CVS Health is buying Aetna, the companies announced Sunday.
The pharmacy giant is acquiring the third largest US insurer in a $69 billion deal. Aetna stockholders will be paid $145 a share in cash and 0.8378 CVS shares per Aetna share.
The deal creates a new type of company that includes a health insurer, a retail pharmacy, and a company that negotiates prescription drug prices with drugmakers called a pharmacy benefits manager. It’s the biggest merger to happen in the US in 2017.
“This is a natural evolution for both companies as they seek to put the consumer at the center of health care delivery,” the companies said in a news release.
The timing of this massive acquisition is no coincidence. Speculation that Amazon might be getting into the pharmacy business has been rampant for months, and the company’s notorious for stepping into new businesses and crushing the competition with low prices, fast delivery, and its massive network of loyal shoppers.
What this means for how your medication gets paid for
With the Aetna deal, CVS wouldn’t be alone in controlling both the insurer and PBM part of paying for prescriptions. UnitedHealthcare, for example, owns the PBM OptumRx, while Anthem, which owns a variety of Blue Cross Blue Shield health insurance firms, will be launching its own PBM called IngenioRx.
Essentially, CVS would own every step of the prescription drug process with the exception of drug wholesalers, which are in charge of shipping drugs to pharmacies and hospitals, and the pharmaceutical companies that actually make the drugs. That would keep much of the money changing hands within the same company.
Here’s a chart explaining how a drug travels from pharmaceutical manufacturer to a patient, and who takes a cut in the process. It’s a complicated web of payments and rebates, but the simplified outcome of a deal that puts pharmacy, insurer, and PBM in one company is that the combined business walks away with more of a drug’s sale price in the end.
With the Aetna deal, CVS would control everything that happens once a wholesaler has handed off the drug.
E-commerce currently accounts for only around 3% of Wal-Mart‘s total revenue, but the company has been investing heavily in its e-commerce initiatives in order to remain competitive in the Amazon-dominated retail market. This is even more relevant now that traditional retailers have to compete with Amazon in the grocery space as well, in addition to its e-commerce business, due to its acquisition of Whole Foods. Below we take a more in-depth look at what to expect from Wal-Mart’s online grocery business.
Summary Of Recent Initiatives
While Wal-Mart is the biggest grocery player in the U.S., capturing around 14% (as of 2016) of the U.S. grocery market, the combined Amazon-Whole Foods entity accounts for just 1.4% of the market. However, Amazon’s share is expected to rise and command nearly 3% market share by 2021, which would put it behind only Wal-Mart and Kroger. To fend off this intensifying competition, Wal-Mart has been ramping up its digital initiatives. Online grocery could present a solid growth opportunity for the company going forward, as groceries account for more than 50% of its sales.
Wal-Mart is well-known for its dominant position in terms of prices, due to its sheer size and logistical capabilities. And now, the company is competing with Amazon on one of Amazon’s key strengths: convenience. For instance, Wal-Mart announced the roll out of giant self-serve kiosk towers, in order to make its in-store pick-up process faster and more efficient. In addition, Wal-Mart also filed a U.S. patent for floating warehouses that can make deliveries using drones, similar to what Amazon was granted in April 2016. Taking these initiatives a step further, Wal-Mart also announced a partnership with Google to offer its products for sale via Google’s voice assistant.
Also, Wal-Mart’s e-commerce site Jet.com launched its own line of groceries Uniquely J, which includes household products including laundry detergent, staples, and coffee. This private label is expected to be of fairly high quality and appears to be Wal-Mart’s attempt to create a line that is different from its cheaper mass-market products. Further, the company also announced plans to add 1,000 online grocery pickuplocations at its U.S. stores in fiscal 2019, which should aid Wal-Mart in maintaining its leading position in the U.S. grocery industry.
Globally, on a constant currency basis, the company’s total e-commerce sales and GMV increased 50% and 54% (including acquisitions), respectively, in the recent third quarter. The majority of this growth was organic through Walmart.com, including online grocery, which is growing fast.
Amazon Still Ahead Of Wal-Mart In The Space
Many customers still prefer to buy groceries in person, and have been less receptive to the online shift so far, as online grocery sales represented just 3% of total e-commerce sales in 2016. However, the market for online groceries is expected to be among the sectors driving overall e-commerce growth through 2022, as the sector is expected to grow at a 20% CAGR over five years. Clearly, Wal-Mart and Amazon will be battling one another for a greater share of the market. Amazon already seems to be a step ahead in that respect, as it is expected to capture 18% of the total online grocery sales in the U.S. in 2017, twice as much as Wal-Mart’s 9% share, according to research firm Packaged Facts. Wal-Mart’s vast presence in more suburban and rural markets is also likely to contribute to that shortfall, as the convenience factor is generally more important to urban customers when it comes to groceries.
Amazon.com Inc.’s expansion into the grocery industry may be pushing more supermarket chains into the arms of Instacart Inc., a delivery service that helps retailers fill online orders.
Albertsons Cos., the second-largest traditional grocer in the U.S., is the latest to team up with the startup on same-day delivery. Instacart will provide its service at more than 1,800 of the chain’s stores by the middle of next year, Albertsons said on Tuesday.
Earlier this month, Kroger Co., one of Albertsons’ chief rivals, said it was starting a pilot test with Instacart at some of its stores in Southern California.
The grocery industry has been roiled by Amazon’s takeover of Whole Foods Market, a deal that’s expected to encourage more shoppers to order food online. For traditional supermarkets, third-party services such as Instacart and Shipt are seen as a way to protect their business.
The Whole Foods deal also put pressure on Instacart to make friends in the industry. The startup has served as the exclusive delivery partner for Whole Foods, but with Amazon in the picture, there’s been speculation that the agreement won’t last. As it adds more partners, Instacart now operates in more than 150 geographic markets.
Instacart, founded in 2012, still has a few years left on its contract with Whole Foods, which invested more than $30 million in the San Francisco startup in 2016.
Albertsons, meanwhile, has been struggling to rebound from a stalled initial public offering. The grocer had considered going public by the end of 2017, but the plans were delayed after Amazon announced its deal to buy Whole Foods, a person familiar with the matter said in July.
Walk into Woodlake Market on any given afternoon and you’ll find the store bustling with customers grabbing pre-made wraps, ready-made soups, or creating a salad from locally-sourced, organic greens.
What you’re less likely to find is someone wandering the aisles loading their cart to fill a home pantry.
Linda Bryce, a Kohler resident who was shopping there on a recent afternoon, said she stops in about three times a week to pick up lunch and other odds and ends.
“I don’t do big shopping here, but I do a fair amount of small shopping,” Bryce said. “If I’m in a pinch and need something for a birthday gift or a special occasion, I can grab something pretty quick. I know I can grab a flower, a birthday cookie and a card and I’m off.”
Woodlake Market in Kohler, like other independent community grocers like it, is not looking to capitalize on the shopper spending an hour in a big-box store filling their cart, and instead is targeting a new brand of consumer looking for quick, quality, ready-made foods at a reasonable price.
Small grocery stores make up a mere sliver of the overall grocery market. According to 2014 data from the U.S. Department of Agriculture’s Economic Research Service, they accounted for 0.2 percent of sales. (Compare that to 65 percent of food sales, in dollars, that went to traditional food marts like Kroger, Safeway or Piggly Wiggly.)
But small grocers across Wisconsin have found a way to find a niche. Ethnic groceries sell specialty foods to cities’ immigrant communities. Small corner grocers or independent stores retain a loyal neighborhood clientele, and often have a history that stretches back decades. And independent grocers such as Wausau’s Downtown Grocery or Kohler’s Woodlake Market focus on offering local, organic foods and fresh, ready-to-eat meals.
“One of the most significant changes I’ve seen in the last few years is everyone wants a fresh-cooked meal, but nobody wants to do it and they don’t want to pay through the roof to have one,” said Gerald Allison, business manager of Woodlake Market.
It’s a trend those who study the grocery business call by the inelegant name “grocerants” — that is, grocery restaurants — signifying the business strategy of selling an experience, offering restaurant-quality food within a grocery store. It’s one way an independent grocer can compete with behemoths such as Kroger or the superstore chains. And it’s especially appealing to millennials, analysts say.
At Woodlake Market, the produce department is a cornucopia of organic fruits and vegetables sourced locally, the salad bar features greens raised hydroponically at a facility just a few miles down the road, and the meat market features steaks and meats from a supplier in Chicago who usually only sells to high-end steak houses.
“Hyper-local means these tomatoes came from one of our associates, whose farm happens to be not far down the road,” Allison said.
Once a large chain, now a Green Bay institution
At Mason Brothers’ Red Owl in Green Bay, co-owner Jarod Mason said their small, stuffed-to-the-gills store focuses less on grab-and-go items — “We’re not trying to out-quick-trip Kwik Trip” — and instead pay close attention to which products consumers are asking for. The number of products has grown over the years, while shelf space has not, forcing smaller stores to be selective in what they put on shelves.
“A lot of what we have had to do here to combat that is listen to your customers,” Jared said. “They can come in, take a basket, get those six or seven items, and be out of here in 10 minutes.”
Many still remember Red Owl, a grocery chain that once operated 441 stores throughout the upper Midwest, but the franchise has all but disappeared, absorbed by Supervalue in the ’80s and slowly phased out as larger stores took their place — but one still remains.
Mason Brothers’ Red Owl in Green Bay has carved out a niche by being attentive to their customers and capitalizing on nostalgia of the brand that still lingers in the history of the state.
Like Woodlake, Mason Brothers’ focuses on shoppers looking for a quick stop for a few items without needing to go to a grocery store. While consumers may drop a few hundred dollars during a visit to bigger stores, the average transaction at Woodlake is about $25 — but the neighborhood customers they court often stop in more than once a week.
“You can come into this store and get just about anything you want in less than five minutes,” Allison said. “You can take that same grocery list to a 100,000 square foot store and you’re in their for a half hour to 45 minutes, depending how busy the checkout lines are.”
Located blocks from Lambeau Field, Mason Brothers’ Red Owl supports the game-day crowd by offering a one-stop shop for tailgate goods, but when fans leave after a big game, convenience is key for appealing to neighborhood consumers.
To keep customers coming back to the small, neighborhood store, brothers Justin and Jared have turned to social media to cultivate a growing fan base, amassing 2,000 Facebook followers for their weekly videos that offer a creative glimpse at what’s on sale.
Niche markets find their place
In Sheboygan, the Union Oriental Market has operated for 35 years. Initially founded as a way to provide familiar food to Hmong refugees settling in the area in the 1980’s, the store has found a niche catering to a specific customer.
The shelves are filled with staples of Asian cuisine: bamboo shoots, noodles, vegetable greens like gai choy, and rice — lots of rice.
“The majority of Asian and Hmong eat rice,” owner Vue Yang said. “A family of six will go through a 100-pound bag of rice in a month.”
Opened in 1982, Yang said the store was a necessity to help refugees acclimate to life in America. Mostly farmers, the refugees were used to planting and harvesting their own food — not wandering the aisles of a supermarket — and most needed help figuring out the currency.
The store has thrived as a community sprung up around it, and it continues to fill a need for unique foods imported from the Philippines, Vietnam, and Korea.
“At an ordinary grocery store, you’d take your cart and go get milk, meat, and cheese,” he said. “Here, they go for rice, canned food, egg roll wrappers, noodles and green vegetables like you see in Asia.”
It’s no different from the proposition offered by other small grocery stores.
In Stevens Point, Ski’s Meat Market competes with five more traditional grocery stores for the slice of the pie, but owner Dave Tuskowski said he has captured about five percent of the city’s meat market. He’s held on by tailoring to two specific customers: consumers looking for treat on a special occasion such as a birthday party or anniversary, and a consumer who understands the value of a good steak. Ski’s only carries top-tier choice beef and every steak is aged in a cooler for several weeks before being put on the floor.
Ski’s has locations in Stevens Point, Oshkosh and Rib Mountain.
“It’s a tricky environment,” he said. “As I look at the next generation coming up, they shop and eat differently than we do. They don’t cook as many meals at home. We’re going to be starting to do more oven-ready meals to take home.”
The changing tides of the grocery market might be most pronounced for Allison, who grew up working for his father’s Sendik’s Food Market in Milwaukee. The industry has changed dramatically since the stores of his youth, but Allison said the focus on customers and quality has renewed his passion for the business since working at Woodlake Market.
“This might sound counterintuitive since I grew up in the grocery business, but I hate grocery shopping,” Allison said. “I just don’t enjoy doing it, which is part of the reason I want to make it an enjoyable experience for everyone else.”
Aldi and Lidl are focused on brick-and-mortar while everyone else in the sector races to perfect online grocery.
A new feature article in The Economist examines the rapid growth of both chains and their reluctance to focus on e-commerce.
Kay Rueschoff, Aldi Nord’s director of marketing, tells The Economist that low prices, the discounters’ hallmark, are no longer enough. But instead of focusing on digital, Aldi has focused on quality to lure shoppers. And quality doesn’t just apply to the assortment. The retailer is also focusing on the quality of the physical store experience.
As Kroger moves to cloud computing, the nation’s largest grocery store chain is sending millions of dollars to Microsoft and Google.
But not to Amazon.
“For obvious reasons competitively, it doesn’t make sense for us to do a ton to help grow that business for them,” Chris Hjelm, Kroger’s chief information officer, told CNBC in an interview.
With Amazon’s retail business pushing into more industries and competing more directly with a growing number of companies, Amazon Web Services is starting to experience a backlash. Kroger is joining the likes of Wal-Mart and Target in finding other vendors to handle their massive workloads for their digital and e-commerce offerings. Alphabet said in its latest earnings release that Kohl’s has moved to Google’s cloud.
In a blog post on Monday, venture capitalist Glenn Solomon from GGV Capital underscored how pervasive this has become. Solomon said several of his firm’s portfolio companies that use AWS have been asked by retail clients to “provide a mirrored service on another cloud because they’d prefer not to have their data stored with Amazon given competitive fears.”
For Kroger, that fear has become more obvious by the day. In August, Amazon bought Whole Foods for $13.7 billion and instantly cut prices at the upscale grocer. CNBC has also been reporting on Amazon’s potential efforts to crack the pharmacy market, another reason for Kroger to be concerned.
Kroger gets about 9 percent of sales from its more than 2,200 pharmacies.
Hjelm said the company started investing heavily with Microsoft Azure and the Google Cloud late last year. With Azure, the grocer is rolling out digital shelf technology to combine the use of sensors and smartphones to alert customers about relevant deals. For e-commerce, delivery and data-focused initiatives such as smart pricing, Kroger is turning to Google. The company also uses infrastructure technology from Pivotal.
Kroger does have some projects running on AWS for businesses that the company acquired. But for any new initiatives, “that investment in growth is not going to AWS,” Hjelm said. Regarding Microsoft and Google, “we feel like we’re not losing anything from a competitive perspective working with those companies,” he said.
If AWS is worried about Kroger representing an emerging trend, it’s not showing up in the unit’s financial performance or its market share.
Revenue in third quarter surged 42 percent to $4.58 billion, and AWS produced $1.17 billion in operating income for a company that’s used to running with little to no profit. Nordstrom, Under Armour, Lululemon and Nisa Retail in the U.K. are a few of the retailers and consumer brands that count on AWS.
For cloud infrastructure as a whole, AWS controls 34 percent of the market, followed by Azure at 12 percent, IBM at 8 percent and Google at 5 percent.
According to AWS, retailers will continue to use its infrastructure because they care most about agility, security and performance when deciding where to run their workloads.
“AWS is the clear leader in these areas,” a company spokesperson said in an e-mail. “Retailers’ end users don’t care about any rivalry that may exist with another retailer.”
Like most big established enterprises, Kroger isn’t moving everything to the public cloud. The company still has many of its core computing functions and storage in its own data centers.
But Hjelm said that in the cloud, Kroger has thousands of projects for testing and development running as well as live applications. He wouldn’t specify how much the company is spending on the cloud, but he said it’s in the millions of dollars and is split roughly equally between Microsoft and Google.
“Over time that balance could shift depending on who creates more value,” he said.
Tariq Shaukat, a president in Google’s cloud division, said in an interview that even if retailers have been reluctant to give Amazon their money, a lot of them have still historically run on AWS. Google is picking up customers now because its cloud platform finally has the services they need, he said.
“There’s an increasing recognition that GCP is a viable option and a leader in areas they care about, like security, data analytics and machine learning,” he said.
John Mackey, the CEO of Whole Foods, says he learned valuable life lessons from his accountant father and paints himself as living a modest life, flying coach and staying only in the cheapest hotels. Although he is worth $75 million, according to Forbes, he reduced his salary to $1 a year back in 2007.
Jeff Bezos is also a no-frills guy, filling his offices with cheap particle-board desks and having all of his employees, even executives at Amazon Studios, fly coach. Bezos, worth $85.8 billion, according to Forbes, caps his and other senior executives’ salaries far below industry norms, saying they should make their money from Amazon stock ? the better the company does, the better they do.
So on the surface, these two executives, espousing similar values, should have a marriage made in heaven. But according to Mackey, the marriage is anything but perfect: In a speech Sunday at the American Production and Inventory Control Society’s annual conference, he described the culture clash as “challenging” and announced a retreat to help him and other top Whole Foods executives align with Amazon’s “higher purpose.”
Perhaps Whole Foods would be better served if Bezos ran the retreat and Mackey stayed home.
Days before the Amazon-Whole Foods deal was announced in June, Texas Monthly’sTom Foster wrote a terrific profile of Mackey, “The Shelf Life of John Mackey,” in which he predicted the Whole Foods co-founder’s leadership and usefulness to the chain had passed their expiration date.
Morgan Stanley’s Brian Nowak wrote in a note to clients in August, as the acquisition was finalized, that Whole Foods’ average food-item price was approximately 14% higher than the average grocery store’s. He cited a recent survey in which 70% of consumers who said they didn’t shop at Whole Foods blamed pricing as the primary reason. ChargeItSpot, a cellphone-charging-station company, conducted a nationwide poll of 900 consumers and found that 62% of shoppers were more likely to shop at Whole Foods after the Amazon acquisition, and 84% had positive feelings about the merger. The survey also found that shoppers were looking for Amazon to “upgrade the grocery store experience with additions of useful technology.”
Which is why it should come as no surprise that the Whole Foods 365 concept seems to have stalled, with one of its five stores already shutting its doors after being open just over a year. (Coincidentally it’s the store based in Seattle, Amazon’s home turf.)
Mackey unveiled the 365 concept as the way to attract shoppers and dispel the “Whole Paycheck” image. The store did neither: It was a mishmash of Whole Foods private label products at the same price as in regular Whole Foods stores and “innovations” that were more gimmicky than useful like the Juicero machine. The check stands were designed for small orders, and the queue line made the checkout experience seem more crowded and laborious.
Bezos and team are big thinkers, and rather than have a sub-chain that is supposed to stand for value, they have focused on the mother ship, as they should; their plan is to get rid of the overpriced reality throughout the entire chain, not just in four stores.
Amazon stands for value and putting the customer first, something Mackey admits he was never able to accomplish. The “marriage,” as Mackey puts it, is challenging for him and some of his team; what Amazon-Whole Foods does not need is a figurehead bringing dysfunction to the table. A single voice and focus have made Amazon a great retailer, and Mackey might soon be asking for a divorce.
The latest sign of trouble: Private-equity giant Apollo Global Management recently tossed a $50 million lifeline to Fresh Market, the struggling high-end chain it took private only 17 months ago.
It will only get worse from here, analysts say. Under Amazon, Whole Foods has been cutting prices of marquee products including organic kale and avocados — a harbinger of the price wars to come. Among the most vulnerable are small regional chains that were facing fierce competition even before Amazon showed up.
“The amount of pressure the Amazon and Whole Foods deal puts on the grocery sector is going to be very significant, and the full ramifications will only be seen over time,” said Antony Karabus, chief executive officer at HRC Retail Advisory, a retail turnaround and performance-improvement consulting firm.
That’s because Amazon founder Jeff Bezos has never really cared much about profit margins, while old-school grocery stores live or die by them. Expect Amazon to keep squeezing and squeezing.
Fresh Market looks like a case study in the troubled economics of the grocery business. When Apollo bought the chain, for about $1.4 billion, the private-equity firm was coming off successes in the industry. Apollo made about $2 billion turning around Sprouts Farmers Market, and before that, made a profit on its stake in Smart & Final Stores Inc., a warehouse grocery chain.
That was then. Nowadays the business confronts the deepest round of food-price deflation in 60 years. Low prices are great for consumers — but bad for grocers. Nationwide, food prices rose in July for the first time in 19 months, according to the U.S. Department of Agriculture, but the increase, of just 0.3 percent, is hardly enough to make up lost ground.
Adding to the pressure, Kroger Co. and Wal-Mart Stores Inc., two of the largest sellers of groceries in the U.S., are trying to keep prices low to fend off German discounters Aldi and Lidl. Kroger said today it’s considering the sale of its convenience-store business to capitalize on a merger wave in that field.
Fresh Market is particularly exposed to the increased competition because it shares Whole Foods’ sweet spot: organic produce and gourmet products.
“They’ve had an identity crisis, and I think they were hoping Apollo could fix that,” Jennifer Bartashus, an analyst at Bloomberg Intelligence, said of Fresh Market.
Apollo declined to comment.
The industry’s stress is apparent in the credit markets, where Fresh Market’s bonds have been hammered. Apollo sunk roughly $525 million into the company at the time of the buyout. Since then, the chain’s $800 million 9.75 percent first-lien bonds have fallen almost 36 cents, to trade at 63.25 cents at 11:03 a.m. on Wednesday. Current prices suggest the company has little equity value.
Meantime, rivals including Tops Friendly Markets and Bi-Lo Holdings, a chain owned by private equity firm Lone Star Global Acquisitions, have fallen hard, too. Tops’ 8 percent senior secured notes due 2022 are trading at about 67 cents, while Bi-Lo’s 8.625 percent pay-in-kind toggle bonds due 2018 have fallen into deep distressed territory, at about 32 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. A group of Bi-Lo’s creditors recently hired legal advisers to gear up for a possible restructuring of the company’s almost $1 billion in debt.
If all this weren’t enough, Hurricane Irma clobbered Bi-Lo and Fresh Market. More than half of Fresh Market’s roughly 180 stores, including 42 in Florida, are in states hit by the storm. A recent research note from Goldman Sachs suggested the damage forced the company to cut back on renovations and may have prompted the Apollo loan.
Apollo is known for trying to safeguard its investments, sometimes at the expense of other debt holders. But its recent loan to Fresh Market is unusual: The $50 million loan, without collateral, is junior to all other Fresh Market debt and pays an effective 6 percent. Retailer Restoration Hardware paid a 9.5 percent coupon in July on a secured loan also provided by Apollo.
That, analysts say, underscores the trouble at Fresh Market.
“The company needs working capital, and Apollo needs to keep it alive to preserve its equity,” said Mark Kaufman, a senior analyst in distressed debt at brokerage firm Ramirez & Co.
Most U.S. shoppers are fiercely loyal to local food stores, calling them better than online options, according to a new Reuters/Ipsos poll that raises questions about how much Amazon.com‘s $13.7 billion purchase of Whole Foods will shake up the supermarket business.
Shares in Kroger, the largest U.S. supermarket operator, have tumbled 40% from this year’s highs on worries that the newly merged company will be quick to siphon business from traditional food sellers.
Seventy-five percent of online shoppers said they rarely or never buy groceries online, according to the survey of nearly 8,600 adults from Aug. 12 to Sept. 1. Even among frequent online shoppers who make internet purchases at least weekly, almost 60% said they never buy groceries online or do so just a few times a year, according to the poll.
The poll also found that around 60% of all adults said their local food markets win on price, selection, quality and convenience. Online sellers led in those categories with only around 3% of respondents.
“I like to touch everything,” said Beth Hatter, 31, who spends roughly $750 a month on groceries to feed an extended family in Newark, Delaware, and buys a lot of produce.
She shops at BJ’s Wholesale Club, ShopRite, and Food Lion, even though online shopping is an option.
Kristian Guy, 25, passes a Met Food market and an organic grocer that stays open until midnight on the walk to his subway stop in Brooklyn.
“I don’t really need to think about buying food online,” said Guy, who does not want food deliveries spoiling on his doorstep.
Amazon has tried for years to grow its online grocery business, without making much of a dent. Its purchase of Whole Foods took its U.S. grocery marketshare from 0.19% to 1.4%, versus 14.46% for Walmart and 7.17% for Kroger, according to GlobalData Retail.
The poll shows “brick and mortar is not dead yet,” said Roger Davidson, a grocery consultant, who predicts that the future of food buying will be mix of online and offline shopping.
The Food Marketing Institute and Nielsen expect U.S. online grocery sales to grow from $20.5 billion, or 4% overall, in 2016 to $100 billion, or 20% overall, by 2025.
Still, some respondents are changing or are open to changing the way they use technology to shop.
Fort Lauderdale resident Ashley Vettese, 24, who said she was wary of online retailers’ food quality, uses grocery store apps for coupons. Kirsten Fox, 28, of Albany, Oregon, likes to pick out her own food. But she said she would consider new online ordering/curbside pickup services being rolled out by Kroger and Wal-Mart Stores Inc to avoid taking her young son into crowded stores during flu season.
Loop Capital analyst Andrew Wolf said attitudes toward online grocery shopping could change.
“The fact that few people want online grocery shopping now doesn’t mean they won’t want it tomorrow,” Wolf said.
From Instacart to FreshDirect to AmazonFresh, on-demand grocery delivery has taken off.
A new farm-to-fridge player called Farmstead is doing things a little differently. Food costs the same as in the supermarket; delivery takes under an hour and is less than $5 (or free in some cases); and the company uses artificial intelligence to figure out what and how much to stock, based on what customers buy most.
Farmstead has been piloting the service for the past year and formally launched in San Francisco on Thursday after raising $2.8 million in seed funding from Resolute Ventures, Social Capital, Y Combinator, and Joe Montana’s Liquid 2 Ventures.
Farmstead’s CEO, Pradeep Elankumaran, told Business Insider that the company’s goal is to reinvent the supermarket model. He believes the future of grocery is on-demand delivery. The online grocery industry is expected to reach $100 billion in US sales and share approximately 20% of the market by 2025.
The startup is entering a crowded space — one that has only become more crowded since Amazon began offering Whole Foods items for delivery this summer. The e-commerce giant is expected to gain a big share of the grocery market, boosting competition for online grocery delivery startups and traditional retailers alike.
But Elankumaran believes Farmstead offers lower costs, better customer experience, and increased efficiency compared to competitors.
“If you shop at Instacart, for example, there are a lot of nitty-gritty things you have to do between you placing the order and you getting the order,” he told BI. “These are things that do not happen at Farmstead. We want you to treat us as a utility. It should be as simple as opening a tap and getting water.”
Here’s how Farmstead works:
Farmstead is a new startup that can deliver groceries to Bay Area homes in under an hour. The other day, a customer received $150 worth of groceries in 35 minutes, Elankumaran said.
Customers can also schedule the specific day they want their food to arrive (as with many other on-demand grocery services).
That’s about the same time it takes to go to a supermarket, and quicker than AmazonFresh and FreshDirect.
The company wants to make grocery shopping easier than going to a supermarket, but still super-quick.
“When we tell [customers] we have Asian pears in-stock, they click a link, and they buy the Asian pears,” Elankumaran said. “They don’t have to go to the store, park the car, make sure the kids are situated, wheel a cart in, go to the produce aisle to get the Asian pears, stand in the checkout line … It’s 2017. Why are we doing that?”
Farmstead is able to deliver quickly because it operates out of two small spaces near where customers live — one in the Mission neighborhood of San Francisco and the other in San Mateo, California.
The service matches local supermarket prices. There is no order minimum, and deliveries are free if customers sign up to get groceries weekly.
Otherwise, delivery costs $3.99 for same-day or $4.99 for one-hour — cheaper than most other services.
Founded in October 2016, the company has completed more than 15,000 deliveries to Bay Area customers. Farmstead prioritizes sourcing from local purveyors and brands, but also sources produce and meat from farms around the US.
Since Farmstead’s AI system tells the company exactly what and how much to buy, the company doesn’t overstock. The minimal overhead, combined with the fact that the company sells from farmers and individual brands (instead of stocking up at grocery stores), saves money.
The company tests different brands and flavors to see which ones move quickly. Recently, Farmstead looked at potato chips: sour cream and onion, regular crinkle-cut, sea salt and pepper, and Sriracha-flavored. “Nobody wanted Sriracha,” Elankumaran said, so the site eliminated it.
Another long-term goal of Farmstead is to reduce food waste. Grocers throw out more than 38 million tons of food is every year, largely from overstocked product displays, customer expectations that produce must look “perfect,” damaged goods, and confusion about “sell-by” dates.
“A lot of the supermarkets’ pricing is because of wastage. If you’re wasting 30% to 40% of your produce, you’re going to pass that cost onto your customers,” he said.
Food stocked by Farmstead that isn’t purchased will go to the food bank network Feeding America, which sends the items to a shelter for women in the Bay Area. Farmstead also sells “ugly” produce, which is fine to eat but might have blemishes or weird shapes.
Elankumaran stresses that Farmstead is a tech company first and foremost. This means there is an emphasis on perfecting its algorithms, and communicating with customers via email and app notifications to learn more about preferences.
As the app learns more about the buying habits of each customers and asks them what perishables they throw out, it will tell them if they are over-buying food. It also alerts customers when certain foods are going out of season, urging them to buy.
The growth of delivery giants like Amazon and Instacart as well as smaller upstarts has made the on-demand grocery space crowded. But Elankumaran believes Farmstead works more efficiently, because it offers just 1,000 products between two 2,000-square-foot industrial spaces.
When Amazon bought Whole Foods, the e-commerce giant lowered prices of many items both in-store and online. That, combined with the fact that the company plans to expand Whole Foods offerings, could make Amazon an even tougher competitor for Farmstead.
Since Farmstead only sells brands that customers commonly buy (big, well-known brands, essentially), it could be difficult for more niche brands to gain traction on the site. Elankumaran said that the company buys small cases of food from several Bay Area brands to trial them. If customers buy the products, Farmstead will continue to work with them.
“We carefully curate. We don’t carry 30,000 items like a traditional supermarket. If you go to a Safeway or Whole Foods, you’re just wandering the aisles and there are so many items. More often than not, these things don’t sell,” he said. “We only carry things that people like and buy.”
In 2017, Farmstead is working towards expanding to more parts of California, and eventually hopes to bring its small warehouses to cities across the United States.