Venture Bytes #70 – Online Grocery Delivery Service – The Next Frontier

Online Grocery Delivery Service – The Next Frontier

The online grocery delivery segment is intensely competitive with big retailers, ecommerce giants, and on-demand delivery companies vying for an increasingly bigger slice of the market. The addressable market, at over $100 billion and growing at a CAGR of 24% till 2025, is far from a zero sum game.

While the online grocery delivery market stands at $106 billion as of 2020, it is merely 10.2% of the broader $1.04 trillion grocery market. More importantly, the double digit penetration is after accounting for the unprecedented COVID-19 tailwind that doubled the penetration level from the previous estimate of 4.3% for 2020.

Online grocery sales are expected to moderate in the coming months, in step with the increasing administration of the vaccines to a broader swath of the population. Shoppers will no longer be intimidated or restricted from visiting retail stores. Despite that, 40% of online shoppers are expected to continue with online deliveries post COVID-19, as per a Mercatus and Incisiv study. The other 60% increasingly favor a more omni-channel experience. More importantly, the study revealed a long-term trend of convenience and time savings as key drivers for online grocery deliveries.

Accordingly, e-Grocery sales are expected to reach $250 billion here in the USA by 2025. This would still be roughly 21.5% of the over trillion dollar broader grocery market growing at a 24% CAGR from 2020 to 2025, per a Mercatus and Incisiv study.

Instacart – A Standout Performer

Instacart has been a standout performer in an increasingly crowded field. From 35% coverage of U.S. market in 2017, Instacart’s footprint had broadened to 80% in 2019. Similarly, in 2019, Instacart’s market share lagged behind that of Walmart and Amazon, which had online market share of 37% and 29% respectively, per Retail Feedback Group.

However, as online grocery delivery service became more popular in 2020, Instacart capitalized on the shift with new funding rounds, an aggressive hiring push, and new strategic partnerships with retailers of all sizes to reach the pole position. Once competitors, Walmart and Instacart partnered in August last year for deliveries in Los Angeles, San Francisco, San Diego, and Tulsa to match Amazon’s same day delivery. As of Feb 2021, Instacart’s wide delivery network covered 85% of the U.S. and 75% of Canada.

Instacart’s journey to the top of the online grocery market in many ways has been like DoorDash’s journey to the top of the food delivery market. Instacart completed a $525 million round in 2020, expanded the grocery delivery market by adding a range of retail partners including national chains such as Albertsons, Bevmo!, Costco, Kroger, as well as hundreds of national and regional stores. To effectively manage the soaring demand Instacart beefed up its delivery network with close to 550,000 shoppers in just three months. As of Feb 2021, the company has partnered with 500 national, regional, and local retailers and delivers from almost 40,000 stores across 5,500 cities in North America.

Instacart’s increasing mind and market share is driven by its ability to provide turnkey and cost effective third-party grocery services to help generate incremental revenue for its retail partners. According to a NERA Economic Consulting study, Instacart’s scalable services led to increased retail grocery revenue of more than $620 million in 2019 across four states including California, New York, Illinois, and Washington. Additionally, in every new market Instacart drives over 4% growth in direct retail grocery employment. Specifically, Instacart’s operations in the four states mentioned above led to the addition of over 23,000 jobs.

Well-Funded Business Model

In its latest funding round completed on March 2, Instacart raised $265 million at a $39 billion valuation, led by existing investors including Andreessen Horowitz, Sequoia Capital, D1 Capital Partners, Fidelity Management & Research Company, and T. Rowe Price Associates. The company has raised $2.7 billion to date. Instacart expects to deploy the new capital in a number of ways, including increasing its corporate headcount by 50% in 2021, as well as further investing in several key areas such as the Instacart Marketplace, which connects customers and retailers; Instacart Advertising, which enables Consumer Packaged Goods (CPG) companies of all sizes to reach customers shopping online; and Instacart Enterprise, which supports the entire grocery ecosystem by offering end-to-end e-commerce solutions for retailers.

The company intends to add new categories to its menu, including prescription medications, electronics, home décor, and sporting and exercise equipment among others. Online delivery for convenience stores is an under penetrated market where online sales through third-party delivery apps are a mere 1%. The $33 billion market is currently dominated by DoorDash with a 60% market share. Instacart has started making inroads into this segment with partners such as 7-Eleven to deliver milk, bread, eggs, alcohol, and other staples in 30 minutes across 750 stores. The deal could extend to 7-Eleven’s roughly 11,800 stores across North America and help Instacart make deeper inroads in this nascent but growing segment.

Cannabis Sector Riding High

Cannabis has caught a bid, as the saying goes. Cannabis related ETFs have been on fire recently. The AdvisorShares Pure U.S. Cannabis ETF announced it has gathered over $1 billion in assets, and the Global Cannabis Stock Index, which tracks U.S. – listed marijuana stocks, has climbed 31% since the start of the year. Strong earnings reports – Tilray is up 181% so far this year – have brightened the spotlight on this sector.

The sector has been buoyed by optimism that there will be additional marijuana deregulation, especially since the Democratic party’s 2020 election platform called for decriminalizing marijuana. Additionally, the November ballots in Arizona, Montana, South Dakota, and New Jersey all approved the legalization for adult use. With that, now more than 111 million people can legally access recreational cannabis in the USA. New York is now weighing a similar move to plug a projected $15 billion budget hole in the current and coming fiscal years.

Whether this momentum is sustainable is debatable, but the underlying drivers are undeniable. The U.S. is the fastest-growing marijuana market in the world. Federally legal pot could help generate an additional $106 billion in aggregate tax revenue in the U.S. by 2025, per a New Frontier report. Roughly 67% of the U.S. population supports the legalization of cannabis, according to a 2019 Pew Research survey. An estimated 78% of U.S. sales still happened in the black market in 2020, according to the cannabis-focused SOJE Fund

Secular Trends Powering Cannabis Use

Millennials, a core user base, have gradually moved away from alcohol due to rising health concerns. The millennial cohort comprises the majority of the 55 million recreational marijuana users in the U.S., according to a 2017 Yahoo News poll. Similarly, marijuana use amongst high school and college students has seen an uptick, according to a Monitoring the Future study in 2017.

Pricing also seems to have tipped the balance in favor of cannabis as per frequent users.

“I realized that I get zero enjoyment out of drinking, and it costs me more money than weed does. I enjoy weed better. It’s more relaxing, I don’t have to worry about how I acted the night before, and don’t have to deal with hangovers or throwing up the morning after” – Jena, 27 year old recreational user interviewed by MarketWatch, July 2019

With surging demand, legal cannabis sales are estimated to reach $46.8 billion in addressable market by 2025, growing at nearly 25% CAGR between 2019 and 2025, according to Cowen Research. Legalization of adult use will be the strongest driver for rapid growth with a market opportunity in excess of $53 billion by 2025, according to Euromonitor.

Additionally, the cannabis supplements market is contributing to incremental sales for online and offline retailers including Amazon, Sephora, and Neiman Marcus. As per Cowen estimates, retail sales of CBD (non-intoxicating compound derived from Cannabis) products are expected to grow to $16 billion by 2025.

Cannabis, unlike tobacco and alcohol, has found usage in pet care. Extending the addressable market, Martha Stewart has launched a CBD infused line of dog treat products including soft-baked chews and tinctures in partnership with Canopy Growth, a major Canadian cannabis company.

Venture Capital Funding on The Rise

Venture capital funding rounds in the cannabis sector have been gaining momentum lately, with triple-digit sequential increases from 2016 to 2019, hitting a recording of $2.7 billion in 2019. The 2020 funding level took a modest dip, but 2021 appears to be on a good run rate with $311 million raised to date.

New Players and a Growing Ecosystem

Major alcohol and tobacco companies such as Constellation Brands, Altria, and Molson Coors are increasing their investments and stakes in cannabis companies to boost flagging sales in their respective core markets. According to a 10-year study published in 2017 by University of Connecticut and Georgia State University, sales of wines and beers declined by 15% in U.S. counties where marijuana was legalized.

With prohibition nearing end, a strong ecosystem has been developing for cannabis here in the U.S. Companies such as Eaze, Harborside, Leaflink, and Greenrush, with their indirect-to-consumers business models are extending the reach of medical dispensaries and paving the way for democratizing cannabis sales in the U.S. Companies including Shopify, Namaste technologies, Dutchie, and Jane provide backend infrastructure helping to commoditize cannabis. Dutchie, for instance, supports over 2,080 dispensaries in 36 markets with website creation, maintenance, and order handling. It processes 10% of all legal cannabis in the world. Furthermore, fintech startups emerging in the sector are enabling eBanking solutions for cannabis retailers. Illinois-based CannaTrac, with its range of solutions, is helping cannabis retailers embrace digital payment solutions.

“We’re seeing adoption rates for online orders, curbside pickup, and delivery soaring through the roof with widespread ‘stay at home’ orders. Consumers are stocking up on cannabis like other non-perishable goods, and businesses have to offer alternative services to meet their needs.”—Ross Lipson, Dutchie CEO and Co-Founder. **

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