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Instacart, grocery delivery grows by leaps after Whole Foods/Amazon deal

A price war is not the only immediate effect Amazon.com Inc.'s purchase of Whole Foods Market Inc. is having on the grocery industry: A delivery arms race is also taking shape.

San Francisco-based Instacart, which allows shoppers to order groceries from a range of supermarkets and related chains, is expanding both its geographic reach and the list of retailers with which it partners. Although the company has been touting its nationwide expansion since April, much of the growth has come after Amazon said it would buy Whole Foods in June.

As of Oct. 5, Instacart had operations in roughly 3,071 U.S. cities and towns, up from both the 374 it served as of Jan. 28 and the 1,974 cities it was in as of June 15, the day before Amazon's announced deal with Whole Foods, an analysis by S&P Global Market Intelligence shows.

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In addition to operating in new markets, Instacart has secured contracts with new grocers and expanded existing ones. In August, the startup agreed to provide same-day delivery for customers of Aldi (Süd) GmbH & Co.'s U.S. stores. On Oct. 5, Costco Wholesale Corp. announced its own same-day service through Instacart, adding fresh food items to the range of products that customers are able to order from its warehouses through Instacart.

While many large national and regional grocers have been experimenting with e-commerce for several years, Amazon's decision to buy Whole Foods has made grocers more interested in bolstering their own delivery capabilities, Instacart Chief Business Officer Nilam Ganenthiran told S&P Global Market Intelligence in an interview.

"Amazon buying Whole Foods clearly was a catalyst for the industry ... to have their morning cup of coffee and get going," Ganenthiran said.

Broadly, grocers in the U.S. and around the world have ramped up their online ordering and delivery functions since Amazon's deal. On Oct. 3, Wal-Mart Stores Inc. said it had bought last-mile delivery company Parcel Inc., which operates in New York City. French supermarket operator Carrefour SA said Oct. 16 that it had launched a service allowing shoppers to have groceries delivered to their homes by other shoppers.

That surge of interest contrasts with a dearth just a few years ago, when most grocers were only interested in grocery delivery as an experiment. "They wanted to do three-store tests, five-store tests, 20-store tests," Ganenthiran said. "The industry was just not ready for a solution."

Trying to build what Amazon could not

By expanding their efforts, grocers and startups like Instacart are attempting to succeed where Amazon has largely failed, said Guru Hariharan, CEO of San Francisco-based startup Boomerang Commerce Inc. and a co-founder of Amazon's WebStore e-commerce platform.

Although Amazon founded its own last-mile delivery service, AmazonFresh, in 2007, it has yet to expand beyond a few mostly urban markets, according to a summary of the service by Amazon posted on its website.

That lack of scale means the company should have ended AmazonFresh long ago, Hariharan said. The fact that Amazon has not given up shows how important grocery delivery is to the Seattle-based retailer as well as the supermarket industry as a whole, he said in an interview.

Many grocers, including Amazon, will eventually develop their own Instacart-like service, Hariharan said. In the meantime, they likely view the startup as a "stepping stone" on the way to that goal, he added.

"They'll want to own the end-to-end customer experience and the value chain," he said. "At some point, very quickly, grocers will be moving their last-mile delivery to in-house."

Amazon did not immediately respond to a request for comment Oct. 18.

Instacart's Ganenthiran said he is not concerned about retailers making delivery an in-house operation. He pointed to the company's order volumes, which often include purchases from several grocers within individual markets and allow it to deliver orders more cost-effectively than individual supermarkets could.

By partnering with Instacart, supermarkets can also offer delivery without having to build a service from scratch in-house.

"It isn't one of the top 10 things I lose sleep over," he said.

As Instacart continues to expand, it may also have to consider its relationship with Amazon. Whole Foods was one of the startup's early nationwide partners, and a source familiar with the matter said the grocer, now part of Amazon, owns a stake in Instacart that amounts to less than 1% of the company. As a privately held company, Instacart is not required to disclose investments other parties make in its business.

For players like Aldi and Costco, which are focused on competing against Amazon and Whole Foods, that stake is evidently not enough of a reason to stay away from Instacart.

"The bar is now raised, and they have to nail all the angles" of the grocery business, including delivery, Boomerang's Hariharan said.