Why Instacart Must Automate to Survive Online grocery shopping exploded during the pandemic. But without automation, it won't be able to compete in the long run.

While many businesses faltered, Instacart was one of the rare pandemic success stories. Its service, offering customers a way to access groceries from the safety of their homes, perfectly aligned with the needs of the crisis. The company is now one of the biggest players in the booming online grocery business, accounting for nearly a third of the market. Its value skyrocketed from $8 billion in early 2020 to $39 billion in its latest round of funding.

Despite this success, reports leaked in early June that Instacart is planning to fundamentally revamp a major part of its operations by automating order fulfillment. It is looking to replace the half million gig workers who hustle around grocery stores filling customer orders with robots packing shipments in automated, optimized fulfillment centers.

As a professor at Arizona State University's W.P. Carey School of Business who studies food supply chains and ecommerce, I was not surprised by this development. The current Instacart business model, while highly successful, is ultimately a stopgap strategy in the digital transformation of the grocery business. The industry is facing major disruptions that will result in more automation and even a reshaping of the grocery store itself.

Related: Why Becoming an Instacart Shopper Can Be the Perfect Side Hustle

Online grocery shopping takes off

Over the course of the pandemic, online sales expanded to roughly 10% of the grocery retail market and are projected to reach more than 20% by 2025. However, food is fundamentally different from other products we shop for online. It's perishable, and demand is often time-sensitive. Customers are looking for fresh ingredients for dinner tonight, rather than a month from now. Thus, standard online retail models, wherein products are shipped across the country via postal carriers from remote, highly efficient mega-warehouses, are not workable for the grocery industry.

While the innovations in online grocery shopping that are most visible to consumers revolve around ordering and delivery, fulfillment is the make-or-break challenge for retailers looking to compete. In traditional stores, customers fulfill orders themselves, walking the aisles and choosing products from a list or on a whim. Grocery stores are designed to take advantage of this: Their meandering layouts invite shoppers to wander the aisles, encounter new products and spend more money. However, this design is a nightmare for online order fulfillment, as it slows down the "pickers" who fill online orders and drives up labor costs in an industry with famously thin margins.

Any model that relies on human workers navigating maze-like grocery stores — as Instacart currently does — is too inefficient to survive in the long run. Instead, the most innovative grocery retailers are developing new facilities optimized for online commerce and automation designed to shave labor costs and expedite order fulfillment.

Related: The Covid-19 Crisis Changed Fulfillment Tech Forever. Here's What's Next.

The future of automation

Automation is nothing new in the grocery industry. It began years ago with the development of bar codes to manage pricing and inventory. In-store self-checkout kiosks and online ordering platforms added another layer of technology that reduced the need for cashiers. Now some grocers are taking automation to the next level with the creation of fulfillment centers and "dark stores" designed for efficiently packing orders rather than shopping.

Kroger, the largest grocery chain in the U.S. after Walmart, announced in April the opening of a new fulfillment center near Cincinnati, where a legion of intelligent robots will pack online orders that can be delivered within a 90-mile radius via refrigerated truck. The company is planning to construct 19 more of these high-tech facilities across the US. To orchestrate this futuristic transition, Kroger has partnered with a U.K. based online grocer, Ocado, that has developed sophisticated artificial-intelligence grocery-warehouse technology over the last two decades.

While little known in the U.S., Ocado's cutting-edge system coordinates thousands of robots simultaneously to pack incoming online orders within a matter of minutes. Both Ocado and Kroger facilities maintain human workers in some roles, such as packing groceries into bags, but Ocado is continuing to push the envelope by experimenting with robotic arms that would further reduce labor costs. Eventually, automation could also expand into the delivery process with the incorporation of drones and autonomous vehicles.

This is the landscape in which both Instacart and traditional grocery stores must compete. Like Kroger, Instacart plans to develop larger, stand alone, roboticized warehouses, but the company is also exploring smaller packing facilities attached to existing grocery stores. These micro-fulfillment centers represent an "in-between" option that can be centrally located in familiar neighborhoods and share inventory with physical stores yet avoid the efficiency pitfalls of the current Instacart model. While larger retailers can afford to invest in major warehouse infrastructure and benefit from economies of scale in bigger markets, smaller local chains and grocers in rural areas may be best served by partnering with a company like Instacart and its gig workforce as they transition to add micro-fulfillment centers to their existing stores.

Related: Can Robot Shoppers Tell If the Bananas Are Ripe?

Using tech to make our food system more efficient

Whatever form it takes, automation promises to transform the grocery industry and our food system. A third of our food supply ends up in the trash, a massive inefficiency that has profound environmental consequences. According to my colleague Tim Richards, food waste accounts for 8% of greenhouse gas emissions, one-fifth of the material in U.S. landfills and 25% of freshwater usage. It also costs retailers $47 billion a year.

Artificial-intelligence systems can help tackle this issue by tracking sales patterns and using algorithms to predict consumer demand, allowing store managers to avoid overordering stock. Technology like Ocado's is designed to ensure that the first products that enter a fulfillment center are also the first to be packed and moved out, reducing food spoilage. These systems can also generate alerts when it's time to discount or donate food that's approaching its expiration date.

The grocery industry is being transformed by technology, a process that was sent into overdrive by the pandemic. The grocery store as we know it will probably never completely disappear. In fact, by design, some of the most profound and futuristic changes will be behind the scenes. But they will be make-or-break for traditional grocery retailers as well as new players like Instacart, who must evolve to compete in a market driven by new technology and escalating automation.