Published on: June 12, 2019
Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.
This week, we talk about the addictive behavior and ultimately self-destructive tendencies in which some retailers engage, as they allow competitors to steal market share, sales and customers.
And now, the Conversation continues…
KC: It was fascinating to read the Barclay’s research paper, “Dissecting The Instacart Addiction,” which illustrated and elaborated on a number of the things that we’ve talked about here on MNB over the years. To reduce the research to its basic elements, the research suggests that both consumers and retailers are becoming increasingly reliant on Instacart - which makes sense as it grows its footprint - but that this may not be a good thing for retailers. While 50 percent of Instacart users utilize it more today than six months ago, 43 percent of customers say they would switch retailers if Instacart stopped being available at the retailer where they’ve been using it. Let me say that again - more than four out of 10 shoppers essentially think of themselves as being Instacart customers, not customers of the retailers that signed on with Instacart. That strikes me as scary - and it cuts across a broad number of retailers, including Costco, Kroger and Sprouts.
Tom Furphy: It’s a very well-done piece by an independent party. I’d encourage everyone to read it.
Yes, the paper did show that Instacart users are using the service more than they used to. However, because the survey was done with current customers, it has a little biased baked in. We’ve heard that Instacart struggles with higher customer churn numbers than they’d like. We don’t know the actual amounts but understand them to be relatively significant. So, if the survey is polling the customers that haven’t left, it stands to reason that these customers are using the service at least as much or more frequently than they used to.
Instacart’s overall numbers are growing. We can view that as a positive since that means that retailers’ ecommerce volumes are growing. However, we should also recognize this means that Instacart’s market share of Grocery is increasing, with loyalty to them building at the expense of loyalty to retailers.
The real message here, as you point out, is that 43% of Instacart customers would leave their retailer if Instacart stopped offering service through them. About 11% said they would look for another e-commerce offering and 48% said they would stick with their retailer and go back into their stores. For every dollar that shifts to Instacart, at least $0.43 moves away in market share. In traditional industry terms, if Instacart is 5% of your volume, you’ve ceded at least 2.2% in market share.
With more than four in 10 of my Instacart customers more loyal to them than to me, and less than half Instacart customers saying they’d come back to me if I didn’t have an e-commerce offering, I sure as heck would be working on owning my customer e-commerce experience. Unless my long-term aspiration is to be a warehouse for Instacart orders. Then I’m good.
KC: To me, this isn’t just about Instacart. The reason that these retailers made deals with Instacart is that it offered an easy, turnkey solution to a very real problem. Give Instacart credit for seeing that and acting on it. But in some ways - and the Barclays research actually refers to this - these retailers are guilty of repeating history. Borders was looking to an easy, turnkey solution to the e-commerce challenge, so it made a deal with Amazon to provide that service … and we all know how that turned out. Toys R Us wasn’t capable of doing e-commerce, or wasn’t willing to make the investment, and so it struck a deal with Amazon … and we all know how that turned out. I’m not suggesting that Instacart is Amazon - far from it - but there’s got to be a lesson in here somewhere for retailers.
TF: I don’t know how much more obvious these lessons could be. Handing over core business to someone whose goal is to compete with you is crazy. I just don’t understand it.
I give Instacart all the credit in the world for jumping on the opportunity. They were convicted in their vision well before the Amazon – Whole Foods deal. They were setting up local ecommerce sites and their team was shopping retail stores. Many of these retailers were not yet partnering with Instacart, but their stores were providing great inventory locations. When the Amazon – Whole Foods transaction happened, the retailers became desperate and the market was there for Instacart to grab. And grab it they did! Suddenly grocery e-commerce became available in most markets. Customers benefitted, Instacart benefitted and the retailers benefitted temporarily. Customers and Instacart continue to benefit. Retailers are hanging onto the volume but have handed the customer over to Instacart. So, ultimately, have the retailers really benefited?
I’m not sure that Instacart is trying to be Amazon, but they are trying to build a sustainable and valuable business. It seems obvious that Instacart is building their own brand and is claiming the customers they serve as theirs. They should! They are earning the right to do it. I think it’s only a matter of time until Instacart offers its own e-commerce fulfillment centers to directly serve their customers. This will further reduce their reliance on the retailers and cement their relationships with customers.
KC: One of the things that the Barclays analysis suggests is that when looking for a partner, retailers have to ask themselves a series of questions, like “Am I partnering, or am I just buying time?” We’ve talked enough about this stuff in the past that I know how important you believe effective partnering is, because the vast majority of retailers simply cannot innovate all on their own. They haven’t got the bandwidth or the horsepower. They’ve got to create networks of alliances that will help them serve their customers and support their own brands.
But that strikes me as requiring a real ability to be fast, nimble, experimental … to not get bogged down in meetings and bureaucracy and the organizational equivocation and rationalization of which most companies are guilty. So even if a retailer has a clear sense of where it needs or wants to go, I’m simply not sure if most of them are able to make the kinds of cultural leaps (not baby steps) necessary to be successful today.
TF: You covered a lot of ground in this question! But this is exactly the crux of the strategic challenge that retailers are facing.
I do believe that retailers who are partnering with Instacart, similar to the retailers above that did so with Amazon, are merely buying time. Keeping the volume is important so they can continue to support their cost structure and enable stores to remain efficient. It also keeps customers from leaving to traditional competition for the near term. But when you are feeding customers to the partner and your chosen partner is adopting customers as their own, the amount of time you are buying is likely not as much as you think.
I think that three to five years ago it would have been a pretty large cultural leap for retailers to do what they need to do to be successful in e-commerce. However, I think the evolution of the market, the retailers’ realization of the shift that is on, and the abundance of very capable partners to help bring it to life is giving retailers more courage to make the leap.
The range of capabilities that retailers must bring together to execute an effective e-commerce and omnichannel operation is too daunting for most retailers to handle themselves. Retailers have to think about the core e-commerce shopping technology, their auto-replenishment solution, how and where they will pick and pack the orders, how they will get products to customers, how ecommerce integrates to wellness and culinary and how they can reach the customer through more robust digital marketing and advertising. This is simply too much for most retailers to completely build and own themselves.
Retailers should develop their own customer value proposition and strategies for serving their shoppers. They need to own that. From there, they can piece together their own ecosystem of partners to develop and execute the necessary capabilities. There is no shortage of quality partners today that can bring this together. A great example is Microsoft. We’ve seen the partnerships they’ve announced with Kroger, Albertson’s and others. This allows retailers to be comfortable launching new capabilities because they are backed with the scale and stability of Microsoft. That can help mitigate risk for the retailer. As a provider, I can say that has been a real positive for our companies.
As is our custom, The Innovation Conversation will go on hiatus for the summer … though we’ll bring it back if events warrant … and will return on a regular basis on Wednesday, September 4.
- KC's View: