Why Whole Foods And Instacart Are Cozying Up

There is an old joke about perspective that imagines three blind men trying to describe the elephant that none of them can see but that they are all touching a different part of.

“It’s rough,” says the first blind man, touching the elephant’s side.

“I think it’s tubular,” said the second one, while he touched the trunk.

“I don’t know what it is, but it surely smells,” said the third, who had gotten stuck with the tail.

And we could not help but remember the tale of the blind men and the elephant last week when the various reactions to the newly expanded partnership between Whole Foods and Instacart broke. The facts of the new deal are fairly straightforward — more cities, more pilots — and weren’t even really “new” news. Reports that such an expanded relationship was in the offing began to leak last month.

Yet, when leak it did, it managed to elicit some fairly polar responses. Fans of the move considered it a harbinger of good things to come for Instacart, while critics decried this as the latest confused effort out of Instacart to try futilely to become the Uber of grocery.

So, what exactly is going on and how did it elicit such a division in opinion?

Well…

 

The Pair-Up 

“We’ve seen how much our customers love this fast and convenient way to receive Whole Foods Market groceries right to their door, so we are excited to extend our relationship with Instacart,” said Walter Robb, co-CEO of Whole Foods Market, in a statement on the expansion. “Working together, we will continue to find even more ways to create outstanding shopping experiences — whether they’re happening in the digital space or within the four walls of our stores.”

Whole Foods and Instacart’s extended strategic relationship breaks down to an expansion of the service into various new markets over the course of 2016, with an unspecified financial investment into Instacart by Whole Foods. Recent reports also indicate the the new deal will last for the next five years.

What remains unknown? The size of the investment, how the funds will be used, the scope of the deal or how it will affect Whole Foods’ other partners in delivery. There was a rumor that the new expanded deal between Whole Foods and Instacart would include an exclusivity arrangement, but thus far, that has not panned out. Whole Foods also participates in Google’s delivery service, Google Express. It is not clear if Whole Foods’ new deal with Instacart would prevent Google Express from offering Whole Foods delivery as the service expands into areas where the two services directly compete.

Apart from expanding past their current 17-city lineup, the two firms also plan to develop new eCommerce and delivery options that will be piloted throughout the year.

The benefits for the expansion are fairly clear for Whole Foods, which has enjoyed a notable boost to its bottom line from delivery customers. Whole Foods stores are seeing Instacart sales rising steadily and are, on average, 5 to 10 percent of their total store sales.

Getting more Instacart into more stores is pretty obviously in Whole Foods’ interest.

But is the deal good for Instacart? Well, depends on who you ask.

 

Fans Will Tell You…

That the move makes sense insofar as it ties into Instacart’s bigger vision of being the skilled professionals in the on-demand grocery delivery space. There is nothing particularly technologically complex about what Instacart does, and as a result, it has often seen itself imitated and copied, since delivering groceries to customers in the age of mobile is a fairly intuitive idea. This has left it facing off against other well-capitalized startups, like Postmates and Uber, and established big market players, like Google and Amazon.

Instacart’s macro-strategy is to be the most professional and most ubiquitous player out in the field — an idea it supports with a fully trained staff (as opposed to an army of independent contractors) and an ever-widening footprint. It is also increasingly monetizing the value it offers its merchant partners, as opposed to relying on the markups charged to customers for the delivery itself.

That value, notes Fast Company, is in the simple reality that consumers that buy their groceries through Instacart buy more.

“There are new items that are introduced all the time,” Instacart CEO Apoorva Mehta says. “How do we make sure that we’re surfacing them on Instacart? How are we making sure that customers are being encouraged to try them out?”

The encouragement going forward will also include recommendations from Instacart on the basis of what a consumer has already purchased and partnerships with the Food Network and Allrecipes.

Lots of companies may be doing grocery on demand — the booster argument goes — but Instacart is doing it smarter and building it to scale faster and better by pairing with Whole Foods.

 

The Critics Will Tell You…

As some were touting Instacart’s professional staff and coming expansion, Quartz was reporting on how these changes were filtering down through the rank and file. With a sudden focus on restrictions for what employees could and could not do — a stricter dress code and a very codified set of policies about the consequences for ignoring the new policies (first suspension, then termination) — the transition from contractor to employee didn’t make the professional shoppers feel more professional so much as it made them feel more nervous.

“We think the company’s not doing well,” says Amanda, an Instacart shopper in Manhattan who requested that Quartz withhold her last name.

The critics note that Instacart might simply be a firm that could get caught up in the backlash of a bubble burst, and the grocery on-demand industry has rather quickly gone from being an investor darling in Silicon Valley to an area that is suddenly attracting some high-profile suspicion, as too many services with questionably profitable business models have proliferated claiming to be the Uber of something.

“People lost touch with the fundamentals of on-demand businesses and were investing based on momentum rather than on economics,” says Tim Young, a partner at VC firm Eniac Ventures in San Francisco. “All these companies are massively subsidized to support growth and restrain growth of competitors. And there’s a point at which the music stops, and investors are no longer willing to see their money go to those subsidies.”

Moreover, grocery services seem less inherently hospitable to Uberization than transportation is. Groceries are a basic need but not a high-volume one in the way needing a ride is. People, on average, only grocery shop 1.5 times a week. The margins are also incredibly thin, and consumers tend to be more price-sensitive than brand-loyal.

Which leads to the fundamental questions: Are there some services that are immune to the on-demand model, and is grocery one of them?

Fans say no, though they note that a lot of smart planning and right conditions have to exist and that the jury is still out on whether Instacart has them. Critics say yes, and that we all learned this lesson the first time in the late 90s when this model was tried and lost hundreds of millions. They say that, though mobile can change everything in some places, in others (like grocery), margins still win the day.

We now get to see which camp Instacart will be getting set to prove right.