Whole Foods was one of Instacart's biggest partners.
Instacart CEO Apoorva Mehta often references Amazon when describing how he started the $3.4 billion grocery delivery startup.
As recounted in various interviews over the years, Instacart’s origin story goes something like this: After a few years post-college working at technology companies, Mehta moved to Seattle to become a supply chain engineer at Amazon. The work wasn’t challenging enough, so he left after two years and moved to San Francisco. In 2012, he starting working on what would become Instacart, applying much of the logistical information he’d learned while at Amazon to build the company, which directly competes with Amazon’s grocery delivery service.
If Amazon had any hard feelings, it can take satisfaction that its recently announced $13.7 billion acquisition of Whole Foods is bad news for Mehta. Just last year, Instacart and Whole Foods signed a five-year delivery partnership, which gave Instacart exclusive rights to deliver Whole Foods’ perishable items.
That relationship is presumably over. Owning brick-and-mortar Whole Foods stores could convince customers initially wary of Amazon Fresh, the company’s delivery service, to sign up. “People like to touch and feel their fresh foods,” says David Portalatin national analyst for the NPD Group on food and beverage consumption, and the ability to see where their groceries are coming could make a difference. Whole Foods “gives Amazon instant credibility from a quality perspective.”
The online grocery business is still in its infancy. Last month, for example, 7% of U.S. consumers ordered groceries online, according to Portalatin. Of this group, 52% already has an Amazon Prime account. Groceries represent “the final frontier for Amazon — they haven’t quite cracked the code on that, but they already have a relationship with consumers.”
The acquisition “is good news for Amazon and Whole Foods, bad news for Instacart and all other third-party vendors that provide fulfillment services,” says Cooper Smith, head of Amazon research at L2, an intelligence service that benchmarks the digital competence of brands.
While some media reports have suggested Amazon could potentially acquire Instacart, Smith dismisses the idea outright. Amazon, with is top-of-line distribution system, “isn’t going to pay someone $10 an hour to pick and pack groceries at Whole Foods.”
There’s likely room for multiple players in the online grocery wars. But with its acquisition of Whole Foods, Amazon just dealt Instacart (and Mehta) two major blows: taking away one of its most important partners, and becoming a more lethal competitor.