Whole Foods and Instacart take relationship to new level.

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Whole Foods Market and online delivery service Instacart have big plans to make it easier for consumers nationwide to receive home deliveries from the nation’s leading retailer of natural and organic products.

The two companies will launch in several new markets in the coming year, building on the 17 existing metros where consumers can use Instacart to order deliveries from Whole Foods stores. Interestingly, the companies also said they are looking ahead to create new e-commerce and delivery solutions, with the first pilots launching in 2016. No other details on the development of new technology were provided.

In addition, the strengthened partnership will increase the number of Whole Foods Market stores with embedded Instacart shoppers by up to 50% nationwide by the end of 2016.

The new partnership means Instacart will be Whole Foods Market’s largest partner for online ordering and delivery.

“We’ve seen how much our customers love this fast and convenient way to receive Whole Foods Market groceries right to their door, so we are excited to extend our relationship with Instacart,” said Walter Robb, co-CEO of Whole Foods Market. “Working together, we will continue to find even more ways to create outstanding shopping experiences – whether they’re happening in the digital space or within the four walls of our stores.”

Whole Foods has previously reported that Instacart sales comprise a mid-to-high-single-digit percentage of sales in the cities where it currently partners with the delivery provider. These cities include Atlanta; Austin; Boulder; Boston; Chicago; Denver; Houston; Los Angeles; New York City; Philadelphia; Portland, Oregon; San Francisco; San Jose; Seattle and Washington, D.C.

Whole Foods would presumably obtain tighter control over what is becoming an increasingly large in-store sales driver with this partnership, while Instacart obtains financing and long-term stability with a major client.

It is possible other Instacart retail partners may have issues with a competitor financially benefiting from their online deliveries. Also there could be concerns about Whole Foods having access to competitive information.

However, as with UPS’ recent investment into online delivery provider Deliv, this agreement shows that online delivery is becoming a more established omnichannel retail niche with growing profit potential. Look for other partnerships between online delivery providers and various retail, logistics and technology partners in the months ahead.

“Instacart has always prided itself on being a retailer’s best friend, and our extended partnership with Whole Foods Market is a testament to how brick and mortar retailers can successfully adapt to the growing demand for ecommerce and on-demand delivery services,” said Apoorva Mehta, CEO of Instacart. “Instacart and Whole Foods Market share a mutual commitment to providing our customers with the easiest and most seamless grocery shopping experience possible. We look forward to continuing to innovate with Whole Foods Market in the services that we can bring to users.”

How Instacart’s pricing changes impact retailers.

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Hailed as “America’s Most Promising Company” in 2015 by Forbes, Instacart is an interesting take on online grocery delivery. Instacart uses the sharing economy-based business model to connect personal shoppers with customers, and its relatively low costs allow it to scale to other markets with impressive speed, launching in some cities in a matter of two weeks.

In December 2015, Instacart announced price increases via a company blog post. The increases affect the following services:

  • Two-hour delivery window for most cities: from $3.99 to $5.99 (50% increase)
  • One-hour delivery window for most cities: from $5.99 to $7.99 (33% increase)
  • Instacart Express membership fee: from $99/year to $149/year (51% increase)

With the latest fee increases, Instacart partners, competitors, and industry observers are likely to pay more attention to Instacart’s price positioning.

How much does Instacart mark up in-store prices?

According to Instacart’s website, Instacart charges the same in-store prices for some retail partners (e.g., Whole Foods) but a “15%+” markup for others (e.g., Costco). Instacart explains that “the average price of items on Instacart is 15% higher or more compared to the average price of that retailer in your local area.” The “15%+” markup is also used as one of Instacart’s mechanisms to highlight their grocer partners from non-partnered grocers.

To better understand Instacart’s markup, in September 2015, Profitero collected 60 products’ in-store prices at Costco stores across 10 zip codes in 5 metropolitan areas: New York, Atlanta, Chicago, Los Angeles and Seattle. On average, Instacart charged a 23% markup over store prices on the same items, 8 percentage points higher than the 15% quoted.

The recent price changes and relatively high markups are strong indicators that Instacart does not aim to be a price leader in the online grocery industry. Instead, Instacart may focus on delivering value through convenience and a focus on customer experience.

Implications for retailers

Given Instacart’s rapid market expansion, it is important for retailers to understand how Instacart is recalibrating online grocery pricing at a local level. To stay on top of the trend, grocers may want to take the following steps:

• Monitor competitors’ prices

Grocers can better understand their competitive landscape by monitoring competitor prices through Instacart. As Instacart continues partnering with more and more retailers, local pricing for some retailers is now transparent (or semi-transparent) for the first time.

• Assess maturity of local online grocery market

Grocers can assess the maturity of the local online grocery market by assessing the local coverage of Instacart partnerships, especially since Instacart highlights its non-partnered grocers via the “15%+” markups. Grocers can also use coverage data when considering partnering with Instacart and other online grocery platforms.

• Assess losses from un-reaped membership fees

Some retailers’ financial models depend heavily on membership fees (e.g., Costco). But Instacart helps some shoppers circumvent the membership fees, since shoppers do not need to be members to shop there.

Grocers can better understand how much they may be losing in potential membership fees by monitoring Instacart’s markups.

Like the broader online grocery market, Instacart continues to evolve. Visit Profitero’s knowledge center for more analysis of Instacart and other emerging players like Jet.com.