“We’re not trying to take their customers away from them,” said Instacart founder and CEO Apoorva Mehta. Forbes in January, addressing strained relationship with some grocers. Mehta added that Instacart never plans to sell groceries directly. But while news about the tech platform this week sparked speculation that Instacart could build its own fulfillment centers and become a retailer itself, Instacart has a much more lucrative opportunity ahead of it: offering a tech solution by white label to struggling retailers.

The FinancialTimes Monday reported that Instacart explores the use of robotic warehousesa move which the FT says is likely to reignite fears among its grocery partners that the company could one day attempt to go it alone.

Celia Van Wickel, eCommerce Information Manager at The Coca-Cola Company
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, said in a post on LinkedIn that could lead to several results. In one scenario, Instacart creates a fulfillment-as-a-service model that is sold to retail partners. This could be achieved through Instacart building its own warehouses, partnering with existing micro fulfillment companies or even acquiring a micro fulfillment company. The outlier scenario is that Instacart expands across the value chain and becomes a retailer itself. This last scenario is in my opinion the least likely, but certainly the one that should be of most concern to retailers.

Why retailers are wary of Instacart

Instacart has been described as a Trojan horse for retailers who have so far delayed developing their own digital strategy. In our next book Instacart for CMOs, my co-author Stefan Jordev and I argue that there are reasons retailers should be wary of hitching their shopping cart to Instacart. These include:

  1. Lost customer connection: Personal information, product information, and household information are all on Instacart. Retailers lose both their current and future direct relationship with the customer.
  2. Margin Erosion: Instacart charges retailers 5-8% platform fees. Some choose to pass this as markup; others absorb it and lose margin.
  3. Instacart can jeopardize vendor allocations and retail media spend as brands shift their marketing budgets online.
  4. The dilemma of serving both in-store shoppers who need to find items and get out of the store quickly and the end customer who does their shopping on their own. Each has very different retailer preferences and measures of value.

Several food retailers have indeed chosen to build their own platforms rather than renting Instacart’s infrastructure. Kroger
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as the largest grocer in the United States, is most notable in its rollout plans 10 distribution centers for online grocery delivery. These customer fulfillment centers are built in partnership with Ocado, a back-end software solution.

Meanwhile, grocer Erewhon has partnered with ECRS to roll out its own delivery platform.

But the cost of setting up a full front-end ordering system, along with the back-end delivery routing software, stands in stark contrast to the minimal setup costs Instacart currently charges retailers.

Two different business models, two distinct platforms

Instacart’s existing consumer-facing app has multiple monetization streams, including membership fees and a levy rate it charges retailers. But the most attractive and probably the biggest revenue stream is brand advertising revenue. National brands pay to advertise their products on Instacart, and their advertising platform is highly regarded by brands. Of all the brands my co-author and I spoke with, the unanimous opinion was that Instacart’s advertising solution provides the best ROI compared to other retail media platforms. Instacart is investing in its advertising platform and will likely find a few other ways to successfully monetize the trust that brands, retailers, and customers have in the platform.

But a white label technology solution deployed by retailers would likely have a different business model, which could be even more lucrative. Going the typical route of enterprise software solutions, Instacart would likely charge retailers for the initial deployment of the solution, its customization, and then its maintenance every year. The retailer would then own and control all customer data. Depending on the size of the retailer and the deal made, this could be a more profitable model. One thing is certain, it would cost a retailer far less in capital and time to white label Instacart’s solution than to build their own from scratch.

I think Instacart creating a white label fulfillment solution for retailers is the most likely scenario to play out. As I speculated in a previous article, fulfillment as a service is a business model that Amazon
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has had tremendous success in recent years. Building fulfillment infrastructure is incredibly expensive, whether it’s actual fulfillment sites or the technology that allows Instacart to increase route density to a point where it can be profitable. An Instacart white-label fulfillment program could consolidate orders and deliveries on the back-end for retailers, providing them with the scale needed to serve customers in small towns.

Instacart keeps moving forward

In a previous article for ForbesInstacart says it’s launching a new portal this spring that will give retailers access to even deeper analytics.

And the company continues to add retail partners to its ranks (a Walgreens
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partnership was announced this week), further aggregating customer demand and becoming a one-stop-shop for consumables – beyond just groceries.

Instacart’s ambitions in the world of e-commerce are beyond doubt. The question is, will they choose the growth opportunity that helps traditional retailers adapt to the new online economy, or will they drive another nail in the coffin of in-store groceries?

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