A rash of new billion dollar valuations has rekindled fears that the kind of unfounded tech optimism characteristic of the dot-com bubble has resurfaced. And no story has emboldened critics like the ascent of Instacart, a local logistics firm whose recent $2 billion dollar valuation evokes the cautionary tales of Webvan, Kozmo and other delivery companies that came to represent the cognitive dissonance of dot-com-era excess.
But the more things change, do they really stay the same? Nilam Ganenthiran, head of partnerships and strategy at Instacart, says no.
The company undoubtedly has technological advantages over its predecessors. Mobility has helped the San Francisco-based startup to cut the cost of delivery by offering unprecedented control over the thousands of contracted agents who shop and deliver goods to consumers. And Instacart has avoided the liability of a supply chain by partnering with thousands of retailers, including chains like Whole Foods and a rash of independent shops.
Below, we talk with Ganenthiran about why it’s different this time around, the democratizing effect of delivery, and how a delivery network could reshape the competitive landscape of local grocery markets.
Let’s start with the biggest question. Why will it be different this time around for delivery startups?
It’s important to realize that deliveries are not a new thing in the grocery business — and I’m not talking about Webvan and Kosmo. About 80 years ago, the grocery market shifted toward a mass market model. Everything became price-focused, and the first thing everyone had to cut was in-house delivery services. Down went the milkman with the rise of the large grocery store.
But the reasons for those cuts was not consumer-driven; they were mostly economic. Flash forward to our recent predecessors 15 years ago, and those companies had the right idea from a consumer perspective but they did not have the technology or economic models to make it work. The biggest challenge was always been capital. This is a fixed-asset-intensive business layered onto a very low-margin business in grocery.
I always hear how technology has made these processes more efficient. But how much more efficient? And what is actually turning the model from unsustainable to profitable?
There’s no silver bullet. There’s not one thing that drives 50% of the efficiencies. The first is that we’ve transitioned many of our larger retailers from a model where the same personal shopper does the packing, checking out and delivery to a split model. We now have dedicated personal shoppers embedded in our larger stores and a separate delivery force. That specialization of labor has increased the speed and quality of our service.
Now that we’re in the store we can break down and track numerically every step in the process of our shoppers, and we kind find out how to accelerate that process. Waiting for the deli counter, we’ve installed printers. At the check-out lane we have dedicated lanes. In the parking lot, we have reserved spots at partners’. Taken together, each of those steps can make the process an order of magnitude more efficient. Without these, the delivery model would be impossible.
Miller Coors recently partnered with the Boston-based delivery startup Drizly to allow consumers to order Miller Lite through an ecommerce site. Can you talk a little bit about the role of these services as a new local marketing channel for manufacturers and how that will figure into Instacart’s roadmap?
We’re not public about the lot of the ways we’re working with CPG partners, but I can say we’re definitely running experiments constantly. In general, marketers see delivery networks as an alternative to any mass market media, and I include paid in search in that bucket. We’re operating at the bottom of the funnel.
There’s no advertising on Instacart.com and there will not be in the near future. What we’re focused on is how we can bring more content — stuff like recipes and lists — to consumers by working with these manufactures. Can we improve the consumer experience by taking away the delivery fee? We’re interested in marketing that improves the consumer experience instead of distracting from it.
One of the concerns many retailers have about mobility is that it could loosen the retailer’s grip on in-store messaging. Do you see these direct marketing campaigns as a way for CPG brands to work around retailers?
The beauty of our model is that we’re not tapping from the same pool of funds [as retailers.] We’re not going after trade funds. We’re working on consumer awareness building. For the small retailers, they can now build great programs for large packaged goods brands, with whom they previously could not work. For the large guys, who have already had access, this is just another opportunity for CPG marketers to work retailers. We’re not disintermediating the CPG from the retailer. If we started to do that, the partnership model would break.
It’s interesting that you mentioned the ability for smaller shops to now compete with large firms over shopper marketing spending. Do you see the emergence of a local logistics service such Instacart as increasing or decreasing the economies of scale in the grocery business? Does Instacart make it better to be big or easier to be small?
That’s a bit theoretically, but I would say that I think there’s a democratization in the ability to access to consumers. Instacart is allowing consumers that may not have been able to access a store, maybe because of driving distance or parking availability, to now start interacting with that brand. These consumers no longer have to deal with the barriers that may have led them to go to the retailer closest to their home.
What does that larger catchment area mean for the ways grocers market?
What I see happening is that retailers will now have the opportunity to focus on their core strengths. Without having to deal with the complexities around real estate and developing technology they might not understand, they can focus on what they’re good at which is merchandising and brand building.
Let’s imagine a time in which deliveries accounted for a majority of grocery spending. At what point would these grocers be reduced to distribution centers for Instacart?
Instacart is a retail marketplace. The best analogy is that we’re a mall. The consumer is interactively directly with the retailer’s brand. On the site,you’re shopping within that retailers environment. You’re actively choosing a brand, and you’re seeing just that store’s pricing and assortment.
That’s very different from previous companies where you search for products and Instacart decides where you’re getting your Diet Coke from. If we did that model, we would undoubtedly risk turning the retailers into distribution centers.
Steven Jacobs is Street Fight’s deputy editor.