Instacart Inc. is entering the warehouse business, seeking to expand its reach in an increasingly competitive food delivery market.
The grocery delivery company said it would start building fulfillment centers for supermarkets over the next 12 months, in partnership with technology company Fabric, in or near grocery stores, with capacity for 10,000 to 50,000 items.
In such fulfillment centers, the company will use robots to pull items from warehouses and have Instacart’s workers pack and deliver orders. Instacart currently deploys shoppers who grab products from grocery stores and drop them off at people’s homes. The company didn’t say how many centers it will build, where they will be or how much it will invest.
Warehouses, which will be automated, are expected to speed up the delivery process, the company said. Albertsons ACI -2.25% Cos., SpartanNash Co. SPTN -2.08% and other grocers are also building small warehouses for online orders.
San Francisco-based Instacart has grown sharply during the pandemic, as more consumers shifted their shopping online. It is facing new challenges as businesses reopen; online grocery sales are slowing and shoppers are returning to in-person shopping. Delivery companies are still struggling to turn a profit, as labor and transportation costs eat into profit margins. Many grocers remain worried that they are sharing customers and earnings with Instacart––which takes a commission cut for each order––and say they have more options as delivery companies pitch favorable deals to stand out.
“People want what they need when they want it,” said Mark Schaaf, Instacart’s chief technology officer. The company spent recent years looking at ways to offer warehouse services to grocers, he said.
Instacart added more than 250 retailers in the U.S. and Canada last year and now delivers from more than 600 businesses. It raised nearly $700 million of new capital over the past year amid a boom in business and has a valuation of $39 billion. The company is planning to go public and has beefed up its leadership team. It hired a chief financial officer from Goldman Sachs Group Inc. and a chief executive officer and a chief operating officer from Facebook Inc. Fidji Simo, the new CEO, has said she sees opportunities to provide more technology to retailers and expand internationally.
Once nascent, smaller warehouses are becoming more mainstream as e-commerce grows. Industry executives and analysts say that fulfillment centers can cut costs over time and keep stock and online shoppers out of store space, but require upfront investments and typically reach profitability in a year. Instacart said it would also help retailers manage inventory in fulfillment centers.
Meanwhile, competition for delivery customers is intensifying. DoorDash Inc. and Uber Technologies Inc. partnered this summer with Albertsons, the nation’s second largest grocery chain after Kroger Co. Fuad Hannon, head of new verticals at DoorDash, has said that grocery remains a big focus for the company and that it is offering delivery and technology services to retailers.
SoftBank Group Corp. -backed goPuff, which owns its inventory of groceries and other staples and delivers them to consumers, raised $1.15 billion in March that assigned the company a valuation of $8.9 billion. The Philadelphia-based company has been further expanding its delivery business in various cities including Dallas and Austin.
Instacart is focusing on identifying new technologies and handling e-commerce for retailers, Mr. Schaaf said, adding the retailers will own the inventory in warehouses.
Instacart has been looking for different avenues of growth. The company is focused on expanding its fast-growing advertising business, which makes money by working with manufacturers to offer discounts on its platform. It has also signaled its international ambition.
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