Grocery delivery service Instacart is facing a growing number of market challenges and has had a number of strategic missteps in a frenzy to adapt to a rapidly changing, challenging e-grocery market.
The company’s valuation dropped precipitously from $40 billion to $10 billion in the last year as orders declined and investors kept their distance. That could be only the start of the decline. Large, corporate chains and smaller independent grocers are shifting to DoorDash. And consumers are showing their displeasure as well, opting to shop themselves and have orders taken out to the car for no additional charge, rather than pay a fee to Instacart. As inflation continues to rise and the economy tightens, consumers can be expected to cut back further on paying for extra luxuries such as delivery charges.
Those who still choose to pay for delivery may not opt for DoorDash, but choose a new competitor who could take some of Instacart’s market share as well. In March, Uber rolled out updates to its Shop and Pay feature designed to address issues that Instacart struggles with, including out-of-stock items, digital payments and order clarity before accepting a trip. Uber launched Shop and Pay last year and has yet to conduct any major marketing push behind it, but doing so could further erode Instacart’s business.
The Out-Of-Stocks and Substitutions Problem
In addition to increasing competition and the drop in valuation, Instacart is funneling money into programs that do nothing to address customers’ main pain points: out-of-stocks and product substitutions. Instacart has a 24% substitution rate, meaning that nearly one in four customers are being told their desired item is out of stock – which isn’t always the case.
Instacart pickers are subbing when they don’t have to, and customers usually don’t learn of substitutions until the order is delivered. To make matters worse, many of the substitutions aren’t even close to what the customer ordered. While substituting a store brand for a name brand might be acceptable in many cases, substitutions not only upset customers but also reflect more poorly on the store than they do on Instacart.
Instacart’s Connected Store
Instacart’s connected store program is one such example of the company’s new technology that may sound great on paper, but doesn’t solve customers’ major pain points. It actually creates new problems for grocers.
Scan and pay debuted with Long Island City, NY grocer Foodcellar Market earlier this year. A customer scans the QR code posted in the store, then scans items with their phone as they shop, including weighted produce, and finally pay by displaying the QR code at checkout. While speeding the shopping experience along, a faster shopping trip isn’t particularly helpful if the products consumers desire are unavailable.
The Caper Cart, Instacart’s smart cart, comes equipped with scales, sensors and a touchscreen above the handles. It gives shoppers a readout of items placed in the cart, displays a shopping list in the Instacart app, and enables pay from the touchscreen. However, smart carts present significant challenges to grocers. In particular, they invite theft as much as traditional shopping carts and can cost in excess of $5,000 each. Additionally, metal carts will last for years, even when left out for extended periods in the harshest weather conditions. Smart carts, with their sensitive electronic technology, can’t stand up to the weather conditions, and many grocers don’t have the room needed for internal storage.
The Instacart smart cart service is costly for grocers, who are already operating with razor-thin margins. Grocers also pay a monthly fee of $1,000. The advertising revenue comes nowhere near covering the cost. As a result, grocers are losing money on every single order.
Instacart’s Relationship with Grocers
Major grocers, including Kroger, Sobey’s and Shoprite quickly pulled the plug on their Instacart relationship as soon as the full costs and lack of positive return were realized.
At a recent National Grocers Association event, Instacart executives had a presentation designed to discuss the future of grocery. Instead, they spent most of the session fielding complaints from executives of independent grocers who were extremely disappointed with the Instacart relationship.
Following in the footsteps of their larger brethren, many grocers including Albertsons, Loblaw, Grocery Outlet and Raley’s have already shifted to DoorDash after their Instacart contract expired. I see this trend continuing en masse as Instacart continues to sour retailers.
Conclusion
Instacart has indeed been up against some rapid changes over the last couple of years. However, the grocery delivery service should be looking to solve the bigger customer issues such as out-of-stocks and substitutions. They need to address ways to make their service a win-win-win for grocers, consumers and Instacart alike before sinking money into expensive, experimental offerings like smart carts and scan-and-pay.
Francois Chaubard is CEO of Focal Systems
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