By Uday Sampath Kumar
(Reuters) - Instacart said on Thursday it will stop delivering groceries for Whole Foods next year, ending a partnership that has been under stress since Amazon.com Inc (O:AMZN) acquired the upmarket grocer last year.
Amazon's $13.7 billion purchase of Whole Foods rocked the U.S. grocery space in 2017 and the ecommerce giant has since steadily increased the speed of delivery throughout its system, including by expanding one-day and one-hour delivery.
"Amazon's intent from day one when it first announced its desire to acquire Whole Foods was to integrate Whole Foods with its own grocery-delivery efforts such as Amazon Fresh and Prime Now," Tom Forte, an analyst with D.A. Davidson said.
The delivery partnership with Whole Foods in 2014 made Instacart popular among young consumers who increasingly wanted milk and eggs delivered straight to their doorsteps.
In 2016, the companies deepened their relationship, entering into an exclusive, five-year agreement to delivery perishables.
It is still not clear what, if any, penalties Amazon incurred for ending the partnership early.
For Instacart, Whole Foods was among the more lucrative grocery client, given the relatively high-dollar purchases from its stores which made it a favorite for many delivery drivers of the startup.
Edward Jones analyst Brian Yarbrough said Instacart will find it difficult to recover from the separation as the delivery space becomes more crowded.
Instacart clients such as Kroger Co (N:KR) and Walmart Inc (N:WMT) both have started in-house delivery services.
Meanwhile, Instacart has sought to find more ways to earn revenue, building up a business of coupon sales and promotions sponsored by packaged-goods brands such as Nestle (S:NESN), General Mills (N:GIS), Coca-Cola (N:KO), which are displayed in the app and target consumers based on shopping habits.
It has also added about 100 retail partners this year. Reuters reported in November Instacart had raised $271 million from investors, including Tiger Global Management, bringing the company's valuation to $7.87 billion.
Instacart Chief Executive Officer Apoorva Mehta said on Thursday about 350 of its 1,415 part-time delivery employees at 76 Whole Foods locations will be laid off once the divorce begins in February 2019 and winds down in the following months.
All other employees will be transferred to service other retailers, the company said.