<p><img class="lead-image-large" src="https://static1.businessinsider.com/image/6018403d6dfbe10018e01170-2400/startup grocery markets dtc turning traditional 2x1.png" border="0" alt="startup grocery markets dtc turning traditional 2x1" data-mce-source="Boxed; Thrive Market; Hungryroot; Imperfect Foods; Samantha Lee/Insider"></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>In 2015, Nick Green and his co-founders were puzzling over which products to add to Thrive Market, their new virtual grocery store for natural and organic foods. </p><p>They wanted to keep the assortment limited to an item or two per category, and they dealt only with shelf-stable items that could be stored and shipped easily.</p><p>Six years on, Thrive has grown.</p><p>In addition to offering items like Kind bars and Califia Farms oat milk, Thrive's own-branded items number about 700 and make up one-third of sales, Green said. This year, it's aiming to become the e-commerce grocery player with the largest <a href="https://www.businessinsider.com/thrive-market-doubled-sales-during-pandemic-says-ceo-nick-green-2021-1">frozen offering</a>, which Green said will help Thrive capture a larger share of customers' weekly food budgets.</p><p>Thrive isn't the only <a href="https://www.businessinsider.com/imperfect-foods-gets-into-health-beauty-and-beyond-produce2021-1">grocery marketplace</a> with ambitious plans. It's one of several upstart grocery marketplaces vying for a share of the roughly $1 trillion US grocery market. And they're hoping that customers will stick with them even after the pandemic ends and consumers feel safe going to stores freely again.</p><p>"Our goal is to be a one-stop shop, to have everything that our members need for their healthy lifestyle," Green told Insider in an interview. "We're continually leaning into new categories like supplements, beauty, home, and frozenall of these categories that were small for us a few years ago."</p><p>Many of Thrive's most direct competitors in the space are taking the same steps to grow their businesses: Expand into other product categories, create private-label options, and capture a larger share of customers' grocery budgets.</p><p>Add to this competitive landscape the fact that the largest players are in the latter stages of funding, and you have a recipe for consolidation, experts say.</p><p>Bentley Hall, CEO of Good Eggs, agrees. "I think what is universally appealing is 'How do you have amazing fresh [foods] and affordable dry goods''" he said in an interview with Insider. "I imagine we will see more people try to tackle that, and maybe even some consolidation in the industry."</p><p>Last week, San Francisco-based Good Eggs announced $100 million in fresh funding, which it plans to use to expand service beyond the Bay Area. Its first stop will be Los Angeles, which notably is a market that Good Eggs used to serve but withdrew from along with other cities in 2015, Hall said.</p><p><img src="https://static4.businessinsider.com/image/601c1b1dee136f00183aa477-1105/thrive market box.jpg" border="0" alt="Thrive Market box" data-mce-source="Thrive Market"></p><h2>'It all comes down to basket size'</h2><p>Investors have poured money into upstart online grocery outfits. Hungryroot has raised $37 million, while Thrive, Imperfect, <a href="https://www.businessinsider.com/how-amazon-competitor-boxed-is-cozying-up-to-big-brands-2019-9">Boxed</a>, and Good Eggs have all raised over $200 million, according to Pitchbook.</p><p>Many of these companies started life with much narrower focuses than a one-stop for grocery.</p><p>Imperfect Foods, for instance, started life as Imperfect Produce, selling only fruits, vegetables, and other fresh foods that didn't meet traditional grocers' cosmetic standards. Hungryroot's early business included a direct-to-consumer option as well as <a href="https://www.businessinsider.com/hungryroot-launches-nationwide-and-gets-into-whole-foods-2016-5">selling</a> easy-to-prepare dishes at Whole Foods.</p><p>But all have broadened their approaches since then.</p><p>Raising money has gotten easier over the last five years, Good Egg's Hall said. His pitch to investors has always included stats on how fast online grocery sales are growing as well as consumers' increasing interest in better-for-you foods. Online grocery sales will make up roughly one-fifth of all grocery sales in the US by 2025, up from just over 3% in 2019, according to estimates from e-commerce company Mercatus and research firm Incisiv.</p><p>"Maybe 10% of people used to nod their head at that slide five years ago," Hall said. The pitch has gained traction since Amazon's 2017 purchase of Whole Foods and as more people started <a href="https://www.businessinsider.com/post-coronavirus-more-americans-will-shop-online-for-groceries-2020-4">ordering their groceries online</a> due to the pandemic. "Now 90% plus of both investors and consumers nod their head quickly and say 'Move on to the next slide.'"</p><p>"I've never seen a habit that is so deeply engrained shift with such magnitude or speed," he added.</p><p>Some of that cash has gone into growing the marketplaces' product selections. When Hall first joined Good Eggs in 2015, the company focused almost exclusively on sourcing fresh produce from farmers near the Bay Area. Since then, it has gone beyond that local focus, increased its stock from about 1,000 products to 5,000, and added meal kits, dry goods, flowers, and alcohol to its website.<strong> </strong>As a result, Good Eggs's customers have come to rely on the service for an increasingly large percentage of their weekly shopping, according to Hall.</p><p>Other marketplaces are also trying to offer more complete selections, but starting from a different place. Hungryroot, for instance, is adding more fresh staples like bread, milk, and eggs to its offerings, said Ben McKean, the company's CEO.</p><p>Offering more fresh foods draws in more customers, but the cost of shipping perishable food can be high, especially on small orders, McKean said. Hungryroot isn't price-competitive with traditional grocers on $50 orders of mostly fresh foods, he said, but the math gets better when customers order a fuller basket of foods for $100 or $150. "You actually can be very competitive with grocery in terms of price," he said. "It all comes down to basket size."</p><h2>Experiences matter</h2><p>Keeping customers coming back is also key. Like some of its competitors, Hungryroot uses data on customers' shopping habits to create a preselected group of items that are automatically added to customers' baskets each week that they can order as-is or adjust.</p><p>"Our highest-retention users are the ones whom the algorithm is working really well for," he said. "Essentially, they don't have to do any work."</p><p>Although Imperfect Foods started out selling produce that failed to meet supermarkets' cosmetic standards, Martha Hale, Imperfect's chief merchandising officer, told Insider in January that the company now sees itself as a retailer. It recently ventured into personal care by launching private-label facial oil, body butter, and three-in-one soap.</p><p>But as the marketplaces expand, they have to strike a balance. Bill Bishop, chief architect at Brick Meets Click, a consultancy whose clients include food brands and retailers, said that many gained popularity because their limited assortment made shopping easy.</p><p>"In the food business, experience trumps almost everything else," he said "These are experiences" for consumers, Bishop said of the marketplaces.</p><p>Companies like Thrive, Hungryroot, Imperfect, Boxed, and Good Eggs all do one thing better than most main-stream grocers, Bishop told Insider: They have built a wide selection of grocery products, but stock only one or two versions of each item. By contrast, consumers can face a deluge of options for a single product on sites like Amazon, which offer private labels as well as brand names, including <a href="https://www.businessinsider.com/amazon-third-party-sellers-prime-day-2020-10">third-party sellers.</a></p><p>"I'd be real careful to move too far away from a very curated offering because that's what brought you to the dance," he said. "And psychologically, that's what people are looking for."</p><p><a href="https://www.businessinsider.com/how-imperfect-foods-thrive-market-compete-2021-2#comments">Join the conversation about this story »</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/worlds-most-expensive-liquid-thoroughbred-horse-semen-2020-3">Why thoroughbred horse semen is the world's most expensive liquid</a></p>
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