local grocery stores and deliver them to customer’s door within the agreed time window. Customers pay a delivery fee based on their size of orders and how fast they want the grocery to be delivered as well as a 5% service fee plus an optional tip for the driver. The shoppers make money based on a somewhat complex algorithm, including factors such as distance from the store, how many items were ordered typically and weight of the overall order.
Instacart’s demand in the last few weeks has been the highest in company’s history wherein its order volume soared by more than ~500% on YOY basis. Add to this, the app downloads were also up by ~218% month-over-month in March 2020. The company has over 500,000 independent contractors which go to the stores to pick orders and deliver the items to the customers across the country. The company says it plans to hire additional 250,000 workers over the next few months to keep up with the surging demand. As per the report of The Information, a US based digital media organization, the company’s customers purchased around US$700 million worth of goods in the first two weeks of April, helping reverse the company’s loss of US$300 million in 2019. It also made a net profit of about US$10 million in April, this year.
Instacart was launched in San Francisco in 2012, however, back then grocery delivery was still an evolving concept. The companies like Peapod, launched in 1989 and Amazon fresh launched in 2007 were already providing grocery delivery while many players like Webvan which stepped-in the industry failed to make any mark and had to exit the business all-together. However, those who stuck around to the base concept and its success in the longer run are reaping the benefits today, with additional benefits coming in during the Covid-19 pandemic. For Instacart, the company today has the ability to deliver the groceries from 25,000 stores across 5,500 cities in the US.I Investors too are eager to support it- recently, the company raised US$325 million, giving the company a US$13.8 billion valuation. With a US$14 billion valuation and funding piling on non-stop, one would wonder if Instacart will soon look to go public or acquire a competitor to consolidate its market share. While Instacart is still very small as compared to biggies like Amazon, Walmart etc., it is still expected to garner continued attention in terms of funding if it plans for an IPO.
However, the company’s recent surge in volumes has not come without hiccups. Instacart shoppers organized a strike at the end of March demanding higher wages and protections if they were supposed to endanger themselves at grocery stores during a global pandemic. Following the same, Instacart facilitated its staff with sick pay, safety kits and medical care along with the introduction of contactless delivery so that shoppers and consumers no longer had to interact face to face and coordinate with grocery stores to allow the shoppers to enter from separate entrances.
The above chart depicts the penetration level as a percent of consumers who have ever purchased grocery online. The moderate case considers if the pandemic subsides during Q3 2020, while the severe case looks at if concerns persist until there is a vaccine in 2021 or 2022. In the moderate case, the rise is expected by 41% while in the severe case the penetration can soar up to 65% in 2023 from 24% in 2019. As per the CEO of Fresh Direct, a leading online grocer in the US, roughly 13% of the population were buying grocery prior to pandemic and today its close to 40%. In addition, with all the restaurants and in dining closed, a vast majority of customers are now going to further create the surge in online grocery delivery. Amazon, Walmart and Instacart have been continuously attempting to squash delays in delivery, but such rapid expansion is challenging for any company. To ease the pressure, the company also added some new features in its app that allow customers to know their delivery window and can book groceries two weeks in advance. Today Instacart is able to provide same day grocery delivery to 90% of North America households and it continues to add more shoppers to keep up with the growth that the company sees. We believe that Instacart’s biggest competition comes from Amazon fresh but as the logistics capabilities continue to be developed grocery chains may want to doing this by themselves.
Obviously, these companies have come up during the time when people were hesitant to walk to grocery stores and faced the risk of being exposed to COVID-19 but the larger question that prevails after this is over is will the demand for grocery delivery sustain?
The pandemic has turned out to be a painful advertisement of the necessity of shopping online. People might feel the need of using it today because of the enhanced safety it offers, however this might not help retain customers in the long-term when customers have the choice to go to physical stores for purchase. To ensure this, companies will need to offer a great experience which is going to be a real challenge with a focus on balancing both demand as well as satisfying customers, thereby helping these companies in retaining their customers in a post covid-19 scenario as well. Also, we might think of buying groceries online as essential due to the virus attack, wherein people are forced to sit at home, however when things get back to normal and the pandemic eases out people could also get back to their normal routine of brick and mortar shopping. This sudden focus on online grocery, we believe has been set up to change consumer behaviour well after the pandemic subsides, accelerating the industry's penetration in the US but not with the same pace which we are seeing currently.