Monday, January 8, 2018

InstaCart and The New Wave of Grocery Startup case study

InstaCart is an on-demand grocery delivery platform, facilitating door step delivery of grocery and other home essential items. The platform was launched in 12 U.S cities in 2012 by former Amazon employee Apoorva Mehta and by 2015 was expanded to 15 US cities. The technology driven business model claims exceptional delivery times and low delivery costs. The company boosts delivering groceries to customers in as little as 1 hour of order submission making it one of the most interesting business model of 2015.
Timeline & Quick Facts:
Founded by Apoorva Mehta (Founder) and Max Mullen (Co-Founder)
Funding received: $275 million
Company Valuation: $2 Billion. 2

InstaCart’s Business Strategy:

Strategy

InstaCart seems to solve the last mile delivery problem through the use of efficient business model:

Supply
·        Strategic Partnerships with existing supermarkets like Costco, Wholefoods, Harvest Coop markets or Safeway providing customers with more than 300,000 items to choose and place orders.

·         InstaCart came up with an idea of “Uber-ization” of business in which a network of temporarily idle transportation resources could be tapped from smartphones.

·   InstaCart brought together freelance “Personal Shoppers”. These Shoppers were independent contractors taking responsibility for their own vehicles, costs of gas and insurance and remittances including Income tax and social security payments helping in reducing the cost to serve customers for the company.

Technology:
The technology and processes were designed to maximize the customer experience.
·         Ability to order groceries online through an App or through desktop/laptop using a web interface.
·         Option to add a note about replacements in case any of the selected items is out of stock.
·         Option to shop from any of the available storage is the area or customer can even combine the order from different stores
·         “Aisle Mapping” facility to guide shoppers to the specific locations on their grocery lists helping in reducing the delivery time to 1 hour.
·         Facility to guide through the most efficient route to help purchasers prioritize the picking of hot or frozen items.
·         The confirmation page to provide live updates on order, including the name of a personal shopper, when he/she started and when they’d finished.

Demand:
·         Optimization, predictive analytics and dynamic behavioral incentive setting to match demand and supply in near real time.
·         Predictive analytics helps in forecasting the number of personal shoppers required to be on call at any moment.
·         Forecasting considered demand factors like rate of ordering given time of day and day of the week, weather and traffic patterns.
·         Analysis helped InstaCart raise prices to shift demand to times when more personal shoppers are available.
·         Express lanes in store to cater to the requirement of reduced delivery time of 1/ 2 hours

Benefits to Customers

The company is able to deliver value to its three primary constituents – customers, stores, and personal shoppers – because of its strongly aligned business and operating model.
InstaCart has thee customer segments2:

Users:
·                       An App to choose one or more stores for grocery shopping.
·                       Desktop/Laptop can also be used for grocery shopping
·                       Option to shop from one or from combination of stores
·                      Option to deliver within 1 hour or 2 hour
·                      User can also schedule orders based on specified date and time.

Shoppers:
·                     Shoppers receive orders on their smartphones
·                     Shoppers are stationed near the stores to save time
·                     Shoppers manually picks order items and delivers to client
·                      Flexible work schedule
·                    In addition to per hour pay, they also receive tips.

Stores:
·                     Tie-ups with major superstores.
·                     Online sales increased due to tie-up with InstaCart.

Differentiating Factors from Traditional & Others in Quick Delivery Space


Benefits of InstaCart
Ý       No Distribution Centre or maintenance of physical facility
Ý       Use of freelance personal shoppers reducing transportation costs
Ý       Tie ups with existing supermarkets/grocery retailers resulting in no holding of Inventory and to provide a wide range of products.
Ý       High technology infrastructure for efficient management of resources to reduce delivery Time
Ý       Confirmation page on providing live updates on orders helping customers manage the delivery schedule.

The company has effectively managed to be part of connected retail operating model. Through the connected retail model company needs to deliver consistent branded experience making the customer feel4
·         Connected to a business
·         Choice to connect into retail channel anytime they wish to engage through
·         Access rich information about products, purchases, shipments and post-sales support
·         Able to access and use technology
·         Connected to retailer’s employees and a broader community

Revenue model

Delivery Fee
Every order processed by InstaCart which is above the value of $35 attracts a standard delivery fee of $3.99 for a scheduled or 2 hour delivery and $5.99 for a 1 hour delivery.
Orders under $35 value are charged at $7.99 for a scheduled or 2 hour delivery and $9.99 for a 1 hour delivery.

Membership Fee (InstaCart Express)
InstaCart offers an annual membership by the name “InstaCart Express” priced at $99. Users having this membership can get free delivery of groceries for full 1 year with few terms and conditions.

Mark up prices (15%+ more)
Some stores selling their products on InstaCart offer the same prices as their in-store prices but few stores listed on InstaCart have a mark-up of 15%+more from their in-store prices.

Operations Strategy

Sizing:
Since the business model does not involve management of distribution centers, physical facilities or holding of inventory, it is imperative to retain customers by provide customers with maximum choices.
Extension of strategic partnerships with supermarkets to provide larger choices and flexibility.
Continuous investments in IT infrastructure to help customers navigate through resources  and also increase efficiency by reducing shopper’s time and thereby reducing the delivery time.

Time:
Company is in growing phase and have also gathered immense publicity in institutional investors circle. Said that it seems to be the right time to expand to the maximum cities though a cautious and planned approach need to be followed.
Since Grocery retail is low margin business, they should also try to explore new high margin avenues in the Non-perishable items space.

Type:
Company came up with the most destructive Crowdsource market place model in grocery retail space connecting users with personal shopper’s right from ordering to the delivery of items. They should focus on INCREASING THE CUSTOMER CONVENIENCE AND REDUCING THE DELIVERY COST.
Amazon fresh is currently testing the drone delivery model which if successful might help reduce its delivery cost to a huge extent. Similarly InstaCart should parallel focus on reducing the cost and spend on IT to increase the customer convenience.

Location:
Though InstaCart has strategically expanded to the major cities in US, it should also parallely focus on expanding to high mid income group neighboring countries like Canada. The resources for IT expenses can be shared between the countries and would provide InstaCart immense expansion opportunity.
Retention of Personal shoppers
Personal shoppers are hired on a part time basis and hence, they do not stick around for long. In order to retain the shoppers, InstaCart has provided an option to include a tip in their orders so that shoppers are able to make extra money.

Reduced Delivery Time
Personal Shoppers found even the 2 hour window insufficient to deliver the orders. As a move to cut down the delivery time, InstaCart placed shoppers in close vicinity of supermarkets so that they are able to respond quickly and deliver orders at the earliest possible time.

Peak Time Management
InstaCart shoppers work on a part-time basis and hence, managing the workforce is tedious for InstaCart. To solve the issue of insufficient shoppers, InstaCart by the help of predictive & forecasting analysis started the “busy pricing” system, where customers would have to pay a surcharge if orders are placed when the shoppers are busy. From the surcharge paid by customers, a partial payout is made to shoppers to keep them motivated and deliver faster.
Customer Trust
When customers realized that InstaCart is using different markup prices, customers lost their trust. InstaCart immediately changed the prices back to in-store prices. Although a few customers stopped using InstaCart, others found that getting the groceries delivered to their house was convenient and worth the higher prices charged.
Wrong delivery by shoppers
There are chances when shopper delivers the wrong item. InstaCart has a team to resolve such issues. Once you get in touch with them and inform them about the wrong delivery, a refund is issued.
Out of stock Management
In case the ordered items is not in stock, the shopper delivers a product that is similar. However, there is a possibility that the customer might not want an equivalent product. To avoid such problems, customers are given an option to tag products that are frequently out of stock so that other customers can order accordingly.

4.      InstaCart vs Peapod:

Peapod, the first online grocer was started by brothers Andrew and Thomas Parkinson in 1990. Peapod was failing until 2001 when Dutch grocery giant Royal Ahold purchased controlling interest in the company for $73 million.
Peapod operates in five markets, mainly by closely affiliating itself with Ahold-owned grocery chains. Peapod by Giant is in the Washington, DC, area, while Peapod by Stop and Shop runs in Boston, New York, and Connecticut. The exception is Chicago, where Peapod operates without an affiliation with a local grocery chain.
Peapod assembled orders in warehouses and does not pick orders from supermarket shelves like InstaCart resulting in warehouse maintenance and transportation costs.
Peapod charges $6.95 for orders over $100, and $9.95 for orders under $100 (order minimum is $60). InstaCart charges a $3.99 fee for orders over $35, and $7.99 for orders under $35 (order minimum is $10 and check out the link below for $10 off). Also, for $99 a year you could get InstaCart Express
Apart from cost benefits, below customer convenience strategy makes InstaCart a better choice over Peapod.
·         Delivery available in under an hour
·         Delivery minimum is only $10 
·         Ability to order from multiple stores, even on the same order (for me this is Shaw's, Market Basket, Whole Foods, and Costco - no membership required) 
·         Booze available for purchase
·         Ability to add specific items if not listed online (called a special request)
·         Excellent customer service
·         Customer can pick the substitution if an item is out of stock, and most of the time the shoppers will confirm the substitution before purchasing
·         The same personal shopper who is buying groceries is delivering them
·         Eco-friendly grocery bags
·         Ability to rate the shoppers
We can see that nearly all customers seek value, so charging for delivery is a big challenge for these online grocery stores. We can say that future belongs to the one who is able to reduce the additional cost and increase the customer convenience using below future methods:

After pioneering the connected retail experience, retailers are now trying the innovative instore experience.  
Virtual In-store shopping experience4:
Tesco, the British multinational grocery and general merchandise retailer, has started testing new digital technologies. The different solution tested are:
·         There is a virtual mirror that overlays a digital image on top of a normal mirror allowing the customer to see how clothing fits.
·         Prototype of an endless aisle, a new type of digital signage where all of a store’s products can be viewed and purchased on a single screen, without having to walk around the store.
·         Third project is the introduction of virtual merchandising that enables retailers to test different ranges of product organization in different stores in order to ensure an easy shopping experience for customers in the real world.

Automated Purchasing4:
Technology to display the pricing from multiple pre-approved vendors for the convenience of purchasers. The technology helps customers to pick the price and vendor of their product.

“In-Route” fulfillment4:
“In Route” Fulfillment enables customer to fulfill orders from sales channels other than the primary supplier using the inventory that customer have stored in the primary provider fulfillment center.
When Customer submits the fulfillment requests, they include the buyer's address, shipping instructions (including the ship method/ship speed for primary supplier to use), and even an optional customized note to the buyer on the packing slip.
Automated Delivery4:
Amazon has recently received a go-ahead from Federal Aviation Authority to begin testing the delivery through drones. Research suggests that delivery through drones could be charged around $1 /item which is way less than the current cost. Also delivery through drones would help in reducing the delivery time to 30 min.1


Sources:

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