Grocery-Delivery Startups Are Eating Up New Markets

This story originally appeared on FOX BUSINESS

Online grocery-delivery startups Instacart and Relay Foods are eating up new markets.

Instacart announced this week a $44 million Series B financing round led by Andreessen Horowitz, bringing total funding to $55 million. The SAN FRANCISCO BAY AREA, Calif.-based startup happens to be operating in 10 markets, with plans for seven new cities by the finish of 2014.

Meanwhile, Charlottesville, Va.-based Relay Foods, which is targeted on local and organic grocery delivery, just announced its expansion into Raleigh, N.C. seven days after arriving at the nearby city of Durham.

"As we take into account the future of e-commerce, groceries are among the last huge untapped opportunities. Even though many have tried to crack the code, few have met with success," said Jeff Jordan, Andreessen Horowitz partner. "However, mobile is enabling a fresh way to tackle digital grocery distribution via an execution that I make reference to as ‘People Marketplaces.’ That is Instacart’s approach, and we’re betting it’ll be the winning play. We are excited to partner with [CEO Apoorva Mehta] and team because they seek to have software eat grocery delivery."

The Instacart Approach

Instacart happens to be offering rapid grocery delivery in SAN FRANCISCO BAY AREA, Austin, Boston, Chicago, LA, NEW YORK, Philadelphia, San Jose, Seattle and Washington, D.C. Instacart depends upon a team of independent contractors, which it calls “personal shoppers,” to look for and deliver groceries in when one hour to customers. Users can shop online or using the Instacart mobile app.

General manager Aditya Shah says there are a lot more than 1,000 personal shoppers doing work for Instacart over the U.S. They look for groceries at stores including Whole Foods, Safeway, BJs and Costco.

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Instacart makes a gain marking up grocery items and charging delivery fees (Shah declined to talk about the precise markup). First-time orders over $35 are free; from then on, users pay $3.99 for deliveries made within a two-hour window. Fees for deliveries within the hour range up to $14.99.

The business says its strength is in its complex logistics system, by which it avoids building warehouses and purchasing inventory.

“It’s an enormous model advantage. We’ve no trucks, no full-time employees – we’ve economies of scale across everything and will launch [in a fresh city] in a week or two,” says Shah.

In a post on the Andreessen Horowitz website, Jordan also touted the strengths of the Instacart model.

“Traditional brick-and-mortar retailers have a big advantage in accordance with e-commerce companies (if indeed they can work out how to harness it): Each of their stores is actually a mini-warehouse with inventory widely distributed through the entire country. So we’re making a bet that Instacart’s partnerships with brick-and-mortar food markets would be the winning play in grocery delivery to the house, having the ability to fight competition from e-commerce companies that build out their own infrastructure,” he wrote.

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Relay Foods Focusing on Suburban Shoppers

Relay Foods, which uses more traditional warehouse model, is differentiating itself by concentrating on a far more niche customer: the suburban shopper looking for local, all-natural and organic food. Relay happens to be operating in smaller Mid-Atlantic and Southeast cities such as for example Annapolis, Baltimore and Charlottesville.

With Relay Foods, online customers can choose produce from local farmers and vendors along with national organic brands. Orders are delivered free of charge to designated sites like schools and gyms, where they are held in temperature-controlled totes until shoppers pick them up. Unlimited home delivery emerges for $30 monthly.

By delivering nearly all orders to pickup locations, Relay Foods will be able to lower costs. Katz says customers find huge value in the free delivery to these locations – and don’t mind driving because of their suburban lifestyle. He says the free-delivery model also allows shoppers to put multiple orders in a single week; orders placed before midnight could be fulfilled the very next day.

“[Our customers] find that the pickup location is far more convenient for his or her lifestyle,” says Katz.

Katz says Relay, which includes raised $20 million from Battery Ventures and private investors, will continue steadily to concentrate on expanding to suburban cities in the southern U.S.

“We will let Amazon Fresh, Peapod, Safeway and Instacart fight for NY and Boston. We’ll take all of those other country,” says Katz.

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