Surprising as it may seem, one can learn an awful lot about the payments industry by watching "Seinfeld."
“I don’t think that anyone would dispute the fact that change in payments happens slowly, not because we don’t want things to change but because so many people have to change sort of at the same time for change to occur…Take mobile payments. Haven’t we been talking about it for an eternity already and we’re still sort of nowhere really? It made me wonder if payments is really the show about nothing,” MPD CEO Karen Webster noted in July of 2014, after a rainy Fourth of July weekend left her binge watching "Seinfeld" and realizing the much of what goes on the payments industry can be summarized concisely by the wit and wisdom of Jerry Seinfeld.
Which mean it should come as no surprise that Mr. Seinfeld, in his side job as a real-life stand-up comedian forecasted the disruption of the grocery shopping experience in a 1998 routine called “The Supermarket Experience”
For those without the time or inclination to watch the video, in about five minutes "Seinfeld" explains everything wrong with the modern grocery shopping experience - “The whole supermarket is designed to break down your sense of having any life outside the supermarket.” Sort of like Vegas casinos, he asserts.
Which perhaps explains the rising tide of services geared at keeping the consumer out of a grocery store environment that some clearly find “casino-like” in 2014. New players, like Instacart are now getting ready to battle it out with the new-old guard like, like Amazon’s grocery service, and the old-old guard, like the mega grocery-chain backed PeaPod. All upgraded their strategies in 2014 and going into 2015 – with their eyes converting the 98 percent of consumers that still push metal shopping carts around grocery stores.
Instacart: The Sharing Economy Upstart
Instacart raised $44 million in July 2014 and then turned around and capped off the year with a $220 million dollar round. That fundraising announcement pushed Instacart from “little” grocery startup to major sharing economy player. Instacart currently allows customers to order online at local stores and have their products delivered to them that same day by one of the service’s green-shirted employees.
“Instacart's offering really resonates with customers," Apoorva Mehta, Instacart's founder and CEO, said in a statement. "We've got robust processes in place to support category and geographic expansion. Our vision is to help all types of local retailers get online and offer their customers one-hour delivery.”
The service now employs 4,000 personal shoppers in New York, Austin, Chicago and San Francisco, who like Uber drivers, are independent contractors who shop for and deliver groceries. The service charges $3.99 for two-hour delivery and $5.99 for one-hour delivery if users spend $35 or more. There's also "InstacartExpress," a $99-per-year membership.
"When [consumers] order their groceries, we connect [them] to one of our thousands of personal shoppers in our network who go to existing stores, such as Whole Foods, Costco and many more, and pick up [their] groceries and deliver them within one hour," Mehta said. "We don't hold any inventory, we don't have any warehouses, we don't have any trucks."
And early signs for the company are strong - according to their internal numbers. Instacart reports their revenue jumped 10 times in 2014 and doubled in the fourth quarter alone. The New York Times also reported that Instacart was projecting its December 2014 revenue to be around $100 million.
Instacart is not alone in the space, however, and in fact is a relatively new player in a grocery delivery space that’s getting more crowded, and crowded with more established players.
Amazon: The (Slowly) Creeping Grocery Giant
Amazon’s Fresh Express, technically, has been available since 2009 if one lived in Seattle where the service underwent extensive testing. The service expanded to Los Angeles in 2013 and across a few major metropolitan metro areas in 2013-2014, but made it’s first major coastal jump with a New York launch in the fall of 2014 - albeit limited way to Brooklyn’s Park Slope neighborhood.
However, while Amazon’s geographic penetration lags, it’s notable that the company is building technological infrastructure to support its burgeoning online grocery business in the form of the Amazon Dash, a device that helps customers build their grocery lists by either speaking product names into it or scanning product bar codes into the Wi-Fi-enabled device. Dash is also synchronized with customers’ AmazonFresh accounts to make the ordering – and payments – process more direct.
However unlike sharing economy oriented Instacart, Amazon Fresh Express represents a somewhat “older school” mindset about online grocery ordering. Fresh buys up groceries in bulk and stores them in warehouses around the country, then delivers orders from those warehouses. Fifteen years ago, grocery delivery services Kozmo and Webvan crashed-and-burned when the dot.com bubble burst and took those services down with it. While there were many differences between those “pre-mobile” services and what is a mobile-enabled offer today, among the (many) problems they faced was that the warehousing model was not ultimately profitable since grocery margins are so thin and variable.
“Amazon's model is built on building their own warehouses, owning their own trucks, owning inventory, and that really puts them at a big disadvantage,” Instacart’s Mehta told Bloomberg. “Instacart is primarily a software company. We're building software for our shoppers. We're building software for our retail partners.”
PeaPod: The Online Grocery Granddaddy
The bursting of the first tech bubble took out many grocery delivery services, but not all of them. Born in the Chicago area in the early 1990s and well before smartphones were a grocery shopper’s best friend, Peapod starting life as a delivery partner of The Stop and Shop Supermarket Company (a subsidiary of Dutch supermarket operator Ahold). Ahold went on to fully acquire Peapod in 2001, right around the time WebVan was declaring bankruptcy. At the time, PeaPod’s annual revenue was estimated at roughly $60M per year.
Its partnership with Stop And Shop/Giant, the “elder statesman” of online grocery delivery has helped Peapod really scale. Its annual revenue has grown to roughly $500 million in 2012 and about $550 million in 2013, according to industry estimates.
However, even an old school player like Peapod is now adapting its strategy for customers who want more options for the receipt of their groceries. It’s now offering curbside pick-up at an ever-expanding number of Stop and Shop across the Northeastern and Midwestern United States.
“We’re finding that it’s definitely growing our e-commerce sales, for sure,” Peapod Director of Marketing Peg Merzbacher noted. “It resonates for people for whom home delivery might not have worked.”
But like many incumbents in an innovative space that’s being transformed and disrupted all at the same time by mobile phones. Peapod faces increased competition from the newer and hipper startups like Instacart that can strike deals with any old grocery chain they want anywhere they chose – Peapod is owned by Stop and Shop and Giant chains that only exist in the Eastern and Midwestern U.S. which limits its reach, at least now.
Changing Revenue Streams
The grocery business has razor thin margins - a well-known fact - which has changed the way all three services are rendering their pricing.
Which is why Instacart quietly shifted its business model so that it largely leaves pricing to the grocers and charges now them a fee for its service,
Under the older pricing model, Instacart would mark up the price of the items it was buying. That sort of cramped its style on the monetization front, making only $1.40 on an order of 15 basic items. Then, the lightbulbs went off.
“We don’t want to be in the pricing game,” Instacart’s head of business, Nilam Ganenthiram said. “There’s exceptions, but that’s generally true. Retailers outsource their e-commerce to us for a fee.” That’s now Instacart’s “primary model,” Ganenthiram said.
Instacart’s strategy shift explains the fact that, for some of its grocer partners, the products cost the same on Instacart as they do in store, while for others the price is more — or, in some confusing cases, less. The fee-for-delivery model also makes grocery stores more amenable to improving Instacart’s efficiency with services like offering the company its own personal checkout line — as well as shielding Instacart from the risk of swings in food prices.
Amazon has responded to questions about how it plans to make money given thin grocery margins, which being Amazon, they brush off as solidifying and developing the base of this e-commerce platform extension. But perhaps feeling a bit of pressure to at least cover some of its costs more fully, Amazon is asking its FreshExpress users in the Seattle area to pay-up for the service. For the last four years, Seattle residents had access to FreshExpress for the bargain price of a Prime Membership, $99 - instead of the current $299 annual FreshExpress price tag.
Perhaps after the Fire Phone and impatient analysts and investors, every dollar now counts.
Even PeaPod is looking to generate more revenue from its base - and is now charging a delivery fee, whether or not customers pick up their groceries in-store, or have them deliver (Peapod users could have the fee waived if they picked up their own groceries). It’s currently $2 cheaper to pick groceries up at the store, but Peapod has said that could change going forward depending on how consumer use habits change.
Which, ultimately, is the answer that the new player Instacart, the new-old establishment player and the old-old establishment player will have to wait for. It bears noting that according to PricewaterhouseCoopers, consumers today are overwhelmingly opting to do shopping in-store for groceries. Only 5 percent of consumers included “online” as a top choice for buying groceries, even though 92 percent indicated they had access to it.
The same data suggests however, that grocery e-commerce is growing fast, increasing 13.7 percent in 2013 to $21.1 billion. While this is a very impressive sounding growth rate and number, it’s only a sliver of total grocery and consumable sales – 1.7 percent. While Amazon is an early leader, and Instacart’s out of the gate application of the sharing economy to override several overhead cost issues is impressive - it remains to be seen how much of the remaining 98 percent of grocery spend online merchants can actually conquer.