One of the most read and quoted books on military strategy and tactics is called The Art of War written by Sun Tzu, a Chinese general, philosopher, and military strategist. One of Sun Tzu’s most famous observations is that “All warfare is based on deception.” I like the quote and I agree with the majority of the strategies proposed by Tzu.
The quote could also have been written to state the following, “All business is based on deception.” In fact, deception is a common practice in business. For example, Apple founder Steve Jobs hid the bugs that could have destroyed the reputation of the iPhone. To prepare for a demo of the iPhone in 2007, Jobs painstakingly identified how to demo the phone in a certain way that camouflage all of the bugs. It worked. The demo was a massive success.
I believe we are witnessing another executive and company practice the art of deception in plain sight, Apoorva Mehta and the company he founded, Instacart. Here’s why.
Instacart’s 20-Year Game
A challenge faced by some executives, especially executives that run startups, is appearing more capable and intelligent than they really are. This isn’t a slam or criticism, it is a fact. I’ve interviewed dozens of executives that lead or work for startups and I’ve been able to get them to open up to me about their fears. The biggest fear I identified is the number of executives who had to accept that luck played a large role in their success and that sooner rather than later, the success or failure of the company would depend on their leadership abilities and business acumen. The executives were afraid because they weren’t leaders or skilled in business. Over 50% of the executives I interviewed went on to fail.
Apoorva Mehta legitimately deserves credit for recognizing the need for a company to fulfill online grocery orders and deliver them. Mehta worked very hard to get Instacart off the ground. However, many retail analysts recognize that Instacart not only benefitted from luck, but their growth can directly be traced to actions taken by others and events that haven’t occurred for over 100 years.
If Amazon hadn’t acquired Whole Foods, and if COVID hadn’t appeared, I wouldn’t be writing this article. The acquisition of Whole Foods by Amazon scared the majority of grocery executives into thinking Amazon would soon take their customers. Instacart benefitted from the panicked executives who contracted Instacart to provide online grocery fulfillment and delivery.
Prior to COVID, only 3% of grocery sales were online. When COVID arrived, the need for online grocery fulfillment and delivery exploded. To the credit of Instacart’s executive team, they took full advantage of the opportunity to grow their business.
(Note: I continue to read articles or hear talking heads on news programs claim that COVID is a ‘Black Swan‘ event. This is false. The shift to agrarian life 10,000 years ago created communities that made epidemics and pandemics possible. The Black Swan event wasn’t COVID. The Black Swan event was that many countries voluntarily shut down their economies creating a global economic disaster).
Will Instacart continue to grow in a post-COVID world or will the luck run out? I believe Instacart will grow because Mehta and his executive team are already planning well into the future.
According to Mehta in a recent Forbes interview, he’s “playing a 20-year game.” Mehta also states that Instacart isn’t trying to take away customers from the grocery retailers they serve, and that Instacart has no plans to “ever sell groceries directly.” Is that true? Let’s turn to Sun Tzu for guidance on how to answer the question:
If Mehta is playing a 20-year game, what then does the future hold for Instacart and it’s customers? Are we honestly to believe that the Instacart of today will look very similar to the Instacart in 2040 except for better analytics? Even though online grocery fulfillment will increase to become 50% or more of a retailers business, we are to believe that grocery retailers will be happy to turn over their customers and business to Instacart? Gosh, is Instacart going to run the grocery stores too in a mutually beneficial relationship with their retail partners where love and respect drives all?
Based on discussions I’ve had with numerous industry experts, retail analysts and individuals who work for Instacart, this is what customers of Instacart can expect in the coming years in my humble opinion.
Instacart will go public in 2021, 2022 at the latest.
I’ve been told by multiple sources with first-hand knowledge of the matter that Instacart is actively engaged in discussions about opening micro-fulfillment centers (MFC). Fabric is one of the companies Instacart has spoken with about Micro-fulfillment as a Service. (Note to Instacart: Drop your insistence on technology exclusivity and acquire Fabric). Instacart has engaged in discussions with other MFC vendors according to executives I spoke with this.
Instacart will need a minimum of 50 MFC locations to begin with but the number of MFC facilities could eventually exceed several hundred. The challenge for Instacart will be convincing their retail customers to sign up for the service. Make no mistake – Instacart will convince a few customers to contract Instacart for fulfillment. When this happens, a flood of customers will follow. (I believe a partnership with AutoStore for Micro-fulfillment as a Service is the best strategy for Instacart to pursue. I don’t believe micro-fulfillment is enough. AutoStore is an ideal company to enable Instacart to become a fulfillment powerhouse).
Micro-fulfillment centers will allow Instacart to remove grocery fulfillment from the stores of their retail customers and reduce costs. This is actually a wise move and it is something I’ve recommended several times to Instacart. Grocery retailers can ship inventory to each Instacart MFC and leveraging technology from Fabric or other MFC vendors like Geek +, Attabotics, AutoStore, etc., online and curbside pickup orders can be automatically fulfilled using the MFC. Some products will continue to be picked by hand. Instacart will be able to reduce the costs associated with fulfilling orders significantly increasing their value to their grocery customers.
Micro-fulfillment centers will allow Instacart to expand their business model. According to Mehta, he wants to expand Instacart beyond supermarkets and has signed deals with Sephora, Best Buy, and 7-Eleven. Opening micro-fulfillment centers will allow Instacart to offer ‘Micro-fulfillment as a Service’ to fulfill online orders and replenish inventory rapidly in small format stores; like Sephora and 7-Eleven, for example.
Micro-fulfillment centers will also make it easier for Instacart to become an online grocery retailer and open their own physical stores. This is something I estimate will happen by 2025 at the latest. Grocery retailers pay Instacart an average 10% per order. In 2019, Instacart was losing $2.00 on every order they fulfilled. (Mehta claimed Instacart was profitable in 2019). In 2020, Instacart is grossing $3.00 per order. When COVID is tamed, which it will be, Instacart is going to again lose money or barely break even. Maintaining the status quo won’t work.
From a strategy perspective, the smartest move for Instacart is to continue to be deceptive about their future plans. Deception isn’t illegal. From the quote above, “When we are near, we must make the enemy believe we are far away.” Instacart must continue to sign new grocery retailers and do everything they can to maintain their current retail customers. Why? Data. Instacart understands the value of data. Instacart also understands the value of convincing grocery retailers that allowing Instacart to maintain a list of their customer names, email addresses, physical addresses and other data is nothing to be concerned with.
If Instacart chooses to become an online retailer, they will easily convert customers from shopping at their favorite online retailer to shopping at Instacart. Why? Because Instacart owns the customer relationship. When Instacart launches their online grocery business, they will have the best pricing, assortment, promotions and the best advertising campaigns for brands. I warned grocery retailers in this 2018 article that if they contracted Instacart, they would be teaching an eventual Trojan Horse their strengths and weaknesses. I was right.
Instacart not only knows how to serve their current grocery retail customers, Instacart knows how to take their customers and put them out of business. Mehta recently stated that Instacart is “actively hiring dedicated Instacart analysts who will be embedded in retail partners’ headquarters to support them.” Am I the only person screaming and laughing at the absurdity of grocery executives who will allow Instacart to embed analysts?
Note to Dunnhumby: You need to target every Instacart customer and market your services. I’m amazed you aren’t more aggressive in an industry actively looking for an alternative to Instacart. Retailers have a growing desire to analyze and monetize their own data vs. allowing Instacart and other third parties own and control the data.
Grocery retail isn’t only about online shopping. The grocery industry in the U.S. is estimated to be a $1T industry with most sales taking place in retail stores. Regardless of the denials, Instacart will leverage the mountain of data they’ve collected, and continues to collect, from their grocery customers. The data will identify exactly where Instacart must open stores to serve the needs of customers. Instacart branded grocery stores will become a reality.
Instacart is going to face an extreme amount of pressure in the coming years. For two years, I’ve had discussions with Postmates, DoorDash and the other restaurant delivery companies, about the need to fulfill and deliver online groceries and also teach their grocery retail customers how to install dark kitchens and sell restaurant quality food direct to their customers. Micro-fulfillment is a major topic of discussion. Uber Postmates, DoorDash, Grubhub, etc., must invest in opening their own micro-fulfillment centers. It’s happening. (Full disclosure: I continue to advise several restaurant delivery companies on the topic of micro-fulfillment).
What about Shipt? My advice to Target is divest Shipt. The company has failed at every level to become a competitor to Instacart even though the opportunity to do so exists. Shipt never lived up to its potential, Instacart exceeded theirs.
Instacart has no choice but to be deceptive. As with all deception, however, at some point the truth becomes known. Odds are high that by 2025, the deception will end and the truth will be told – Instacart is going to become the largest online grocery retailer in the U.S., and will open hundreds if not thousands of stores.
Instacart has every right to do what I outlined above. In fact, I hope it happens. But will it? The unknown is whether or not Instacart will be acquired. I have stated in writing and publicly that Shopify, Berkshire-Hathaway, Facebook, FedEx, Target or Google should assess acquiring Instacart. Amazon could acquire Instacart as doing so would eliminate a major competitor. Walmart could acquire Instacart.
The challenge for Instacart is that they’re vulnerable. The sun has shone brightly on Instacart for several years but storm clouds are gathering. DoorDash and Uber Postmates have exceptional potential to go after Instacart’s customers.
Most of Instacart’s customers can enter into agreements with micro-fulfillment companies to purchase and install MFCs within their retail ecosystems thus eliminating the need for Instacart.
Instacart going public may turn out to be its last hurrah if it’s not careful. Investing in micro-fulfillment, becoming an online grocery retailer, and opening their own stores remains the best strategy for Instacart.