- Walmart viewed as potential suitor for Instacart
- Valuation of grocery delivery service could suffer
Instacart could attract a range of suitors as its exit options narrow in the wake of Amazon’s [NASDAQ:AMZN] pending acquisition of Whole Foods [NASDAQ:WFM], multiple sector advisors said.
In the weeks before the Whole Foods deal was announced, the San Francisco-based online grocery delivery service had been discussing a potential initial public offering with investment bankers, two sources briefed on the matter said. But now a sale may be a better path for the company, they said.
Walmart [NYSE:WMT], which directly competes with Amazon, could take an interest in Instacart to bolster its e-commerce business, the sources said. In addition to adding a delivery component to its grocery division, purchasing Instacart would help attract younger consumers, one sector advisor said.
A quarter of Walmart’s revenues come from grocery sales and it can’t afford to lose market share, he said. Walmart is the biggest grocery player in the US with a 14.5% stake, GlobalData Retail reports.
The retail giant needs to add some “juice” to its e-commerce business, a second advisor agreed. “Frankly, Walmart has struggled online. Walmart does not have the online presence that Amazon does,” added a third advisor.
Walmart’s splashiest foray into e-commerce came in 2016 when it bought Jet.com for USD 3.3bn in cash and stock. Marc Lore, a Jet.com co-founder now in charge of Walmart’s digital strategy, has been buying up companies like Bonobos and ModCloth. He is seen as an “empire builder,” one lender noted.
Acquiring a startup like Instacart would be a logical response to the Whole Foods deal, the lender said.
Other potential suitors
Discount retailer Target [NYSE:TGT] and traditional grocers like Kroger [NYSE:KR] and Safeway also might see value in picking up Instacart to grow their presence online, two of the advisors said.
Adding a grocery component to a restaurant delivery service like GrubHub [NYSE:GRUB] would make plenty of sense and highly valued stock could be used to do it, said a CEO of a meal kit delivery startup.
Or Instacart investor Sequoia Capital could consider combining Instacart with one of its other portfolio companies like DoorDash or Good Eggs to create a bigger and more competitive entity, he added.
FedEx [NYSE:FDX] and UPS [NYSE:UPS] might want Instacart’s online infrastructure too, one of the advisors said, as they are competing for last-mile delivery – a space seeing disintermediation with the entrance of startups like Postmates and Door Dash, which are delivering food directly to customers.
Alphabet [NASDAQ:GOOGL] can’t be ruled out as a bidder either, the advisor said. It could combine Instacart with Google Express, he said. Another advisor said he doubts Alphabet would want to bid for Instacart.
A foreign buyer would “make a lot of sense,” the third advisor said. “An interesting play could be a Chinese player” like Alibaba[NYSE:BABA] or Tencent [HKG:0700], he said. Asian buyers have made their interest in US assets well known and absorbing Instacart would likely garner far less regulatory scrutiny than a semiconductor company or an asset located near a military base, this advisor said. Another e-commerce player like Japan-based Rakuten [TYO:4755] also might view Instacart as a way to gain US market share, he said.
Overseas grocers like Tesco [LON:TSCO], Lidl or Aldi could show interest in Instacart too, the second advisor said.
Valuation in jeopardy
In the event Instacart does come to market this year, it will struggle to maintain the UD 3.4bn valuation investors assigned it during a USD 400m capital raise in March. Indeed, the startup’s valuation might be halved when Amazon completes its purchase of Whole Foods, according to three sector advisors.
A fourth advisor who has met with Instacart said “Amazon can put them out of business very quickly.”
Whole Foods discounts its products for Instacart customers – an arrangement widely expected to end when its five-year partnership with the online startup expires, the advisor said. Instacart had hoped to replicate the model it formed with Whole Foods because the unit economics are better than that of the other retailers Instacart works with, this advisor said. Whole Foods holds a small interest in Instacart.
It is possible Whole Foods will look to shop its minority stake in Instacart now that it is under Amazon’s ownership, added a fifth advisor who has overseen marquee acquisitions in the online retail space.
A person close to Instacart downplayed the impact the Amazon-Whole Foods deal could have on its business. Whole Foods comprises less than 10% of Instacart’s total revenue and that percentage is declining, the person said. Whole Foods only owns 2% of the overall US grocery market, she added.
In the last month alone, Instacart announced expanded partnerships with Publix, Ahold-Delhaize and Wegmans, the person said, and in the last few months the startup has expanded its partnership with CVS [NYSE:CVS] and launched new alliances with Bashas’, Homeland and other grocers, she said.
“From the beginning, we’ve been committed to helping grocers compete online,” an Instacart spokesperson said in a prepared statement. “That’s more important than ever, given Amazon just declared war on every supermarket and corner store in America. We already work with over 160 retailers across the country and look forward to partnering with many more.”