The Economic Impact of Instacart on the Retail Grocery Industry: Evidence from Four States
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The Economic Impact of Instacart on the Retail Grocery Industry: Evidence from Four States Robert Kulick, Ph.D. February 2020 I. Introduction About the Author This study presents a comprehensive analysis of the contribution made by Latino Americans1 to Dr. Kulick is an Associate Director in NERA’s Communications, Media, and Internet Practice. the US economy, based on data from a wide variety of government and private sources. The He is also an adjunct professor at George Mason University Law School where he teaches findings are striking: To an extent few appreciate, the US Latino population is growing, young, Regulated Industries. increasingly educated, employed, connected, entrepreneurial, and upwardly mobile in terms of income as well as consumption. The author is grateful to Instacart for its sponsorship and to Patrick McGervey and Megan Ye for assistance with this report. The views expressed are exclusively Dr. Kulick’s own and do Consider the following: not necessarily represent those of NERA Economic Consulting or any of the institutions with which he is affiliated. • While much of the developed world is facing stagnant population growth and an increasingly elderly age distribution, growth in the Latino population is keeping America both young and growing. Between 1990 and 2015, the Latino population grew from 22 million to 57 million, roughly five times as fast as the population overall. To illustrate this rapid growth, consider that if the Latino population had grown at the same rate as the rest of the US, there would be 30 million fewer Americans today. • At 28 years old, the median Latino is nine years younger than the population at large and 15 years younger than the median white. Millenials make up 26 percent of the Hispanic population, compared to 22 percent for the US population. Economic research suggests that the youthful demographic profile of the Latino population enhances productivity and increases growth in per capita incomes. • Latinos are responsible for 29 percent of the growth in real income since 2005. They account for roughly 10 cents of every dollar of US national income, and that proportion is rising both due to growth in the Latino population and rising per capita earnings. • Latinos play a critical role in the labor force, both as employees and, especially, as job creators and entrepreneurs. They are more likely to participate in the labor force (65.9 percent vs. 62.7 percent) and to be employed (61.6 percent vs. 59.3 percent) than the overall US population. While Latinos account for 17 percent of all workers, they account for 21 percent of new entrepreneurs. Latinos accounted for nearly half—46 percent—of the growth in employment from 2011 to 2015. 1 Throughout this report, the words “Hispanic” and “Latino” are used interchangeably to refer to ethnic Latinos in the United States. Further, for simplicity of exposition, the report refers to Hispanics, whites, and other groups as “ethnic” groups (as opposed to “racial” or “racial-ethnic” groups). For statistical purposes, the U.S. Office of Management and Budget (OMB) defines “Hispanic or Latino” as a “person of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin, regardless of race. The term, ‘Spanish origin,’ can be used in addition to ‘Hispanic or Latino.’” See Standard for Maintaining, Collecting, and Presenting Federal Data on Race and Ethncity,” Office of Management and Budget (October 30, 1997) (available at https://www.whitehouse.gov/sites/default/files/omb/assets/information_and_regulatory_affairs/re_app-a-update.pdf). See also “Revisions to the Standards for the Classification of Federal Data on Race and Ethnicity,” Office of Management and Budget (October 30, 1997) (available at https://www.whitehouse.gov/omb/fedreg_1997standards). 1 Executive Summary The retail grocery industry in the United States faces a precarious economic environment. Due primarily to competition from warehouse clubs, supercenters, and e-commerce, retail grocery sales have underperformed the U.S. retail sector and the overall U.S. economy, and employment growth in the industry has been stagnant. Yet, a large proportion of consumers maintain a strong preference for shopping at retail grocery stores, and total grocery industry sales and employment still exceed sales and employment at warehouse clubs/supercenters and e-commerce retailers. To compete in this setting, many retail grocers are turning to third-party online grocery delivery services offering online shopping and same-day grocery delivery, the largest of which is Instacart. This study applies a broad array of rigorous statistical methods using evidence from California, Illinois, New York, and Washington to evaluate whether Instacart increases grocery employment by creating incremental demand for the retail grocery industry and quantifies Instacart’s effect on incremental grocery sales. The evidence indicates that Instacart’s entry and expansion in these four states has significantly increased retail grocery employment and revenue. Specifically: • The results from the primary statistical model indicate that Instacart’s entry into a local market is associated with a four-percent increase in retail grocery employment. • The statistical estimates imply that across the four states, Instacart adoption increased retail grocery employment in 2019 by over 23,000 jobs, supporting over 11,500 grocery jobs in California, 3,400 in Illinois, 6,600 in New York, and 1,900 in Washington. • Across the four states, Instacart increased retail grocery revenue by over $620 million in 2019 with impacts of over $337 million in California, $75 million in Illinois, $154 million in New York, and $55 million in Washington. Contents I. INTRODUCTION ....................................................................................................... 1 II. INDUSTRY BACKGROUND ......................................................................................... 2 A. The Growth of Warehouse Clubs, Supercenters, and Retail E- Commerce ..................................................................................................... 2 B. The Evolution of Consumer Preferences for Food Consumption and Shopping ................................................................................................. 6 C. The Economics of the Retail Grocery Industry ............................................... 9 D. The Growth of Third-Party Online Grocery Delivery and Instacart ............... 14 III. STATISTICAL ANALYSIS OF INSTACART’S EFFECT ON RETAIL GROCERY EMPLOYMENT IN CALIFORNIA, ILLINOIS, NEW YORK, AND WASHINGTON ..................... 15 A. Methodology and Data ................................................................................. 15 B. Model Estimates ........................................................................................... 17 IV. QUANTIFICATION OF INSTACART’S INCREMENTAL EFFECT ON INDUSTRY EMPLOYMENT AND REVENUE ................................................................................. 23 A. Employment ................................................................................................. 23 B. Revenue ....................................................................................................... 24 V. CONCLUSION ........................................................................................................ 26 I. Introduction The retail grocery industry in the United States has been subject to significant economic pressure over the past decades and is likely to experience further disruption in the coming years. The precarious economic environment confronting the industry is the result of three major trends in the U.S. economy: the entry of warehouse clubs and supercenters into grocery and their subsequent growth, the rapid rise of retail e-commerce, and changing consumer preferences regarding food consumption and shopping. Yet, the retail grocery industry remains important for consumers, workers, and the U.S. economy. Economic research and customer surveys show that many consumers continue to value highly the traditional grocery shopping experience, and in 2018, the U.S. retail grocery industry accounted for 17 percent of retail employment and 13 percent of retail sales.1 Grocery retailers thus face the challenge of serving their customer base by providing the product choice, shopping experience, and service that customers expect, while competing for the business of customers attracted by alternative retail models. To compete, many traditional grocery retailers have sought out new ways to engage consumers. One of the most important innovations in this area has been the introduction of third-party online grocery delivery services offering online shopping and same-day grocery delivery, the largest of which is Instacart. By managing orders and maintaining a delivery network that is shared across stores, Instacart allows retailers to offer quick and convenient grocery delivery without incurring the prohibitive costs and coordinating the complex logistics associated with offering same-day online grocery delivery. Critics of Instacart’s business model have charged that Instacart merely cannibalizes existing sales and reduces grocery store employment. However, to the extent it allows retailers to attract or maintain customers who would otherwise purchase food through a different channel, Instacart may create incremental demand for individual grocery stores and the industry as a whole. Furthermore, because Instacart shoppers replace