The Delivery Battle Between Google, Amazon, Whole Foods

Despite long being seen as an innovator in many ways, Whole Foods is actually a latecomer to the online grocery shopping game, having been beaten to the punch long ago by a slew of competitors.

The fairly open status of the field has enabled a lot of experimentation with different models, and there are a number of distinct but often overlapping camps in which the various services fall:

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·         First are the localized but comprehensive offerings of smaller, often well-established companies like FreshDirect Inc., which engage in direct sales of groceries, delivering both fresh and non-perishable goods from their own warehouses to customers’ doors.

·         AmazonFresh is a larger-scale adaptation of that concept, as Amazon.com Inc. NASDAQ:AMZN CEO Jeff Bezos’ brainchild already delivers the company’s own stockpiles of fresh and dry grocery items to much of the West Coast, with plans to enter other markets.

·         At the other end of the spectrum are services like Google Shopping Express and eBay Now, which emphasize same-day service, but only ship non-perishable items. More interesting, they have chosen to go lean, delivering customers in their limited (so far) distribution zones goods they choose online from a number of existing brick-and-mortar retailers, eschewing the expensive task of sourcing and storing groceries of their own.

·         Retailers have also taken steps to deliver groceries themselves, doing away with middlemen. Safeway already delivers groceries to customers, and Wal-Mart Stores Inc. NYSE:WMT is reportedly exploring a direct grocery delivery service. In 2000, Dutch grocery conglomerate Koninklijke Ahold N.V. (AMS:AH) chose to acquire the middleman, in its case Peapod Inc., which is dedicated largely to delivering groceries for Ahold’s Stop & Shop Supermarket Company and Giant Food of Maryland LLC grocery chains.

·         A startup called Instacart Inc. introduced yet another grocery delivery model two years ago that uses the magic of the “sharing economy” to keep its overhead and labor expenses low while providing same-day service in its limited distribution areas. The startup offers personal shoppers, who pick up goods at stores on buyers’ lists and deliver them by bicycle. A number of other startups like Good Eggs Inc. and Greenling Inc. have also garnered attention and multimillion-dollar funding rounds.

·         Whole Foods has yet to outline its grocery delivery model in any detail, but co-CEO Walter Robb said Wednesday that the chain is partnering with Instacart for its service, suggesting it could borrow from the firm’s innovative approach.

Despite the crowded field, the two biggest names with delivery services currently up and running in at least part of the country are Google Inc. NASDAQ:GOOG -- which has announced that it is dedicating $500 million to its effort -- and Amazon. The two represent what many see as the two mainstream models in the competition to be king of the grocery delivery hill. And Instacart “is like Uber but for groceries,” according to Susan Lee, a project manager at the global strategy agency Brand Union in New York, N.Y., who provided a succinct breakdown of what differentiates the three services.

“Google is going to be partnering with retailers and Amazon will be warehousing its own produce and food. Even though Amazon’s overhead costs are low, with produce it will be a more challenging feat,” she said. “Instacart doesn’t have any physical brick and mortar locations; they don’t provide the groceries. What they do is connect personal shoppers with people looking for groceries who don’t have time to go to the store, pick out groceries, pay for them and bring them home.”

Lee predicts that there will be consolidation in the delivery market as time passes, with the bigger, better-heeled players -- be they Google, Amazon, eBay Inc. NASDAQ:EBAY, Wal-Mart or someone else like Target Corporation NYSE:TGT or even Kroger Co. NYSE:KR -- acquiring smaller outfits to hone and augment their services, or to move into markets already dominated by a localized service. Google is already setting up partners with retailers like CostCo to deliver to their customers in test markets.

Competition will drive down prices while storage and other expenditures will keep overhead high, according to Joseph Agnese, an analyst at S&P Capital IQ.

“It’s extremely difficult to run a profitable online grocery delivery operation,” Agnese said, adding that it might be particularly challenging for Whole Foods and other higher-end grocers to make money on delivery. “It may be more difficult at least to expand it broadly across the United States because they’re not extremely price-competitive. Typically online businesses are more price-competitive, such as Amazon and Wal-Mart. The market opportunity for Whole Foods [products] is a lot more narrow than it is for selling cheap, commodity-type goods.”