21 June 2022
As grocery subscriptions grow, perks offer relief from inflation
Kroger and Instacart are revamping membership programs.
Kroger and Instacart are revamping membership programs.
When it comes to growing a digital business, subscriptions are a tried-and-true model for growing an engaged base of users. As grocers gain a foothold in ecommerce, they are increasingly embracing a member-based approach.
It makes sense: Loyalty programs are a longtime facet of grocery businesses, helping stores tout savings to members. Building on this with inspiration from the massive success of Amazon Prime, grocers rolled out a new generation of subscription programs over the last two years to help shoppers more easily access ecommerce services with features like free delivery. As they partner with others to layer on additional perks that make memberships more attractive, these programs are taking a page from startup playbooks for growth.
With the pandemic’s ecommerce boom cementing their footholds in digital, grocers are now unveiling upgrades to their membership programs. Kroger and Instacart both introduced their own expansions in the last week. It comes at a time when the benefits of these programs could help provide relief to shoppers as they face rising prices.
Let’s take a look at the updates:
Kroger is expanding its Boost membership program nationwide in the coming weeks, CEO Rodney McMullen said on the company’s first quarter earnings call.
Piloted in four markets since November, the Boost program offers no-fee delivery on orders over $35, doubles fuel points customers receive for every dollar spent, discounts on private label brands and other perks. Kroger takes a tiered approach to its membership program, with a $59 annual membership providing delivery within 24 hours, and a $99 annual membership that offers unlimited delivery within two hours.
The program is “delivering promising results,” McMullen said. In particular, delivery sales increased in the pilot areas when compared to company divisions where it wasn’t implemented. Retention of delivery customers also improved, McMullen said. This leads to more engaged customers.
“The thing that's most important to us is it causes that customer to be stickier to our overall ecosystem, not just on delivery,” said McMullen, on the company’s earnings call.
It’s helping to build a base of shoppers in ecommerce. Overall, McMullen said, “This next-generation loyalty program is deepening our relationships with customers as they continue to look for value and convenience.”
The membership program is part of a digital business that has grown to more than $10 billion digital business for the grocer. While Boost is visible to shoppers, Kroger has also been expanding its “hub-and-spoke” network that provides delivery behind the scenes. The hubs are automated customer fulfillment centers, of which the company is planning to have more than a dozen in the near future, including a new addition in the Denver area announced this week. The spokes are more localized centers, such as a 60,000-square-foot facility in South Florida that allowed the company to begin delivery this month before it even opened a store in the region. Both are powered by robotics technology from the UK-based Ocado Group.
As the different parts come together, it shows how Kroger is making big investments in its ecommerce business.
A day before Kroger’s call, grocery delivery service Instacart announced that it is revamping its subscription program.
This includes a rebrand, as they company is changing the name of the program from Instacart Express to Instacart+. Available for $9.99 a month or $99 a year, it offers free delivery on orders over $35, 5% credit back on pickup orders and reduced service fees and other perks.
With the revamp, Instacart is rolling out a series of additional features that the company says is the “first of their kind.” These include:
Similar to Kroger, Instacart touted members of Instacart+ as its loyal customers. From the company’s announcement:
Instacart subscribers are among the company’s most engaged customers, driving superior lifetime value through increased orders, higher GTV per customer and habitual ordering than standard customers – as well as ordering from a greater diversity of retailers on the platform. On average in 2021, Instacart subscribers spent nearly two times more each month compared to non-subscribers.
Walmart, which is the top US grocer by sales, rolled out a membership business in 2020 as it sought to offer free delivery and other digital offerings as its ecommerce business saw unprecedented growth. This year, Walmart+ is making moves to add perks. As The Current recently recounted, Walmart announced a series of additions to the membership this spring, including:
These upgrades come at a time of transition for grocers. The first two years of the pandemic brought massive gains in grocery ecommerce, as delivery and curbside pickup became more commonplace. On the two-year stack of 2020 and 2021, Kroger’s digital sales grew 113%. It’s the kind of acceleration that led McKinsey to declare that grocery ecommerce will remain a key part of the business, even if the growth levels off in the near term, as Kroger’s 6% year-over-year decline in ecommerce sales in the latest quarter suggests. What was once a an emerging area very quickly became a permanent growth area of the business. With processes to run ecommerce set up, it’s a time to build for the future. Grocers are putting the infrastructure in place to help spur continued expansion of ecommerce for the long-term. Bolstering subscription programs is part of that.
Yet these upgrades also come at a time when many consumers are pulling back on subscriptions as a whole. As economic talk turns toward a potential downturn, warnings of subscription fatigue are beginning to grow in volume. As budgets get tighter, the thinking goes that consumers will be most likely to cut back on subscriptions.
However, this is predicated on the fact that most subscriptions are for a media service or software program. Deciding to trim HBO Max or Hulu from a household’s still-robust streaming service lineup is different than making a decision about cutting back on groceries.
Groceries remain essential items that can’t get cut, and prices are only going up. An increase in food costs has been a key contributor to 40-year-high inflation this year. The latest reading of the Consumer Price Index from the US Bureau of Labor Statistics said food prices increased 10.1% year-over-year in May. According to Numerator’s measure of grocery inflation, prices were up 14.6% year-over-year by the end of May on all items in grocery stores, growing from 12.1% in early May. That’s the steepest increase the service reported since it began tracking inflation in June 2021.
The companies are buoyed by the fact that Interest in grocery membership programs was already rising, even before inflation became an everyday topic. A digital grocery benchmark report from Insider Intelligence issued in January said membership and account perks such as free delivery and discounts were among the most in-demand digital grocery features. With prices rising, shoppers tend to seek out new ways to save. This makes a membership program more enticing. With weekly savings and perks like Kroger’s discounts on the private label brands that many shoppers seek out in a downturn, these subscriptions come with deals that gain importance when shoppers are seeking ways to save. Sharing an Instacart subscription across a household allows families to pool resources to save.
The perks that stretch beyond food purchases also have a built-in way to address a key concern of this inflationary period: Pain at the pump. According to the Consumer Price Index, gas prices were up 48.7% year-over-year in May. With the average gas price hovering near $5 a gallon, it’s a very visible form of price pressure that’s being exerted during this period.
That makes fuel rewards offered with a membership program all the more valuable. Walmart+ moved to increase the amount of its fuel benefit, and partnered with top gas station companies to expand access to it. For its part, Kroger said shoppers can save up to $1.25 per gallon through its fuel perk. Interest in this showed in the company’s quarterly results.
“Our loyal customers are using our fuel rewards program now more than ever and, in fact, more than 600,000 incremental households engaged for the first time this quarter,” McMullen said.
Subscription programs help to grow ecommerce in the long-term. They also form the bedrock of a virtuous cycle for the digital business, as insights gained from purchases made by members help to fuel data-driven personalization and retail media. In the short-term, these programs can provide value to shoppers by offering perks that help shoppers navigate the current context in which they’re living. With benefits that are well-timed to the moment, grocery executives see an opportunity to add members now. Take care of them, and there’s a good chance that they will continue to be loyal digital customers, even when the economy swings back up.
Ask Instacart answers prompts with personalized recommendations.
A pair of recent launches from Instacart highlight how the grocery ecommerce company is integrating two of the key emerging areas of technology into its offerings: Generative AI and marketplaces.
Let’s take a look:
Instacart is seeking to harness generative AI to create a more personalized shopping experience.
A new tool called Ask Instacart that is launching this week is designed to allow customers to type in questions about specific recipes or general recommendations for an occasion. Embedded in the search bar, Ask Instacart also provides personalized questions to be asked by customers. In addition to specific items, it provides information about food preparation, product attributes and dietary considerations.
For those eying how generative AI will play a role in the shopping experience, Ask Instacart shows how search can be transformed into a place for discovery. Instacart is aiming to provide answers to the more open-ended questions that people would naturally ask, not just simply provide info in response to a question that has one answer. It shared the following sample prompts:
The tool is also showing the way for generative AI to integrate with retail media. Ask Instacart is designed to integrate with a brand's sponsored products campaign, so that the answers to questions that match consumer needs can also provide a way for brands to stand out.
To create the tool, Instacart combined the language understanding of ChatGPT with its own AI models. It added in catalog data from 80,000 retail partner locations around the country, which together have more than one billion shoppable items.
Beyond mission: Ecommerce marketplaces have honed a shopping experience where it’s easy to find what you’re looking for. But if shoppers want to happen upon something they didn’t know they needed, social media or the store is still the best place to visit. Instacart is showing how generative AI can make discovery a marketplace function. It also signals that advertising will come to generative AI by way of retail media. Going forward, the growth of discovery could make retail media more valuable as a tool for advertising that raises brand awareness, not just lower-funnel conversions.
Instacart will power a new virtual convenience store for the grocery chain Aldi.
Aldi Express will feature 2,000 of the most-shopped Aldi items, ranging from prepared food and snacks to grocery staples.
Drawing on 2,100 Aldi locations around the country, items will be delivered as fast as 30 minutes, the companies said.
“Through ALDI Express, we’re making shopping more convenient so you can satisfy a craving or get a missing ingredient in minutes,” said Scott Patton, VP of National Buying at ALDI, in a statement. “Together with Instacart, we’ll continue to find ways to innovate and make the online grocery experience even more effortless and accessible.”
Aldi began offering delivery via Instacart in 2017, and has since expanded services to include pickup as well as alcohol delivery.
Aldi’s marketplace moment? While Aldi previously offered delivery, making the assortment available through a virtual store offers the opportunity to create a marketplace for its goods. With the virtual store, it will more closely resemble DoorDash and Uber Eats, which have been expanding their grocery assortment. With a marketplace, additional revenue opportunities could open up for the grocer, such as advertising through retail media.