Online grocery shopping has steadily picked up steam over the past year, but the introduction of a new technology to lower prices for consumers may be what the industry needs to finally push it past the tipping point.
Food and beverage hasn’t traditionally been a hot category for e-commerce. According to industry estimates, just 2.8% of all retail e-commerce sales in 2018 happened in the food and beverage category.
For a time, analysts believed that slow shipping would be a barrier too high for online-only grocers to overcome, but same-day delivery services and specialty packaging that keeps cold foods fresh in transit have largely eliminated that challenge.
Now, the distinction between real-world supermarkets and online-only grocers has come down to price. Meal kit services like Blue Apron, Plated, and Hello Fresh are known for offering lengthy free trial periods. But giving away food for free isn’t a sustainable business model, and coming up with a strategy to compete with brick-and-mortar supermarkets hasn’t been easy.
A startup called Farmstead believes it has cracked the code. The grocery delivery service is using artificial intelligence to predict what products people will buy. The company then stocks those products in its micro-warehouses and ultimately sells items—usually pantry staples—for less than local supermarkets in the areas it serves.
“Using AI, we predict what our customers will need better than any other supermarket ever can. This gets us deep discounts from our vendors, who themselves have to predict in order to cut down on waste,” says Pradeep Elankumaran, founder and CEO of Farmstead.
Elankumaran says Farmstead passes those savings on to customers, while also leveraging advanced technology to deliver food to customers’ doorsteps within minutes.
According to a study by KPMG, 48% of shoppers currently purchase “at least some” of their groceries online, and 59% plan to do so sometime in 2019. Twenty-five percent of shoppers say they plan to do 40% or more of their grocery shopping online this year, up from just 17% in 2018.
With that sort of expected growth, it’s not a surprise that online grocery has become a competitive space. Elankumaran believes that Farmstead’s focus on innovative technology is helping the company stand out. He views other grocers as partners, rather than competitors, because some have expressed interest in licensing Farmstead’s AI technology to improve their own logistics.
“We’re a technology business that builds all of our infrastructure from scratch,” he says. “Our competitors either layer on top of existing grocers and inherit the existing problems of supermarkets, or are unable to offer even the same prices as supermarkets.”
What differentiates Farmstead from grocery delivery services like Instacart and Shipt? As Elankumaran sees it, Instacart is a technology and delivery layer on top of supermarkets. Farmstead’s model is full vertical integration using its own technology.
Customer loyalty is also a bigger part of Farmstead’s business model. In order for Farmstead to scale, the company has to elevate the digital-first grocery industry and increase the number of consumers who say they are ready to start buying fresh food online. Although Farmstead is based primarily in the Bay Area for now, the company plans to expand to several more metro areas this year.
The company also recently introduced a program called Refill & Save, which gives steep discounts—bringing the prices of certain items down to below-average cost for the Bay Area—to customers with recurring orders. It’s one of a number of strategies aimed at improving customer retention and loyalty moving forward.
“Return customers are a vital part of our business model,” Elankumaran says. “Farmstead’s weekly program is a huge hit. Over 70% of our customers each week are part of it.”
Stephanie Miles is a senior editor at Street Fight.