The Same-Day War: Amazon, Google And Walmart Race To Bring Your Groceries

Jeff Bercovici Forbes Staff,  http://www.forbes.com/

Same-day home delivery of groceries is to retailers what Mount Everest is to climbers: The lure is obvious, the logistics fearsome, and tackling either without the right plan is suicide. Nevertheless, 13 years after the spectacular collapse of Webvan made it a lasting symbol of dot-com-era hubris, similar services are cropping up in cities and suburbs across America. Operating them are the biggest names in tech and retail, along with a bevy of more specialized startups.

AmazonFresh recently expanded from Seattle to Los Angeles and San Francisco, where it offers new customers free same-day delivery on orders over $35. In the Bay Area Google GOOG -3.66% is working with stores such as Walgreens to provide rapid delivery of food and other products through Google Shopping Express; a test with Google employees in Los Angeles is under way. Promising low prices and fees, Walmart to Go colonized its second market, Denver, in October after two years in San Francisco. Two-year-old Instacart is already live in six cities, providing superfast deliveries from Whole Foods, Costco and other chains. (Its home base: San Francisco, of course.)

While retail in general is moving online — Forrester predicts 10% of U.S. sales will be via e-commerce by 2017 — the $600 billion grocery industry has been slow to follow. Produce and dairy spoil fast, and delivery windows are narrow. As of yet GSE doesn’t sell perishable groceries, but “it’s something we’re in the advanced stages of working on,” says Tom Fallows, director of product management.

That caution is typical of the new generation of online grocers. Amazon tested Fresh for six years in Seattle before taking it on the road, whereas Webvan blasted through more than $800 million in two years in a frantic landgrab. “They hadn't figured out the economics in one city before they were in ten cities,” says Apoorva Mehta, Instacart’s founder and CEO. He should know: His lead investor, Sequoia Capital’s Michael Moritz, was also on the board of Webvan.

Compared with its massive rivals, Mehta’s company is expanding at a breakneck pace. It can afford to do so because it travels light. Unlike Amazon and Walmart, which source and store inventory, Instacart handles only delivery, relying on 1,000 freelance “shoppers.” A smartphone app navigates them through aisles and streets with maximum efficiency. The app is powered by an algorithm not unlike the one that steers Amazon’s associates around warehouse floors. As an engineer Mehta worked in fulfillment at Amazon before striking out on his own.

Instacart typically charges $3.99 per delivery plus markups on products (something Google and Walmart swear not to do) and collects fees from merchants. But even with a three-legged revenue stool, route density is crucial, says RetailNet Group analyst Justin Bomberowitz. “If [your shoppers] are not delivering three-plus orders an hour, you’re going to lose money.”

“Instacart’s growth has been amazing. In the short term they’re definitely winning,” says Bill Bishop of consultancy Brick Meets Click. But with its relatively high fees he predicts a tough road ahead against the bigger players. A price war will have at least one winner: consumers.