Instacart has been providing grocery delivery services since 2012 by creating a platform that connects three players – customers, grocery stores, and workers. Customers select the store they would like to purchase from on the Instacart app and the items they want delivered. Instacart workers then buy these items at the grocery store and then deliver them to the customer.
With the rise of Amazon and online shopping, customers now expect to be able to have anything they want delivered – including groceries. However, until recently this service wasn’t technology enabled at a large scale. This changed with Instacart which provides a platform for customers to order groceries to be delivered from a variety of stores in their area through the app and website. Through Instacart, more than 80% of U.S. households can have their groceries ordered and delivered through the service (1). This enables user to save time visiting the store and finding items as they will be delivered to their door in a few hours or less.
First, many grocery retailers don’t have the resources or internal expertise to build out an e-commerce platform of their own. Instacart has created value for these companies by investing in creating the technology that allows for online fulfillment and delivery.
Second, Instacart helps drive business to its partner store locations by making their products available on the platform. When opening Instacart, a user will see a list of available retailers in their area that Instacart has partnered with. 43% of users reported that they would order from stores they typically wouldn’t go to in person because they have teamed up with Instacart to offer grocery delivery through the platform (1).
Finally, Instacart has been making a push into the Enterprise business by developing a white-label product called Powered by Instacart. Powered by Instacart allows shoppers to place orders directly with the retailer and bypass the Instacart site. By building this product after developing its existing platform, Instacart has created additional value for retailers by allowing them to connect directly with their customers on store-branded sites while still leveraging Instacart’s technology.
Instacart has two separate employment models that provide opportunities for workers to earn money and work either flexibly or on a fixed schedule. Full-Service Shoppers are independent contractors who both purchase customers’ orders and deliver them. In-Store Shoppers are part-time employees who exclusively stay in one store buying items from orders. Both roles create jobs and value for people who work with Instacart.
Economies of Scale
Instacart is able to capture value by taking advantage of their economies of scale and drive efficiency in their business model. At stores that receive a high volume of orders, Instacart has stationed designated shoppers who spend their entire shift picking items. Like an assembly line, this focus on a specific task in the Instacart supply chain creates efficiency and cost savings for the business. Further, these shoppers gain a deeper understanding of the store offerings which is important when selecting substitutions for customers in the case when an item is out of stock.
Instacart charges customers several fees including that help the company capture value from its users. These include fees that are transparent for to a user – Delivery fees ($3.99 – $7.99) and service fee (5% of order). In addition, Instacart also marks up prices for some retailers. On average, prices are 15% higher compared to what would be paid in store (2). By having people become reliant on the service and integrate it into their routine, Instacart has proven that people are willing to pay for the convenience of not having to go to the grocery store. Further, price markups desensitize users to what market price is for their goods allowing Instacart to capture this difference.
Scalability and Sustainability
There are several threats to the sustainability of Instacart’s model. First, online grocery is a growing market segment making it an increasingly more attractive market for competitors to enter. Today, online grocery is only ~4% of US grocery spend. However, it is projected to be worth as much $100 billion by 2025 – or 20% of all grocery spend (2). Second, that platform is city centric and that shoppers will only ever care about grocery stores around their home. This leaves Instacart susceptible to competitors targeting individual cities through lower fees for buyers to gain market share. Third, not only does Instacart face competition from similar business models but also from the grocery stores directly. Both Whole Foods and Walmart have made big pushes into online grocery delivery. In 2018, Whole Foods pulled its stores from the Instacart platform (4) . If other stores see providing delivery services as a viable business opportunity, Instacart risks having one side of their platform disappear effectively ending their business.