After Amazon-Whole Foods merger, grocery delivery companies adapt to industry’s new reality

Companies like Favor and Instacart say they are forging ahead and even planning new growth.

Posted December 6th, 2017

On June 16, the day Amazon announced it would acquire Austin-based Whole Foods Market, Instacart CEO Apoorva Mehta called a company-wide meeting from Instacart’s headquarters in San Francisco. 

Mehta wanted employees to know it was not time to panic, as some grocery stakeholders were doing throughout the country that day, said Instacart senior regional director Sean Twersky.

Instead, “He said, ‘This day is now proving something we have believed in at all times: That you have to have some form of grocery e-commerce because consumers demand it,’” Twersky said. “Those conversations we were having before, there was more urgency to have them now.”

The assumption from many industry analysts and consumers was that Instacart and other on-demand grocery delivery services would suffer as a result of the Amazon-Whole Foods merger. By adding the Whole Foods brand and its roughly 470 stores, the logic went, Amazon could take over the grocery delivery industry,  devastating companies such as Instacart and wiping out smaller operations.

But in the six months since the deal was made, companies that deliver groceries have maneuvered to not only survive Amazon and Whole Foods’ threat, but to also forge a future in the food delivery industry. 

“Amazon has forced all of these competitors to respond," said Michael Pachter, an industry analyst with Los Angeles-based investment firm Wedbush Securities. “They are having to offer very similar offerings of what (Amazon) does and will do with Whole Foods, (Amazon)Fresh and (Amazon) Prime Now.”

Instacart, for one, has pushed ahead with growth.

Since the merger, Instacart has started new service or expanded existing service with at least 17 grocers, including beginning service with national grocery chains Kroger and Albertsons.

Instacart said it has grown its same-day delivery service from 30 U.S. markets at the start of the year to 163 markets. The company has also expanded delivery areas throughout the country, and in Austin, it said it now serves 99 percent of households within city limits.

Joseph Pisani/Associated Press Amazon's Echo and Echo Dot devices are offered for sale at a Whole Foods Market store in New York on In this Aug. 28, 2017.

Whole Foods used to represent one of Instacart’s closest partners. But with Amazon expected to increasingly integrate its business with Whole Foods -- having already placed some Whole Foods items on its website -- Instacart has begun to hedge its bets elsewhere, saying Whole Foods now makes up less than 10 percent of its revenue, with that figure declining. 

“When you pull back, Whole Foods has a (small) percentage of the grocery industry,” Twersky said. “We expect that (Whole Foods) will continue to be a partner. But our focus is on all of our retailers.”

Neither Amazon or Whole Foods responded to repeated requests for comment.

Instacart, though, is not alone in its battle. Other companies that deliver groceries, including local Austin brands, also have plans for the future of the industry. 

One of the biggest is San Francisco-based delivery firm Postmates, which launched six years ago and in November began Fresh, a service where customers can order curated grocery supplies from local stores.

Postmates, which said it completes more than 2.5 million deliveries each month in more than 250 U.S. locations (including Austin), has long offered an option for its delivery workers to pick up grocery items aside from its main operation of delivering prepared foods from restaurants. 

Fresh, however, represents a more deliberate attempt to take on competitors by forming partnerships not with national grocery chains like Whole Foods, but rather locally-based markets. Postmates also promises a 30-minute average delivery time, according to Vivek Patel, the company’s head of business operations.

The Fresh service, now operating in Manhattan, San Francisco and Los Angeles, was also an anchor for a redesigned Postmates phone application.

"For grocers to be successful, they have to understand their market," said Phil Lempert, an industry analyst with Santa Monica-based Supermarket Guru. "It's the same thing with the delivery phenomenon -- to have a relationship with the people that provide them food. I think as you see more players, it will be more specialized and companies will find their niche." 

Courtesy of PostmatesThe redesigned Postmates phone application includes the company's new Fresh service, a feature where customers can order curated grocery supplies from local grocery stores.

In Austin, Keith Duncan, senior vice president of sales and business development at Austin-based delivery service Favor, said that’s what his company is also attempting to accomplish.

Launched in 2013, Favor now operates in 15 Texas locations. This year, it added 25,000 contract workers to an existing roster of roughly 15,000 workers, and it received $22 million in funding in July.

Months ago, Favor cut its non-Texas markets in order to reach profitability and focus more on its local ties, Duncan said. 

Like Postmates, most of Favor’s deliveries involve prepared food from restaurants, but the company also expects grocery delivery will begin to have a large role, Duncan said. As a result, the company is beginning to explore how it could further that service locally, as well as how it could form partnerships with non-grocery retail stores. 

“You can't deny the size and scale and potential of Amazon, but it doesn't keep us up at night,” Duncan said. “We’re focused on trying to own Texas as much as we can. We’ve always had competition, but this space has only been around for a few years.”

Because grocery delivery is a relatively new concept, companies are still exploring its potential -- even Amazon.

In November, Amazon scaled back its AmazonFresh grocery delivery system in at least seven states. The service has reportedly not grown very fast after a decade in operation, while the company’s Prime Now expedited delivery system, which also includes groceries, has surged. 

It’s unclear what Amazon is planning long-term for Whole Foods, but the company said customers can expect further integration between the two entities and has discussed testing new store concepts. 

“Amazon doesn't need more than 5 percent of the grocery industry to get billions in sales, so they don't need anybody to go out of business,” Pachter said. “They just need their existing customers to (buy Whole Foods products online). Once they have all of the logistics built up, they already have those customers. They are going after one of the biggest markets possible."

For now, those scenarios remain more expectation than reality. 

So far, the company’s biggest moves have included promoting lower prices at Whole Foods while beginning to sell Amazon devices in Whole Foods stores. Customers are anxiously waiting to see what’s next.

Competitors, meanwhile, say they’re carrying on.

"We're just trying to do the same thing we have always done," Instacart’s Twersky said. "You will continue to see us add new partners and new geographies. Providing more and more service and more and more options is our focus.

“It's something that we believed in. Now other people are believing in it, too.”