The Latest Battleground in Competitive Grocery

June 27, 2018
| Articles


Author: Keith Daniels, Partner
Carl Marks Advisors

The last few years have been difficult for the brick and mortar retail business, including groceries. Deflation and competition by new international competitors and nontraditional grocery retailers have been driving down margins, causing further reduction in capital available for investment to meet changing consumer preferences for such things as prepared foods and technology-based delivery.

It is hard to discuss what is going on with grocery today, as with almost any type of consumer product-oriented business, without Amazon becoming a topic of discussion. While online grocery has been around since the earliest days of ecommerce (e.g., Webvan), promising to save time for the consumer by avoiding walking the aisles and/or driving to the store, it has lagged in consumer adoption compared to other forms of retail. Part of this may be due to the perishable nature of food items and consumers’ desire to handpick them. The convenience of online ordering and delivery evaporates when you have to schedule your activities around the delivery of your perishable grocery items. Grocery retailers are focusing on different strategies to provide solutions to these issues for the consumer.

Amazon has been ramping down AmazonFresh, its pre-Whole Foods acquisition grocery delivery business, in anticipation of merging it with PrimeNow and has begun testing delivery from Whole Foods stores in select cities. Alternatively, Walmart, the largest grocery retailer in the U.S., has been focused primarily on rolling out its online ‘pick up at store.’  It currently has over 1,000 stores offering the service and expects to add 1,000 more stores in 2018. However, in response to the Amazon threat, it is also now expanding its in-house order pickers and is expected to expand delivery service from the current six markets to 100 by year end. Walmart is currently outsourcing delivery, using Uber and Deliv, and is also looking to leverage its business. Some grocery companies have invested in standalone delivery companies, such as Ahold Delhaize operating Peapod. Others are outsourcing the order picking and delivery service entirely.

Instacart appears to be emerging as the preferred choice for many retailers going with the outsourcing route. Retailers such as Kroger, Costco, BJs, Acme, Wegmans Giant, Publix, Jewel-Osco, Aldi, Safeway, Albertson’s and Sprouts have announced partnerships with Instacart in the past few months. Instacart is a “crowdsource” company, similar to the Uber model, where grocery pickers and drivers are independent contractors of the retailer and Instacart. The contractor can be a picker, driver or both, and receive fees based on the number of items picked and delivery. These fees are passed on to the consumer through higher prices than would typically be charged in the store.  The markup can be 15-20+% over instore prices.

With so many competitors flocking to the use of Instacart, it is yet to be seen what the consumer acceptance of that model will be. Will they pay the premium? Will the number of grocery retail options on the website prove confusing? Instacart solves the need for many grocery retailers to offer a home delivery service without a significant investment of limited capital in the near term, and allows them to compete with Amazon and Walmart. It also enables these companies to buy some time to see how the online ordering and delivery business evolves. However, it is expected that the online grocery business will explode in the next five years, expanding from 25% of consumers buying food online to 70% (Nielsen and Food Marketing Institute). Hence the dilemma faced by many grocery retailers — limited capital resources are forcing them to pursue the Instacart model in the immediate term, but they may be giving up the advantage of controlling the picking and delivery service in-house. If consumers do not embrace this model, grocery retailers run the risk of not being able to catch up.

Keith Daniels is a partner at Carl Marks Advisors. He has over 20 years of experience as a financial restructuring advisor and has seen firsthand what is driving change in the supermarket world. Additionally, he has had frequent hands-on involvement in the reorganization of grocery chains and retail businesses and has supported them with financial/operational advisory on restructurings and with the combination of their business.

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