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Why Partnering With Instacart Is a Win for Whole Foods Market Inc.

By Jeremy Bowman – Mar 8, 2016 at 5:02PM

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Delivery and e-commerce offer Whole Foods another way to differentiate itself from the competition.

Whole Foods Market (WFM) took its budding relationship with Instacart one step further last month. The leading natural foods grocer made an undisclosed investment in the grocery delivery start-up, according to Re/Code, and terms of the deal also included a five-year delivery partnership.

By taking a stake in Instacart, Whole Foods is doubling down on a delivery strategy and a partnership that began a year and a half ago.

In 2014, Whole Foods signed up as Instacart's first national partner, allowing one-hour delivery through the service in 15 metropolitan areas, which has since expanded to 16. A year later, management estimated that Whole Foods customers had saved 970,000 hours by ordering through Instacart and purchasing millions of apples, bananas, eggs, and other items through the delivery service. Fresh produce proved especially popular.

Whole Foods did not provide a dollar amount for Instacart orders, but a range of $50 to $100 million seems like a reasonable estimate based on the figures it shared. While that is still less than 1% of annual revenue, it represents a growth opportunity, and the percentage is skewed since Instacart is not available at all Whole Foods locations.

Co-CEO Walter Robb touted the partnership:

The results speak for themselves. Our customers clearly love having this convenient shopping option, and Whole Foods Market will continue to provide our shoppers with innovative new choices that deliver great shopping experiences and help make their lives easier. 

In the company's recent earnings call, Robb said many of its stores are "seeing [Instacart] sales as a percentage of total store in the mid-to-high single digits." With performances like that, furthering this partnership with Instacart has the potential to be a significant driver of sales growth.

Differentiating itself
For the first time since the recession, Whole Foods reported declining sales at established stores in its latest quarter. The sales slide has taken the stock price with it -- shares are down nearly 40% in the past year, and the company has since introduced a number of initiatives to turn around its business.

The company is opening budget-minded "365" stores targeting millennials. It has hired renowned chef Tien Ho to improve its prepared foods department and launch a new food truck test kitchen. Ramping up its delivery business is also a significant opportunity.

While the Instacart partnership is by no means exclusive -- the delivery company works with dozens of other supermarkets, including the competition -- Whole Foods is perhaps best suited for such a service.

The company's demographic overwhelmingly skews urban and higher income -- the type of customer who is most likely to be starved for time and willing to spend a few extra bucks for the convenience of delivery. Instacart charges $5.99 for one-hour delivery and $3.99 for two-hour service. 

E-commerce has also proven to be a steady growth industry, with online sales rising about 15% a year since the recession. Because of their perishable nature, groceries add an extra element of difficulty to deliver, but Americans are becoming increasingly accustomed to online shopping. Amazon, the market leader, has made no secret of its own aspirations in grocery delivery. The company sells perishables and other food items through its Amazon Fresh service in select markets around the country, but the annual fee of $299 has made it prohibitive for many potential customers. Wal-Mart, the nation's leading grocery retailer, is also banking part of its recovery on a new online grocery pick-up service that it is quickly expanding.

For Whole Foods, the growth of e-commerce and improvements in technology should ensure that the share of orders through Instacart continues to grow. Increased competition from rivals also makes it necessary for the company to intensify its efforts in this area.

Though Whole Foods is struggling today, its leadership is the same one that built the company from one store in 1980 into the leading organic grocer, now worth $11 billion. The team is clearly impressed with the Instacart partnership thus far, and building on it seems to be the right strategy. Catering to its customers' needs and investing in e-commerce should pay off in the long run.

According to reports, the investment has not closed yet, but expect an announcement soon that should detail additional benefits for the two companies. Strengthening its relationship with Instacart could help the company restore the competitive advantage it has lost as mainstream grocers have crept into organic, natural offerings.

John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool’s board of directors. Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends and Whole Foods Market. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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