3 Unexpected Ways Instacart May Be Costing Grocers Profits

In the past six months, online grocery shopping has become a must-have for grocers of any size. Online sales were already building momentum before COVID-19, but since the start of the pandemic, it has exploded into the forefront. Now, no grocer can afford to not offer online shopping, and yet very few are in a position to do so profitably on their own. Enter Instacart, a convenient third-party delivery solution that allows grocers to partner with gig workers to affordably incorporate ecommerce into their brick and mortar operations. However, partnering with Instacart isn’t without some risk. The platform can cost grocers profits in a number of ways, including fraud, loyalty erosion, and limited insight into the customer experience but by integrating Instacart transaction data with brick and mortar POS data, grocers can identify these instances of profit loss.

Instacart and services like it are changing the way customers engage with grocery stores by creating a complementary online service that would often be prohibitively expensive for traditional grocery retailers to create on their own. Instacart allows users to order groceries online while Instacart’s personal shoppers shop in-person and deliver the groceries directly to the door of the customer, often within a matter of hours. Like any other disruptive technology, Instacart isn’t without risks and grocers are learning to identify sources of profit loss associated with the service.

The Rise of Instacart and Online Grocery

Instacart was founded in 2012 by Apoorva Mehta, a former Amazon supply chain engineer who developed fulfillment systems to move packages from Amazon’s warehouses to customers’ homes. In 2018, Instacart underwent a major growth spurt shortly after Amazon acquired Whole Foods. The acquisition caused many grocery executives to assume Amazon was intruding into the grocery industry and turn to Instacart to compete for a share of the online and delivery market.

In 2020 during the COVID-19 pandemic, Instacart saw an unprecedented surge in popularity as consumers searched for ways to safely shop for groceries while in lockdown. At it’s peak, the rush helped drive Instacart’s share of online grocery as high as 57%.

Currently, Instacart partners with over 350 national, regional, and local to provide grocery delivery from 25,000-plus stores across more than 5,500 cities in the U.S. and Canada. The company said its delivery service is now available to more than 85% of households in the U.S. and over 70% of households in Canada.

Though online grocery shopping has been on the rise for a while, before the COVID-19 crisis, the grocery sector has remained relatively sheltered from the forces of eCommerce for a couple of reasons. First, American consumers prefer to choose their own food, especially meat, produce, and other perishable goods. Second, few grocers have had the financial capacity to invest in a highly efficient, large-scale operation required to make home deliveries at a profit.

Grocers large and small should step back now and reevaluate their near- and long-term strategies for online and delivery offerings.

Loyalty Erosion

Despite its rising popularity, many grocery analysts have pointed out that Instacart’s objectives are fundamentally opposed to those of the grocery retailers it purports to service. Having multiple retailers on the delivery platform encourages shoppers to cherry pick, thus, eroding whatever loyalty they may have for a particular retailer. Grocers could eventually become nothing more than convenient generic front-line warehouses for Instacart, their brand equity and loyalty completely obliterated by the convenience Instacart offers.

Currently, users cannot apply manufacturer (unless offered within the Instacart interface) or store coupons to their Instacart order, as well as any loyalty or rewards program discounts from the retailer. Ultimately, the customer loses all incentive to be loyal to your store, and instead, are given the option to shop with the same convenience with several of your competitors, as long as it’s through the Instacart app, it’s a win for Instacart.

Research from Barclays Investment Bank has found that 43% of Instacart users stated that if their preferred grocer became unavailable on the platform, they’d switch to another grocer available on Instacart instead. And the reasoning makes sense. While Instacart has repeatedly asserted that they are a technology platform, not a retailer, nor a grocer, the argument can be made that they compete for the same space in the mind of the consumer as any other grocer. After all, what need is Instacart fulfilling in the mind of its users?

Limited Insight into the Customer’s Experience

Delivery customers have high expectations for reliability and speed, and while third-party delivery services like Instacart let grocers off the hook for clearing that high bar, it also means that they lose control of the customer’s experience.

When your customers order through Instacart, Instacart views your customer as theirs. And in many ways, they’re right. The customer contact information, preferences, and other data collected by Instacart is theirs. Also, the branding and entire shopping experience takes place within an Instacart interface, not within your store.

When asked if Instacart is a strategic fit for retailers, Karen Short from Barclays Investment Bank said, “The bigger and bigger Instacart gets, the less control you as a retailer have. And so you lose control with the customer, you lose the customer data, or at a best case scenario, you’re just sharing the data.”

Instacart Fraud

In addition to loyalty and customer experience concerns, grocers who have partnered with Instacart have also uncovered a number of instances of fraud within the platform. These types of theft and fraud can negatively impact customer experiences as well as directly impacting the retailers bottom line if left unchecked.

Third-party Gift Card Purchases

This type of fraud occurs when an Instacart personal shopper fulfills and packs an order for a customer but adds a third-party gift card to the purchase without the customer’s knowledge or consent. The gift card amount is often set to keep the order total within the “margin of error” amount (supplied within the Instacart interface to account for out-of-stocks and price fluctuations) given to the customer before the shopper arrives at the store to suspend suspicion. The shopper then keeps the gift card for themselves.

Instacart does not necessarily maintain the same policies regarding online purchases as the grocers they’re partnered with. For example, many grocers prohibit the online purchase on third-party gift cards, but Instacart doesn’t always honor that and allows their shoppers to add gift cards to a purchase, making this type of fraud possible. One Agilence customer found a single Instacart shopper had stolen $2,500 using gift card purchases.

Loyalty Card Usage

This type of fraud occurs when an Instacart shopper takes advantage of grocer loyalty and rewards programs for their personal gain. The shopper can simply apply their personal rewards or loyalty card while shopping for customers and redeem the benefits for a personal purchase.

The “Instacart Effect”

Despite the risks, a pre-pandemic study sponsored by Instacart found that rather than being a disruptive economic force for supermarkets, Instacart boosted retail grocery jobs, revenue, and demand in 2019. NERA Economic Consulting studied Instacart’s impact in California, Illinois, New York, and Washington and found that Instacart adoption lifted incremental grocery revenue by more than $620 million in those states and created over 23,000 grocery jobs, and an average increase of 4% in local job growth. The jobs created are direct employees of grocery stores and include positions such as cashiers, stocking associates and deli counter clerks, among others, according to the report, which added that these are net retail grocery jobs that wouldn’t have existed without Instacart’s market entry and expansion.

While it’s unclear exactly what the grocery landscape will look like after the pandemic, there’s good reason to believe that online grocery demand will continue to grow. That’s because once consumers get a taste of how convenient online grocery can be, many will want to continue to use these services.

Data Integration is the Key

The key to understanding the impact that Instacart and other third-party delivery platforms have on your business is to integrate the data with your other transaction data and analyze it for patterns. By integrating Instacart data with other transaction data, you’ll gain a full view of the impact on operations and be able to identify areas of concern and maintain customer loyalty throughout the current crisis and beyond.

The Agilence & Date Check Pro teams have teamed up to author our new eBook, “Reinventing Grocery: The Timeline to the New Normal” which examines the current situation and future expectations across the grocery industry post-COVID 19.  Download this resource now to learn more about keeping inventory on shelves, the new shopper profile, emerging competitors from other industries and more.

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