Instacart is Making AmazonFresh Look Silly

By Jeremy Bowman Markets Fool.com

Grocery delivery start-up Instacart is just half the age ofAmazon.com's(NASDAQ: AMZN) rival service AmazonFresh, but it's growing up fast.

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Late last month the delivery service announced a nationwide expansion, opening up new markets in Texas and the Midwest, including Detroit, Columbus, the Rio Grande Valley of Texas, and Las Vegas. Over the coming weeks, the company will expand to markets in Texas, Florida, the Carolinas, Kentucky, Tennessee, Michigan, and Ohio. Instacart now serves more than 40 metropolitan areasnationwide, compared to just 17 for AmazonFresh in the US.

Image source: Amazon.

Instacart is also sweetening the deal by offering a freeyear of service to new members in Texas and in major new markets in the Midwest. AmazonFresh, on the other hand, offers new members just a one-month free trial, which is generally the standard with these kinds of subscription services.Netflix, for instance, also offers a one-month free trial.

Not so fresh

Amazon launched its Fresh grocery delivery service ten years ago, kicking it off in its hometown of Seattle in 2007. It took six more years for the company to bring it to another city, but Amazon has recently been ramping up expansion of the program. It also lowered the price from a $200/year additional charge over Prime to $15/month.

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The company is also testing other ways of selling groceries, such as its new Amazon Go store, which is only available to employees, and AmazonFresh Pickup, the soon-to-open service that will allow customers to order on their phones and pick up the items.

It's clear why Amazon wants to get a foothold in groceries. The $800 billion domestic industry would open up a whole new revenue stream for the company, which it will increasingly need as Prime reaches a saturation point.

But Instacart seems to be beating AmazonFresh on almost every front, in addition to the number of markets it's available in and the yearlong free trial for some new members. Instacart is also expanding much faster than AmazonFresh and plans to make its services available to 80% of the country by next year.

Here are two key areas where Instacart is beating AmazonFresh:

  • Speed of service: AmazonFresh promises delivery by 6pm for orders before 10am, or delivery at 6am the next morning for orders placed by 10pm, essentially offering an eight-hour delivery window.Instacart, meanwhile, offers delivery in as little as an hour. It can do that because it partners directly with supermarkets rather than selling its own groceries the way Amazon does.
  • Price comparisons are a little trickier, but Instacart appears to be cheaper than AmazonFresh. While Fresh charges $15/month for its service, Instacart Express is available for as low as $99/year, though prices vary depending on the market.

Does anyone even want grocery delivery?

E-commerce seems to be taking over American retail sector by sector, from books to electronics to toys and now apparel. But groceries have remained largely immune to the online channel, as Americans seem to prefer shopping for fresh foods like produce and meat in person. Even AmazonFresh was not a new idea, as Ahold's Peapod delivery service dates back to before the internet.

Customers do not seem entirely happy with the service. AmazonFresh rates a middling 3.4 starts on its own site, with 606 reviews. Nearly as many reviewers gave it 1 star as 5 stars. Among the most common complaints were late or inaccurate deliveries and not picking up old delivery totes. Instacart was no better, receiving almost universally low ratings in about 100 reviews onYelpand Sitejabber.

Instacart was recently valued at $3.4 billion in a recent fundraising round, putting it in line withSprouts Farmers Market, but that value seems to underscore the fact that investors still don't believe in the disruption of delivery in the grocery industry. Disruptors in other industries like Uber and Airbnb are valued at nearly $70 billion and $30 billion respectively.

The sum of those factors would seem to bode poorly for AmazonFresh. It's not only losing ground to Instacart, but the market sees little value in grocery delivery itself, especially for a company valued at more than $400 billion. That may explain why Amazon is turning to alternatives to break into the grocery industry, but those have their own challenges as well.

Amazon's best move might simply be to buy Instacart, but that would require the company to work directly with the grocers AmazonFresh now competes directly with. Without a clear strategy, AmazonFresh could lose further ground to Instacart, but the start-up's rapid expansion makes it clear that AmazonFresh can't stand still.

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Jeremy Bowman owns shares of Netflix. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.