Now Monopolies Are Crushing the Online Grocery Business

A boom in home deliveries is predatory prey for Uber, Softbank, and others.

As new Covid-19 cases decline in the U.S. and life begins to look more normal, one big question remains for the $1.4 trillion grocery industry: Is delivery here to stay?

Online grocery sales tripled in the early stages of the pandemic and continue to grow today, rising another 65 percent between March and May. Many think that the shift to online shopping will remain even after the pandemic fades. For instance, eMarketer estimates that online groceries will make up 11 percent of all U.S. grocery sales by 2023. But how this expanding market winds up being structured could have major consequences for everyone, including consumers, workers, and local grocery stores.

Tech giants and their investors want to create the next monopoly middleman between you and your groceries. They’re willing to burn cash on cheap, unprofitable delivery to corner this market. Softbank has promised $1 billion to grow a startup, GoPuff, that wants to replace your local corner store with a network of delivery-only warehouses. Last week, fellow Softbank darling Uber announced an exclusive partnership with GoPuff that allows Uber app users to order a snack, soda, or even hand soap from one of GoPuff’s micro-fulfillment centers. This follows a big year of food delivery investments for Uber, and they’re not alone. Leading grocery delivery rival Instacart attracted another $265 million in venture capital funding in March, doubling its valuation since October to $39 billion. Competitor DoorDash is also building delivery-only “dark store” warehouses, and GrubHub is working with more supermarkets.

These third-party food delivery services put pressure on grocers to invest in delivery as well, but no one seems to know how to offer quick grocery delivery at a price that consumers will accept without gouging grocers, exploiting workers, or abandoning brick-and-mortar stores altogether.

Grocery chains were slow to take the plunge into delivery since most adults prefer going to the store (and according to a recent survey, some 84 percent still do even with Covid lurking). Moreover, many consumers who value home delivery resist paying a steep price to cover its actual cost: One 2018 survey found that only one percent of customers were willing to pay for the true cost of grocery delivery. But these considerations don’t inhibit tech investors who are willing to lose money on underpriced delivery to attract customers and gain market share.

Instacart leads the industry with roughly half of all grocery delivery sales and relationships with some 600 different retail chains. The corporation typically charges grocers more than 10 percent commission on each order and relies on a network of gig workers to shop for and deliver foods, which has more than doubled during the pandemic to about 500,000 workers.

Now more tech giants want a piece of grocery delivery. Raj Beri, Uber’s global head of grocery, has said that the corporation wants to become a “one-stop shop for all customers’ food occasions.” The ride-hailing giant acquired rival Postmates in December for $2.65 billion, claimed a majority stake in Chilean-based grocery delivery startup Cornershop two weeks later, and dropped $1.1 billion in February to take over an alcohol delivery business, Drizly. DoorDash and GrubHub are also onboarding more grocers.

Most of these grocery delivery ventures are not profitable, yet. After eight years in business, Instacart only reported its first profit in April, and because the company does not regularly report profits, it’s unclear how it has done since. Uber’s entire business loses billions annually and has never turned a profit, nor have most food delivery apps. Delivery is labor intensive, and tech companies’ grocery commissions and low delivery fees do not quite cover the cost.

Tech corporations and their lavish backers want to make back their investment by consolidating enough market power to squeeze others in the supply chain for profit. This means higher commissions from grocers, pricey premiums on product placement for vendors, and further wage cuts for workers. Such consolidation in grocery delivery could drive consolidation across the food industry. Smaller grocers will struggle if only the largest players can afford delivery commissions, and customers won’t find new food brands if only Big Food can buy prime placement in delivery apps’ search results.

GoPuff’s and DoorDash’s dark stores could be another path to profitability, by cutting out retailers entirely and making money on product sales out of low overhead warehouses. While GoPuff has not turned a profit yet, its executives say three-quarters of their warehouses currently break even or turn a profit.

That said, third-party delivery companies face a competitive challenge from the largest retailers, who can draw on their deep pockets to build in-house delivery systems and avoid paying commissions or sharing customer data. “The pendulum has started to swing back,” says Bill Bishop, chief architect of Brick Meets Click. “You can definitely feel grocers looking for ways to reduce their dependence on Instacart.”

Walmart, Target, Albertsons, Ahold Delhaize, and Kroger are spending millions (even billions) on e-commerce infrastructure, especially automation and delivery-only fulfillment centers to compete with dark stores. Target acquired Instacart rival Shipt, while Ahold Delhaize bought delivery companies FreshDirect and Peapod. Together the three captured nine percent of online grocery sales in November. But Walmart has the largest grocery delivery lead by far. With an extensive e-commerce network trying to rival Amazon, the big box giant commanded 44 percent of online grocery sales in November, second only to Instacart.

But it is not clear if grocers can make money on delivery, either. While in-store or curbside pickup is much cheaper to pull off than front door delivery, a grocery analyst for Bain estimates that globally, grocers typically suffer a negative 15 percent operating margin on all online orders. Of all grocery delivery models, only expensive, fully automated micro-fulfillment centers project a positive margin of just two percent. Growing delivery expectations from consumers could disadvantage smaller or regional chains that cannot weather these losses or invest in internal systems to escape third-party apps.

Behind virtually all grocery delivery systems, whether Uber, Instacart, or Walmart, is a highly exploited workforce. These companies misclassify delivery shoppers and drivers as independent contractors instead of employees, which means workers do not receive a minimum wage, overtime, workers compensation, unemployment insurance, healthcare, discrimination protection, or protections to form a union.

Low-wage gig labor is a foundational part of the grocery delivery model. “The main way they moderate their expenses is by keeping their labor costs down,” says Errol Schweizer, former vice president of grocery for Whole Foods. Uber and Instacart recently dropped historic lobbying cash to help introduce and pass Prop 22 in California in order to avoid classifying delivery drivers as employees. “These folks are essentially rewriting labor laws to deny essential rights to delivery workers … and legalize precarity,” Schweizer adds.

While some Instacart or Walmart shoppers report making upward of $20 per hour, wages can easily fall below minimum wage with just one imperfect rating, changes in tipping policies, or increased wait times between orders. Apps can randomly suspend workers at any time and hold them to unforgiving metrics. In one instance, Instacart permitted workers only a 10-minute break every four hours; if someone wanted to rest or go to the bathroom before then, they risked a late penalty. The gig economy’s labor law loophole drives a race to the bottom across the grocery industry. Chains such as Albertsons that initially hired delivery workers in-house have laid off employees and replaced them with gig workers. Other chains, notably Walmart and Kroger, are investing in automation to avoid hiring delivery workers altogether.

There are visions for a more equitable and innovative grocery delivery system, such as worker-owned delivery cooperatives or modern-day milkman models that streamline delivery with advanced orders and a daily route. But so long as reckless monopoly capital can bankroll more exploitative middlemen, responsible grocery delivery groups cannot fairly compete.

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Claire Kelloway

Claire Kelloway is a senior researcher-reporter for the Open Markets Institute and the lead writer for Food & Power.