The Future of U.S. Grocery Delivery

Hey everyone 👋 — I’m Roshan, co-founder of The Takeoff. When we first started The Takeoff, we only did newsletter-style interviews, but have since expanded into curated content, podcasts, and deep dives. I’m thrilled to finally share my first deep dive with you all today.

This article discusses what grocery delivery is, what the opportunity looks like, what relevant alternatives are available, how to think about the different grocery delivery players, how the space is evolving, and more. My intention is for you to walk away feeling knowledgeable about the industry.

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My interest in grocery delivery began last summer (2020) when I was working as an analyst focusing on ride-sharing and food-delivery marketplaces at a crossover tech-investment fund (Octahedron Capital). My boss would rave about how good of a business Instacart is, and I became fascinated.

Throughout 2021, I have become a frequent user of Shipt, a grocery delivery service owned by Target, and have had an extremely positive experience to date. In Amazon’s 2020 Letter to Shareholders, Jeff Bezos wrote about how half of Amazon purchases are completed in less than 15 minutes and how research suggests that a trip to a physical store takes about an hour. He also did some math and showed that if you assume that a typical Amazon purchase takes 15 minutes and saves you a couple of trips per week to a physical store, that’s more than 75 hours a year saved. While the numbers may be different for grocery delivery services, the logic still applies, and my favorite aspect of grocery delivery is the time it saves.

A home grocery delivery service is exactly what it sounds like: a service that delivers groceries to customers' homes or to a central pickup spot. You can order and pay for your groceries online with almost any of these services. Generally, temperature-sensitive items like produce, meat, dairy, and frozen items are kept fresh and cold using refrigerated trucks, coolers, and freezer bags.

Figure 1. Market share is fragmented among top grocers.

In the U.S, the traditional grocery industry is highly fragmented. As seen in Figure 1, Kroger is the market leader, followed by Albertsons, and companies like Trader Joe’s and Whole Foods, which each have roughly 5% of the grocer market share. The industry fragmentation makes more sense when thinking about your own grocery shopping habits. You likely have a primary grocery store that you shop at, followed by a secondary and possibly tertiary store where you’ll go occasionally.

Prior to the pandemic, a mere 3.2% of food and beverage sales were online, giving the category the lowest online penetration of total retail sales of the categories shown in Figure 2 below.

Figure 2. Pre-pandemic sales for food & beverage were the lowest compared to other retail e-commerce categories.

Food and beverage is a $1 trillion category in total U.S. retail sales annually. Every additional 1% of e-commerce penetration moves about $10 billion online. Those dollars could easily flow away from grocery chains and into the pockets of grocery delivery companies. As grocery delivery continues to grow, it could reach over $100 billion in annual sales –– just 1% market share would lead a new business to achieve $1 billion in annual revenue.

The COVID pandemic turned out to be a giant advertisement for the benefits and necessity of online shopping. Online grocery shopping is one of many industries that saw massive growth during the pandemic. Globally, the online grocery market was $27.5 billion in 2018. Now, it is expected to reach $129.5 billion by 2025, with a CAGR of 24.8% during 2019-2025. With the pandemic at large, in Q2 2020, quarterly spending on groceries grew to nearly $400 per customer -- up 31% year-over-year (see Figure 3). In June 2020, 45.6 million households shopped for groceries online. Clearly, this is a rapidly growing industry, but there are many questions around the landscape and growth in a post-pandemic world.

Figure 3. Grocery spend has risen to nearly $400 per customer in Q2 2020 during the COVID-19 Pandemic.

Before getting into the grocery delivery services consumers are using, it’s worth taking a look at some other companies that can serve as replacements to traditional grocery shopping. Three relevant types of companies here are meal-kit services, convenience store delivery services, and grocery box delivery services.

Meal kit delivery companies walk you through cooking your meals by shipping you recipes along with the exact quantities of all the ingredients needed to make them. Meal kit delivery services generally ship to you a few times a week. In comparison to buying the ingredients separately, meal kit delivery services cost more per meal but make up for it by saving you time figuring out what and how to cook. As seen in Figure 4, meal kit companies also saw significant growth during the pandemic. Some of the most notable meal kit companies include Marley Spoon, HelloFresh, and Blue Apron.

Figure 4. Meal Kit Companies also saw increased growth during the pandemic.

Though they don’t advertise themselves in the same way that grocery delivery companies like Instacart do, convenience store delivery services can be used as grocery delivery services if one desires. The most notable company in this space is GoPuff, valued at almost $9 billion. GoPuff aims to deliver convenience store items such as snacks, drinks, and groceries in thirty minutes or less. Another hot convenience store startup is Burpy, which was mentioned in a16z’s 2021 Marketplace 100. Burpy has a similar mission to GoPuff, as they focus on delivering home essentials from local stores within an hour of ordering.

Grocery subscription services operate to deliver a box with a selection of fresh produce one to two times per week. As you may have guessed, these services operate on a subscription basis where consumers generally pay a weekly or monthly subscription for their services. There are a couple notable grocery box delivery services. Imperfect Foods sells foods that are misshapen (“imperfect”) at a discount. Hungry Harvest delivers excess produce from farms. An added bonus of these companies is that they are sustainable and environmentally friendly businesses.

Now moving into the grocery delivery players, as can be seen in the data from Second Measure (see Figure 5), Instacart appears to be the key beneficiary of all the grocery delivery players during the pandemic, reaching a valuation of $39 billion in 2021. Prior to the pandemic, Walmart Grocery was the market leader, but Instacart’s market share has now eclipsed Walmart Grocery. Let’s dive into some of these companies, starting with Instacart.

Figure 5. Instacart’s market share surpassed Walmart Grocery’s during the pandemic.

Based in San Francisco, Instacart is a multi-sided marketplace operating in all 50 states, partnering with national and local grocers to enable consumers to get items delivered from those stores. Instacart is not like some other services which ship you groceries from a warehouse. Instead, Instacart employs independent contractors (called shoppers) to shop for you at your choice of available retailers (e.g. Publix, Costco). Instacart delivers from nearly 40,000 stores across more than 5,500 cities in North America. From Instacart’s LinkedIn: “Instacart shoppers offer same-day delivery and pickup services to bring fresh groceries and everyday essentials to busy people and families across the U.S. and Canada.”

Looking back at the fragmentation of the traditional grocery industry, I see the brilliance of Instacart being that it has aggregated not only grocers, but also shoppers and delivery personnel, all into one platform. Instead of going to multiple grocery stores like you normally would, you can now purchase products from all your favorite stores through one app.

PeaPod, which has been around since 1989, is another service similar to Instacart. PeaPod is owned by Ahold Delhaize, the same company that owns Stop & Shop, and offers delivery from the supermarket chains it owns. While PeaPod operates similarly to Instacart, one notable difference is that PeaPod’s delivery people are professional drivers working for the company, rather than gig workers (independent contractors).

Walmart Grocery, Amazon, and Shipt (owned by Target) have direct, full-stack models for grocery delivery, leveraging their physical stores. Shipt also uses an Instacart-like model to offer deliveries from partners such as CVS in addition to Target stores. As these services are owned by massive companies, it is worth noting that they leverage their warehouses and therefore operate as a hybrid between Instacart’s model and warehouse-based delivery stores, which we’ll dive into now.

Warehouse-based grocery delivery services which aren’t tied to physical grocery stores or chains also exist in the space. Almost all of these services deliver directly to your home, but some offer warehouse pickup. Additionally, the majority of these warehouse-based services operate in a specific city or region. Some of the major players here are FreshDirect (also owned by Ahold Delhaize) and Corbon’s. FreshDirect primarily operates in the New York / New Jersey area, and Corbon’s operates in the Midwest.

My personal favorite warehouse-based player is Jupiter. While Jupiter follows the model of warehouse-based delivery, it operates on a subscription basis and offers features such as ordering based on recipes (like a meal kit service) and social shopping (we’ll discuss this in a bit). What makes the company most unique is that they leverage AI/ML technologies to pre-populate your cart based on your consumption habits. You can then edit your pre-populated cart until the order closes on your chosen day of the week and your items are shipped to you.

Another type of company worth noting in the grocery delivery market are platforms that enable people to create their own grocery delivery businesses. The most notable example here would be Dumpling, which aims to empower shoppers to create their own delivery businesses in order to escape independent contractor gig work. Dumpling does so by providing individuals with digital retail tools they can use to kickstart their business. Using an Amazon and Shopify analogy, one can think of Dumpling as a Shopify, and Instacart as the Amazon-style aggregator. Another company, Mercato, is kind of in-between Dumpling and Instacart in this analogy. Mercato empowers grocers with easy-to-use marketing, e-commerce, and service tools for seamless online ordering and delivery. However, while Mercato arms its clients with the tools to compete in online grocery delivery, Mercato does do some aggregation as it allows its hungry customers to order from any one or multiple of its grocer clients’ stores.

Lastly, there are also farm-to-table options that either deliver farm-fresh groceries to your door or offer pickup at a central pickup location. These farm-to-table grocery delivery options are a great way to sustainably support your local agriculture industry. Some of the notable farm-to-table grocery delivery options include Rastelli’s (technically “farm-to-butcher-to-table”), and GrubMarket.

Looking ahead, four trends caught my eye: social shopping, brands going direct-to-consumer, autonomous delivery, and food delivery players entering the market.

A major criticism of grocery delivery is that it just isn’t fun. People enjoy going to the grocery store, browsing the aisles, and buying things that catch their eye. While it does save time, shopping for groceries on platforms like Instacart is seen as a chore by many people, myself included. A lot of the current grocery delivery players provide similar offerings, but these companies have yet to make grocery delivery fun. Today, the physical players still have a better “product offering” than the online players primarily because of the experience grocery stores provide.

One method of making online grocery shopping more fun and enjoyable is social shopping. Social shopping is the concept of making it possible to easily shop and share items with friends online. One implementation of social shopping is team purchases, highlighted in Figure 6. Social shopping can also include social feeds with comments and reviews on products, interest groups, and more. This concept has become extremely popular with Asian companies, and is likely a trend that will become more prevalent in America. PinDuoDuo is a great example of a Chinese company with social e-commerce, and though there were obviously other factors at play, the company nearly doubled their online grocery sales in 2020 from the prior year. The success of PinDuoDuo in China suggests that there is a huge opportunity for social commerce platforms to emerge in other regions. Looking back to the U.S, Jupiter has already followed suit and implemented social shopping features, as mentioned above. It is likely that we’ll see other grocery delivery companies follow suit in an effort to make online grocery shopping a more exciting experience.

Figure 6. PinDuoDuo offers social shopping through team purchases.

All brands yearn for direct-to-consumer (DTC) sales, but for most brands, this simply isn’t as profitable as selling through traditional grocery stores. This may not be the case in the future, however, and we will likely see some of the next big packaged food brands selling DTC. Grocery delivery services make it easier than ever for brands to go DTC –– brands are already selling directly through platforms such as Instacart, which has a self-serve advertising product for brands to promote their products in-app. As they scale, almost all grocery delivery companies are keeping DTC sales for brands in mind.

Before the pandemic, management teams and investors looked at autonomous delivery as a way to reduce costs, but the pandemic has revealed new use cases such as service continuity for existing vendors and health concerns. Startups in this space include drone delivery companies such as Zipline, automated delivery van providers such as Gatik.AI, and autonomous robot providers including Starship and Nuro. Autonomous delivery pilot programs are already underway, including a partnership between Nuro and CVS to deliver prescription drugs in parts of Houston.

Food delivery companies are joining the fight for market share in the grocery delivery space. Uber’s management has expressed interest to bolster investment into grocery delivery through Uber Eats and has acquired Latin American grocery delivery app Cornershop, as well as alcohol delivery platform Drizly. Uber and DoorDash are both currently providing grocery and/or convenience store delivery in select locations. They operate with an Instacart-like grocery store delivery model of leveraging independent contractors to fulfill customers’ orders. These companies will likely become large players in grocery delivery in the coming years.

While some players have been around for a long time, online grocery delivery is a rapidly growing space with a long runway of potential improvements ahead. The main concern consumers have with online grocery delivery are the high prices associated with these services, an issue yet to be addressed. Going back to Amazon’s 2020 Letter to Shareholders, Bezos talked about how Amazon is saving people 75 hours per year, and he continues on discussing how if you value your time at $10 per hour, that’s $630 of value created per customer after accounting for the Amazon Prime subscription cost. Once again, though the numbers don’t add up exactly, the same logic can be applied to grocery delivery companies. While prices are high, time is money, and these services can save you massive amounts of time. Further, the potential for economies of scale and lowering costs as these platforms continue to grow could make pricing even more attractable for consumers in the future.

Looking at the grocery delivery market in the U.S. barely scratches the surface of all the companies that exist in the space globally. The industry is geared for much more innovation, and I am excited to closely follow how this industry evolves over the coming years.

That’s all for today! Special thanks to Lynnea Brumbaugh, Michael Spiro, Yash Gaitonde, and Divya Jindal for all your help along the way.

Thank you again for taking the time to read my piece, I hope you learned something new today. 😊 If you have comments, would like to give me feedback, or just want to chat, feel free to DM me on Twitter @RoshanChandna. I still have a long way to go in analyzing companies/industries, so feedback is highly appreciated.

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About Me: I’m a co-founder at The Takeoff, rising senior at Washington University in St. Louis, and incoming intern at Floodgate Fund. I’ve previously done internships at Octahedron Capital as an investment analyst, as well as at Rubrik and Sumo Logic on their respective product teams.

I’m on Twitter @RoshanChandna 👋. Be sure to also check out The Takeoff on Twitter :)