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Instacart IPO Builds on a Business Model that Works for Stakeholders

Instacart IPO Builds on a Business Model that Works for Stakeholders

A Balancing Act with Customers, Retailers, Advertisers & Shoppers

The Instacart IPO is generating significant buzz, thanks to the interesting place it holds as the grocery delivery service between consumers and retailers.  Not that Instacart would say it is in the grocery delivery business. Rather, it describes itself as a grocery technology company.  “That which we call a rose By any other name would smell as sweet.”  Regardless of its self-description, success means a continuation of the balancing act between the needs of consumers and retailer business partners. 

History Leading Up to the Instacart IPO

Instacart was founded in 2012 by Apoorva Mehta who had experience as a supply chain engineer at Amazon.  Despite some significant bumps in the road, including a $4.6M class action lawsuit and a shopper strike, Instacart attracted both venture capital and retailers, such as:

  • Kroger
  • Aldi
  • Costco
  • Publix 

While the pandemic hurt many businesses, Instacart thrived.  In the spring of 2020, it hired over 300,000 workers to meet the surging demand.    In August 2020, Walmart, the nation’s largest grocer, became a partner.  Capital to support the growth came from not only venture capital firms like Sequoia and D1 Capital Partner but also institutional investors like Fidelity, which hinted at the metamorphosis from start-up to grown-up company that was taking place.  The final phase of that transformation is scheduled to happen September 1, 2023, with the Instacart IPO.

The Instacart Business Model – How the Consumer Sees It

As a customer of Instacart, you use the app or website to send your grocery list and time range for delivery.  An independent contractor, henceforth referred to as a “shopper,”  drives to the grocery store, fills a grocery cart based on the list you provided, checks out, bags your items and drives them to your home.  The groceries most likely will cost a bit more than instore.  For example, a 13.7-ounce box of Club Crackers are $4.29 if you order directly at Target (for pickup or delivery) and $4.99 at Target through Instacart.

Currently, the service will cost you $3.99 for delivery (if you spend $35 or more), a $3-$5 service fee and an optional gratuity.  For frequent users of Instacart, they can purchase an annual membership for $99 that waives the delivery fee but not the service fee.

Understanding Consumer Needs

I took an informal survey of friends and neighbors to uncover the benefits of online ordering and home delivery.  Convenience seems to be the only reason. Convenience has several drivers:

  • Pandemic-fueled fear of being in close proximity to others
  • Being temporarily ill, whether suffering from COVID or some other illness, so that going to the grocery store was not an option
  • A reduction in ability to physically obtain groceries – hips, knees and stairs were all cited as overwhelming impediments to grocery shopping
  • A crazy, busy lifestyle that makes any additional task, even the requirement to feed oneself, seem overwhelming
  • Stocking up on non-perishable necessities
  • Unique foods or varieties, especially ethnic, that are not available in retail stores

Everyone I spoke with was happy to pay for delivery to reduce the time and effort required to procure food for their households.  However, for many, when the situation changed, they returned to instore shopping.  In fact, most wanted to return to instore grocery shopping, citing the desire to choose their own produce and meat for themselves.

Just as convenience drivers differ by consumers, so do delivery needs:

  • Standard shipping via standard carriers like FedEx, UPS or USPS for nonperishables like those big boxes of paper towels or a small package of dried galangal (Thai spice) from ImportFood Thai Supermarket
  • Pre-made foods or recipe ingredients like HelloFresh are shipped in special containers, again by UPS or FedEx, often expedited
  • Even Omaha Steaks and Graeter’s Ice Cream can be shipped via regular carriers using expensive packaging
  • Perishable, refrigerated and frozen products that cannot bear the cost of the special packaging and so require local delivery from the source to the consumer
Instacart IPO Builds on a Business Model that Works for Stakeholders

The Instacart Business Model – How the Retailer Sees It

The online channel in grocery has grown to 12% of the $1.1 trillion industry, according to Bloomberg.  Grocers like Costco, Target and Walmart have both online ordering capabilities and the ability to deliver large boxes of paper towels direct to consumers’ front doors.  However, a gallon of milk is not in their wheelhouse. 

Instacart offers different levels of service, depending on the needs of the grocery retailer:

  • Turnkey online presence: ordering platform, shopper and delivery
  • Shopper and delivery for grocers using either the retailer’s or Instacart’s ordering platform
  • Delivery-only of groceries ordered through and picked by the retailer

For example, Target offers groceries both through its own online platform for pickup or delivery and on Instacart.  A smaller local grocer, Dave’s Markets, directs consumers to Instacart to order for delivery.

Retailers pay Instacart a percentage of sales, perhaps around 14% of the order (given the 70¢ markup on the $4.29 box of Club crackers).

Retailers Have Other Options

In addition to direct competitors like Shipt, retailers can put the pieces together themselves.  Many have online ordering platforms and became experts at shopping for consumers during the pandemic.  All they need is the last-mile delivery, which services like UberEats and DoorDash are happy to provide.  Two retailers in Cleveland, Heinen’s and Giant Eagle, have cut ties with Instacart but still provide home delivery.  For the price of $9.95 or $9.99 (Heinen’s or Giant Eagle, respectively), consumers can have their groceries delivered to their front door.

Instacart IPO Builds on a Business Model that Works for Stakeholders

Another Player in This Game: Advertisers

Food producers, big and small, advertise on Instacart to meet consumers at the buying moment.    According to Business Insider, 20% of revenue in 2022 came from advertising, and it is expected to grow.  To emphasize this point, PepsiCo is buying $175M of preferred convertible stock during the Instacart IPO. 

Instacart IPO Builds on a Business Model that Works for Stakeholders

One More Player: The Actual Shopper

I had the opportunity to interview a former Instacart shopper.  Overall, she was positive about her experiences both with consumers and Instacart.  She enjoyed the flexibility to work when she wanted and to know what she would be paid for the order upfront. For each order, she was paid $7 plus the tip from the consumer – either as a dollar amount or a percent of the sale – which was known when the order was posted for shoppers to accept or reject.  If an order was not accepted by any shoppers, then Instacart would increase their own payment. 

However, Instacart has been the recipient of several lawsuits concerning their labor practices, so keeping its shoppers satisfied is critical to their success.  It may call itself a grocery technology company, but without a person (or maybe a robot, someday) to deliver the groceries to the consumer’s home, no technology is needed.

After the Instacart IPO, continued growth will depend upon balancing the needs of its four constituents: consumers, retailers, food companies and Instacart shoppers.

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