Sylvain Perrier: Welcome ladies and gentlemen to the Mercatus Podcast, Digital Grocer, Episode 14. We’re recording right here at Mercatus HQ, and guess what, summertime has crept in to downtown Toronto. I think today we’re going to get something like 30 degrees Celsius, and for those of you who do not know the metric system, that’s 90 Fahrenheit, and that’s pretty hot and sticky for this city. I’m your host, Sylvain Perrier, president and CEO of Mercatus Technologies, and joining me today is Mercatus’s very own senior director of marketing, Mark Fairhurst.
Mark Fairhurst: It’s a pleasure to be back.
Sylvain Perrier: Well, it is an amazing pleasure to be back. And at the board is our trusted sound engineer, Kevin Glenn.
Kevin Glenn: How’s it going?
Sylvain Perrier: Now, Mark, the last time we recorded, Episode 13, we talked about an important subject.
Mark Fairhurst: Yep.
Sylvain Perrier: It’s not the most riveting subject, right? It’s CCPA, and that is not an accounting term. It’s the California Consumer Privacy Act, and there’s been a lot of changes since Episode 13 that have kind of transpired out there in the world of politics and retail and so on. I don’t know if you know this, but there’s been nine states that have actually filed their own copycat bills. And there’s been this really interesting Senate bill that’s been proposed by Senator Josh Hawley or Haley, I’m not sure how to properly pronounce his last name. But it’s kind of like this, do not track bill that really will give control back to the consumer to say, “Hey, by the way, mobile app or website, I do not want to be tracked.”
Sylvain Perrier: And that’s kind of interesting, because what’s happening with all these changes, there’s going to be new investments in terms of what are the penalties going to be for the publicly traded or the private corporations. And that just makes the life of a company that provides an e-commerce solution that much more challenging and difficult. So I’m kind of excited to see what’s going to happen. But in any case, we’re definitely going to inform our listeners out there, and to let them know what’s the best approach and what they should be doing.
Mark Fairhurst: I think with the CCPA, like most things, people tend to procrastinate until it’s right on their doorstep. So as, I think, the calendar looms, January 2020, the interest in this topic will increase enormously.
Sylvain Perrier: Well, they’ll be a mad scramble.
Mark Fairhurst: Absolutely.
Sylvain Perrier: I think there are certain retailers out there today that I think are still not complying on the whole Visa, Amex kind of type of thing where you have to be secure and so on and so on and so on, so stay tuned. But CCPA aside, there’s been a tremendous amount of developments out there in the industry. One thing, couple of weeks ago, I think it was mid June, really caught my attention. It was this video posted up on YouTube from Kevin Coupe over at-
Mark Fairhurst: MorningNewsBeat.com
Sylvain Perrier: Yeah, MorningNewsBeat, which was really interesting. He was talking about … The subject just was riveting, even the title of the video was the whole idea of data being weaponized. Kevin went on in his video, he was interviewing someone for a podcast at a trade show, if my memory serves me correctly. How this Whole Foods shopper using the Instacart mobile app, and we all know today that because Whole Foods is owned by Amazon, and they’ve been unceremoniously delisted. They’ve decided to remove themselves from the whole Instacart mobile experience and likely the marketplace online as well.
Sylvain Perrier: That this individual specifically, according to Kevin, received an email from Instacart calling out, “Hey, here are the items that you’ve historically purchased with us, with Whole Foods through the Instacart marketplace. Hey, by the way, just so you know, these items are equally available from other retailers that are on the marketplace.” That’s kind of surprising considering that there’s been debate out there in the industry of, well, who owns the data? What can and can’t be done? The whole notion of the brand. Who controls the brand? And so on. And then when I listened to the video, then I clicked on the associated link back to Kevin’s website, by scrolling through the whole written aspect of the post, there was mention of this very interesting report that was prepared by Barclays Equity Investment.
Sylvain Perrier: It was titled, “Dissecting the Instacart Addiction”.
Mark Fairhurst: It’s a great title.
Sylvain Perrier: It’s an addiction. Drugs are a bad thing, as Nancy Reagan used to say, right? Just say no. And so we felt that it was important for our audience and our retailers and the potential retailers that we may be working with some day, that we shed light on this report. And so we’ve decided on our show today, to invite the principal author to speak about this. She’s comfortably sitting in her office at Barclays in New York City. Her name is Karen Short. Karen is the managing director at Barclays Investment Bank. She’s a former Toronto native, but more so a New York native now. She’s lived in New York longer than she has in Toronto. Prior to being at Barclays, she was managing director at Deutsche Bank and before that, she was at Bank of Montreal.
Sylvain Perrier: Karen, welcome to our podcast, Digital Grocer.
Karen Short: Thanks very much for having me.
Sylvain Perrier: Well, it’s a pleasure having you. So let’s just dive in. So can you share the reasons why your team decided to write this report?
Karen Short: Yeah, I mean, I think several reasons. I think, you saw obviously post D-day August, as some people in the food retail industry would call it when Amazon announced they were buying Whole Foods. The first reaction for everybody in the industry was Instacart is toast, basically. And then as the evolution of the Amazon, Whole Foods acquisition kind of transpired, what ended up happening was that Instacart was just a lifesaver for many food retailers in the country. So the assumption that this whole acquisition would kill Instacart turned out to be categorically false, and in fact, the exact opposite happened. Instacart became the only solution for many retailers in the United States.
Karen Short: It just seemed to me as I observe all the differences in terms of the strategies all these retailers are taking in terms of how they use Instacart, that A, the power is building with Instacart as opposed to the retailers. But as Instacart continues to develop stronger and stronger relationships with customer, the customer starts thinking of Instacart as their provider, not the actual food retailer, and that becomes a very dangerous situation to be in, in my view, if you’re a food retailer, especially food retailer with limited differentiation. So what we wanted to do though, is prove that, and so that required a survey. We did this extensive survey, customer survey, across the United States to gauge what the customer, I guess, perspective on what Instacart was.
Karen Short: The data from the survey was overwhelmingly positive for Instacart.
Sylvain Perrier: That’s amazing. And now, in your research, is Instacart a good strategic fit for the retailers out there?
Karen Short: I mean, from my perspective, no, but I also don’t know that the … Many retailers don’t have a choice. When I say no, I mean … First of all, it’s a great instantaneous solution, because developing the infrastructure for all these food retailers is extremely costly and time consuming. And I think food retailers have been in complete and utter denial that the customer behavior was changing, so they don’t have any of the infrastructure, and they haven’t put any of the cost and time allocation towards it. So obviously, Instacart, given its name, provides an instant solution. So that’s great, because if you’re a food retailer, you’re just seeing the data and saying, “Oh, my e-commerce sales are growing at X%, or whatever the number may be.” But depending on what your structure is, with Instacart, you’re losing money on every single transaction that takes place through Instacart.
Karen Short: And again, that’s not across the board, because different retailers have different structures with Instacart, so that’s not a blanket statement. But put it this way, if you’re a retailer, and your prices in your store are the same as the Instacart pricing, then that implies that you’re paying Instacart a fee, because it’s not coming through a markup on the product. Instacart is not getting paid through a markup on the product. You’re paying Instacart a fee to have price parity, so you’re losing money on every single ticket. More importantly, it was an instant solution, but longer term, the bigger and bigger Instacart gets, the less control you as a retailer have. And so you lose the control with the customer, you lose the customer data, or at a best case scenario, you’re just sharing the data, but Instacart has data.
Karen Short: You basically delayed addressing a problem that you’re going to have to address.
Sylvain Perrier: And at that point, I mean, I think it’s safe to say that it becomes very difficult, unless you have a strategic partner to work with to move away from an Instacart solution, because you’re faced with some of these risks that you just mentioned.
Karen Short: Yeah. And again, I think that the retailers in their minds are just thinking about the top line and saying, “Well, we preserved our top line.” They’re not thinking about necessarily what the economics are of that particular basket, and the sense that, “Well, yeah, we just lost money on that purchase. So that’s great, we preserve the top line, but we did not preserve the bottom line.”
Sylvain Perrier: And where do the lines get blurred between Instacart solution and the retailer’s brand?
Karen Short: Well, I mean, if you saw some of the charts in our report, I think what was very telling is that if you’re a retailer with very limited differentiation, the lines are already blurred. The only two retailers that were skewed to the fact that if the retailer removed themselves from Instacart, that the customer would actually still go to that particular retailer to shop, the only two that stood out were Sprouts and Costco. The others were pretty much kind of 50/50, like, “I just use another retailer on Instacart, if my retailer of choice was no longer available.” So I think the lines have already blurred for many retailers.
Sylvain Perrier: Essentially shoppers are … I mean, your opinion would be, are they really addicted to Instacart? Or are they addicted to it because of the convenience of delivery or the fact that they can buy online?
Karen Short: Well, I think they’re addicted to the convenience, but there’s definitely a first mover advantage situation here with Instacart, from the perspective that they have all the shoppers, they have the infrastructure. No one else is even close in capabilities to Instacart from brands geographically, but also of format. So it’s almost like scale begets scale to the extent that Instacart keeps up the momentum. It seems less and less likely that other solutions will present themselves to retailers that will circumvent Instacart.
Sylvain Perrier: You talked a little bit about the markup of the products that are sold online versus in store, what are the other ways that Instacart makes money?
Karen Short: To put it in perspective, so different retailers, so say a Costco, Costco has engaged with Instacart and has said like, “We’re not subsizing anything. We’ll figure out what makes sense from a markup perspective.” So they’ve come to some agreement on what the actual markup would be. If I go to Costco’s website and I use the Instacart portal but through Costco, and I’m a member, I’m going to get a certain percent markup on the product, have the product delivered. Costco is completely agnostic. The customer pays everything. The customer pays the markup, the customer pays the delivery fee, etc, etc. So in that scenario, there’s a markup situation. In other scenarios, the retailer, if they insist on price parity, they will basically agree to what the fee should be.
Karen Short: So it could be somewhere between, I’ve heard anywhere from five to like 9% markup, depending on the retailer … Sorry, percent fee paid to Instacart from the retailer, if that’s what the strategy is. Obviously, there’s a vendor dollar component, and you were just talking about this in terms of the ability Instacart will have to provide customer data to the vendors, but also helps sell products, specifically and targeted to customers. And then their soft dollar support, because if you’re a smaller, if you’re any retailer, you don’t have time or inclination to take images of all 50,000 SKUs in your store. So there’s a soft dollar setup support process that they would also make money off of. And then obviously, there’s delivery fees and service fees.
Sylvain Perrier: So in the case of the vendor dollars, because historically, I think the audience would know that trading co op dollars or to a certain extent extremely important to the grocery retailers that are out there today. And so if Instacart is getting those dollars, is there any evidence that they’re co sharing those dollars back out with their retail partners?
Karen Short: There’s no real discussion around it. I can’t speak for Instacart, but my guess is it’s not in their best interest to relay any of that information. But I will tell you that it’s not, in my view, coincidental that Kroger suddenly decided to remove vendor dollars from their annual filings and not tell us what those dollar amounts are anymore, because my sense is that there will be some reallocation. We show some charts in that report that look at what vendor dollars are as a percent of EBIT for the retailers. I mean, in the case of Kroger, vendor dollars exceed EBIT by almost a multiple of three times. So those dollars are really important for retailers.
Karen Short: Instacart, they not only have the data, and they have the customer relationship, but they also have a much broader demographic and geographic view than any retailer would have other than like a Walmart or an Amazon, because they are national and they’re covering all formats.
Sylvain Perrier: So why do they need the retailers at this point?
Karen Short: Yeah, I mean, it’s a very good question. I mean, obviously, they have to go to a retailer to shop, but as their power increases, I mean, I’m not sure that they really do need the retailer, because you know, a Sprouts can’t prevent an Instacart shopper from walking in the front door and starting to do the picking. There’s nothing they can do about it, just a regular gig worker doing their job.
Sylvain Perrier: Yeah, and it’s true. It’s kind of like Kevin’s comment in his post, how do you prevent Instacart from using the Whole Foods data and redirecting the shopper to someone else?
Mark Fairhurst: Then the question becomes, whose customer is it? Is it the brick and mortar or is it Instacart’s?
Sylvain Perrier: Yeah. And that’s the challenge, right?
Karen Short: That’s the slippery slope. I think that’s exactly the point that this survey was. The biggest point on the survey for me was the headline that, if my chosen retailer just suddenly disappeared from the Instacart platform, 43% of the customers surveyed said they would just use a different retailer.
Mark Fairhurst: Wow. And that was the metric that caught my attention, because I know in the post that I read, there was a comment by Tom Furphy, where he said, that 43% equates to 43 cents on every dollar. And then the calculation is for every 5% of sales volume, but as a retailer, you have potentially losing up to 2% or more market share.
Karen Short: Well, yeah, and he doesn’t get into this, but the other metric that’s even more important than this is … This is more relevant for a union operator just because of their higher fixed costs. This metric wouldn’t be as severe, say for a Costco, but for every 1% sales loss, you’ve lost 10% of EBIT. It would be significantly lower for a Costco, but that’s kind of the rule of thumb.
Sylvain Perrier: Wow, that is an impressive number. Now, Karen, what’s your advice for retailers that are out there today kind of thinking about this, and they’re listening this podcast, or they’ve read some of the commentary that’s out there online? What should they do?
Karen Short: Well, either way, you’re going to have to incur costs on your own. I mean, I don’t know that I can say I applaud Kroger, but Kroger has obviously decided that they do need their own solution, and so they’ve partnered exclusively with Ocado. So that would be for their delivery solution, and at the time of the announcement, I was definitely in favor of that, because they had exclusivity for a home delivery solution. The problem with that is the details kind of become more available, is that the timeline to get something like this ramped in terms of the Ocado solution is just way too extended. I mean, they just broke ground on their first facility for Ocado, and the cost per facility are enormous.
Karen Short: So at the time, I thought, “Good for you Kroger. You guys realized that you need to have your own solution.” But as I kind of observe what’s happening, I’m not so sure that having next day delivery out of a facility that just cost you $300 million is the right one. Ahold has gone to much more of like a hub and spoke model with much smaller fulfillment centers, I believe in the 13 million range to be a depot, to do delivery, but it would be in their markets. Maybe that’s a little easier for an Ahold just because of the density of their markets, but honestly, that’s why I say the Instacart addiction is on the customer side and the retailer side, because I haven’t seen a lot of other viable alternatives that don’t come with significant expense.
Sylvain Perrier: Yeah, in our world, when we’re working with our, we like to call our super regional retailers that may span five to 11 states. There is this kind of strategic approach that looks at delivery, curbside pickup or click and collect as being extremely commoditized solutions. That it isn’t a one size fits all, depending on your geographical distribution of your stores. And kind of the leading thesis is number one, own your experience, own your brand. Pick a partner that ultimately, at the end of the day, represents you and the equity you’ve invested in terms of brand presence in the market, but scales with your needs. And so more often than not what we see happening, it may be one or two or three different delivery partners to own need.
Sylvain Perrier: Much like your report talks about, we’re actually also seeing retailers that have reached the tipping scale, in terms of positive ROI when it comes to e-commerce and suddenly they realize, “Wait a minute, okay, we took the check the box approach two years ago, we need to change. We need to own the experience now.” And I think slowly loosening those grips in terms of where the pendulum is being swung here and bringing it back to real world, but I don’t think it’s a one size fits all approach. Especially when it comes to Kroger, I would agree with you that investment is a tremendous investment. You have to have, quite frankly, the order volume to be able to substantiate something like that.
Sylvain Perrier: I’m not sure if Kroger is there. I think some of the banners that they own, mainly a Harris Teeter would definitely be there. They are a gold standard in this space. Karen, I got to say I really appreciate having you on the show today. Your report is enlightening, and I really look forward to hearing more from you guys at Barclays. If somebody wants to get ahold of this report, what’s the best way to do that?
Karen Short: Yeah, happy to. I think best way would probably just be to email me at Karen, [email protected], and I’m happy to provide the report. Yeah, it’s been very interesting. One thing I would just maybe also leave you with is Walmart’s approach. Walmart has the ability to have more flexibility because some of these retailers that are union also have work rules that prevent them from finding solutions, and like reallocating employees to different tasks. But what Walmart has done is A, they’re non-union, obviously, but B, they appreciate that they need to own the experience for the customer. So they do everything within their four walls, and all they’re doing is outsourcing the last mile.
Karen Short: The last mile is obviously the most monetized component of the experience, so that’s another angle I guess you can take if it’s an easier solution, but that’s not available to a lot of retailers just because of work rule restrictions.
Sylvain Perrier: Yeah, absolutely. And there was a great article yesterday from Walmart Canada CEO, who have partnered with their building developer-
Mark Fairhurst: PenguinPickUp.
Sylvain Perrier: Yeah. And so the developer owned by, came up with the name of the family here in Toronto, they basically run the real estate for all of Walmart Canada. They’ve created on site facilities, and they were kind of singing praises about it, and I think we’ll be sharing that across on LinkedIn. So ladies and gentlemen, thank you for listening. Don’t forget to download our next episode where I’m sure we’re going to be tackling another amazing subject. Mark, how do people get ahold of us?
Mark Fairhurst: The usual way, it’s www.mercatus.com. Our social channels are listed in the footer of our web page. That’s @mercatustech on Twitter, or via email at [email protected]
Sylvain Perrier: Thank you, everyone.