How the Amazon-Whole Foods deal could hurt — or help — Instacart

Amazon said it is buying Whole Foods Market in a deal valued at about $13.7 billion, including debt. (June 16, 2017) (Sign up for our free video newsletter here


There is always fallout from company mergers and acquisitions. Employees are made redundant, competitors are gobbled up, entire cottage industries wiped out.

With Amazon’s proposed acquisition of Whole Foods for $13.7 billion, it’s not hard to see how grocery delivery start-up Instacart could be an unwitting casualty of the deal. But if Instacart plays its cards right, technology and business analysts say it could actually come out stronger than before.

The 5-year-old San Francisco company, which is valued at $3.4 billion, built its business by partnering with brick-and-mortar grocers — most of which lack the technological know-how to offer customers same-day delivery — and leveraging a network of shoppers and delivery drivers to get food to people’s homes and offices in less than an hour. Whole Foods was an early partner, and currently accounts for around 10% of Instacart’s business.

Amazon has its own grocery delivery service too. And if its acquisition of Whole Foods goes through, it could bring its logistics expertise and broad reach to Whole Foods’ 460 locations. It could also potentially deem Instacart redundant, choose to not renew Instacart’s contract, replace the service with its own and lock the start-up out of Whole Foods entirely.

But Instacart has options, analysts said, many of which could bolster its business.

Highlight your differences

“If a competitor comes in to take your business away, you can compete with them or you can look at areas where they can’t compete with you,” said Ira Kalb, a professor of USC’s Marshall School of Business.

One such area where Instacart can compete, Kalb said, is in the way it handles deliveries. Instacart’s service offers flexibility where Amazon’s Fresh service doesn’t. A person who wants same-day delivery from Amazon Fresh has to place his or her order by 10 a.m. that day, whereas Instacart allows customers last-minute orders and offers within-the-hour delivery.

Instacart also has more than 160 retail partners, making it a one-stop shop for people who want to shop from multiple grocers.

And while the company has not revealed its customer numbers, it said in a blog post this year when it raised $400 million in venture capital funding that a typical customer uses the service four times a month and spends around $450. Customer trust, repeated use and loyalty are all valuable assets, Kalb said.

If you can’t beat them, join them

Years ago it was unusual for competitors to cooperate, Kalb said. But today, it’s not out of the ordinary for companies to invest in or lean on each other for success, even if they share the same customers.

Whole Foods bought a small stake in Instacart last year, which means if the sale to Amazon is approved, Amazon will own a stake in Instacart.

“If I were them, I’d have an conversation with Amazon and say, look, you already have an investment in us, so let’s work together to improve your investment and make it more valuable,” Kalb said.

Instacart, which is available in a little more than 60 markets, could benefit from Amazon’s household name and reach, while Amazon could lean on Instacart for delivery.

“As I tell my students, don’t be afraid of competitors,” Kalb said. “You’re always going to have competitors. Figure out your added value. But you can also figure out a way to work with competitors so you’re both better off.”

An Instacart shopper looks for groceries at a Whole Foods store in Denver. (Cyrus McCrimmon / Denver Post via Getty Images)
(Cyrus McCrimmon / Denver Post via Getty Images)

Double down

When Amazon announced its acquisition plans, Instacart said in a statement that it was committed to helping grocers compete online and that its job was “more important than ever given Amazon just declared war on every supermarket and corner store in America.”

It was this mission that led Alex Mittal, co-founder of venture capital fund FundersClub, to invest in the company in its early days, and again this year when Instacart raised its Series D funding round.

“Americans have to ask ourselves, do we want a future where we buy our books and knickknacks and healthcare and food and insurance and cars from one supplier?” Mittal said. “The precedent that’s been set by more than 50 years of consumer purchasing preference is that Americans love variety, and we love niche experiences, and we very much love our neighborhood and local stores as well.”

In my view, Instacart’s value has suddenly gone up 10 [times].

— Alex Mittal, co-founder of FundersClub and investor in Instacart

Instacart, then, can position itself as the savior of brick-and-mortar retailers who are seeing Amazon in their rearview mirrors, but haven’t yet figured out the tech for themselves.

“In my view, Instacart’s value has suddenly gone up 10 [times],” said Mittal, who described Amazon’s Whole Foods acquisition as a catalyzing event that is likely to light a fire under traditional retailers and send them Instacart’s way. “Both consumers’ preference for choice, and the retail experience as we know it, these underlying forces will bode well for Instacart.”

And even if Instacart is eventually locked out of Whole Foods, the grocery market hasn’t changed, said Brendan Witcher, an analyst from research firm Forrester.

“The grocery market is much more than just Whole Foods,” Witcher said. “Instacart might become more attractive for other grocers knowing they have to move quicker.”

Don’t talk smack

The one thing that Instacart shouldn’t do, said Kalb, who has 45 years of business experience under his belt, is put down a competitor, which it may have done when it said that Amazon had “declared war” on grocers.

“When you put down your competitor, you’re putting down their customers,” Kalb said. “It’s like when Hillary Clinton was running and she called Trump’s supporters deplorable. Or when Samsung put down Apple customers for standing in line for a phone that has fewer advanced features than Samsung’s.”

Putting someone else down doesn’t give customers a reason to do business with you, Kalb said. In fact, it’s viewed as such a mistake that IBM used to fire salespeople on the spot if they said something negative about the competition.

And so the worst-case scenario isn’t that Amazon will lock Instacart out, Kalb said. It’s if they “anger the bear, which is Amazon, and Amazon comes up with a competing service that kills them quickly, because Amazon can do that.”



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