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Target and Instacart partner to challenge Amazon Fresh on grocery service

September 15, 2015 01:09 PM
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(Bloomberg)—Target Corp. is teaming up with Instacart Inc. to offer same-day delivery of groceries and household items for $3.99 in its hometown of Minneapolis as the big-box retailer rolls out an alternative to Amazon.com Inc.’s $299-a-year Amazon Fresh grocery delivery service.

Target, No. 16 in the Internet Retailer 2015 Top 500 Guide, will be Instacart’s second-largest retail partner by revenue, behind Costco Wholesale Corp. (No. 11), significantly expanding inventory for the San Francisco-based startup as it positions itself as the antidote to Amazon for brick-and-mortar retailers. Instacart delivery charges start at $3.99 per order, depending on its size.

Even as sales of books, electronics and clothing shift online, shoppers still prefer supermarkets for food. Companies expect that grocery sales may move to the Web as well and are experimenting to find the best approach. Amazon, the world’s largest e-commerce retailer and No. 1 in the Top 500 Guide, has promoted its grocery delivery service with free 30-day trials in some markets. Google Inc. last week announced plans to begin testing a delivery service for groceries and fresh food later this year in San Francisco and one other city.

Consumer behavior

"One of the reasons we are interested in doing this is just to understand the guest behavior," said Jason Goldberger, president of Target.com & Mobile. "What do they buy and when do they buy it."

Instacart works with retailers that provide stores close to customers. The company supplies the technology to enable online orders as well as employees who fetch groceries from store shelves and mostly contract drivers who deliver them in their own vehicles. Instacart’s other retail partners include Whole Foods Market Inc., Petco (No. 275) and local supermarkets in 18 metropolitan areas including Miami, Seattle and New York.

"Our hope and plan is that you’ll see many more Target-Instacart cities coming soon," said Nilam Ganenthiran, vice president of business development & strategy for Instacart.

Expanded inventory

The Target partnership announced Tuesday adds considerably to Instacart’s inventory of health and beauty items as well as baby products. It expands online order options for Target customers, who can already get free delivery within five days on a $25 minimum order. The Instacart deal adds perishable foods such as milk and eggs to online order options and faster delivery, rounding out the company’s offerings for online shoppers.

Online groceries are a $10.9 billion industry in the U.S., and the market is expected to grow 9.6% annually through 2019, according to a December report by IbisWorld.

Google will also work with Costco and Whole Foods in its planned delivery service. Amazon Fresh is available in Seattle, Northern and Southern California, New York and Philadelphia. Amazon’s program, with an annual fee of $299, is an upgrade of its $99-a-year Prime membership and provides all the benefits of Prime plus free delivery on grocery orders of more than $50.

Early advantage

The first company to offer grocery delivery in a given market has an immediate advantage as customers develop habits they are reluctant to change, which will encourage Amazon to increase the pace of its grocery expansion in 2016, said Steven Weinstein, senior Internet analyst at ITG Investment Research. Amazon had more than 80% of online grocery orders in Seattle in the second quarter and FreshDirect, the Internet grocer, had more than 80% of web orders in its hometown of New York City, he said.

"It’s going to be expensive to have someone go to a store, do your shopping and bring it to you," Weinstein said about Instacart’s model. "Amazon Fresh and FreshDirect have possibilities to be true supermarket replacements. These other things are more niche, or when you’re in a pinch, because you’re going to be paying a premium."

Target’s same-day delivery push comes as it revamps its grocery department, which it expanded several years ago by adding fresh meats and produce to compete with Wal-Mart Stores Inc. (No. 3) and supermarkets. Customers complained about the quality and freshness of the products and the company wasn’t able to get the type of traction it expected. It had about $18 billion in sales from the grocery business last year, which accounted for more than 20% of revenue.

 

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