Instacart – Leading the way for grocery deliveries

Instacart, an on demand platform for delivering groceries, is considered one of Americas most promising companies. The company was founded in 2012 and has rapidly expanded ever since – paving a new way for grocery deliveries

Instacart is an on demand platform for delivering groceries and other goods from the best super markets around you. Once an order is placed via an app, a free lance shopper (some are employees) is notified to proceed to shop for and deliver goods to the customer. The company has expanded rapidly ever since it was founded in 2012 and currently serves several cities including 21 metros in 20 states. It has also raised $275M from investors such as Whole foods, American Express Ventures and Andreesen Horowhitz, valuing it at $2B.

Value Creation

There are several ways Instacart is able to create value for its customers, shoppers and the super markets it sources goods from.

  • By not having to visit the super market, customers can save ample time by ordering straight from their smart phones or a web application.
  • The groceries can be delivered within 1 hour or even at a later date
  • The technical capabilities of the application allow for, among many other useful features, quick searches, recommendations, descriptions of products, show of discounted items and tracking orders/history.
  • This setup can be especially useful for the elderly or people with poor health who finds the process of getting to the super market, shopping for goods and then carrying them back too tiring
  • Ability to combine orders from different super markets
  • Crowdsourced model to help users connect with shoppers and delivery personnel
  • Shoppers gain since they are flexible to work at any hour, any day and for any duration they desire
  • Supermarkets get more visibility via the Instacart app which can result in their increasing revenues
  • Supermarkets are able to showcase their best selling products

Value Capture

Instacart reported revenues of $100M in 2015 – this is generated via several different sources

  • Customers pay a delivery fee that varies in the following way
    • Variable fee that’s dependent on urgency of delivery. E.g $5.99 for a one hour delivery, $3.99 for 2 hour or greater delivery
    • Variable fee that’s dependent on minimum order size. E.g $9.99 for a one hour delivery, 7.99 for 2 hour or greater delivery for orders less than $35.
    • Monthly/ yearly subscription fee. E.g $99 for annual membership for free deliveries
  • Grocery retailers pay a fee that is based on volume of orders generated via the app.
  • Consumer packaged goods partners pay a fee to Instacart for promoting their products.
  • Some products are marked up (indicated) by ~10-15% on the app vs at the actual store and that difference goes to Instacart.

The operating model

While I do have concerns in scaling the operating model since, as opposed to Uber where not much employee training (driving is a common skill) is required, Instacart needs to ensure its temporary workers are well trained (to pick out groceries that aren’t too ripe or too raw) in order to maintain high ratings. However, with scale there is also a significant opportunity for Instacart as when more people start ordering, the shoppers and delivery personnel will become more efficient due to serving larger volumes at once, enabling the company to cut down on its costs. Another advantage of the operating model is that Instacart doesn’t hold any inventory since all the items on its listings are in the super markets and hence the company can avoid heavy capital expenditures in warehouses. Also, taking advantage of the crowd sourced model to connect users with shoppers/ drivers, Instacart doesn’t need to have any trucks/ cars for the delivery of goods.

Overall I believe the company has been on a great track since its start and given the basis and model on which it has been founded, there is a high chance of it emerging as a winner eventually.

 

Sources:

  1. http://nextjuggernaut.com/blog/how-instacart-works-makes-money-revenue-business-model/
  2. http://fortune.com/2016/09/15/instacart-apoorva-mehta-disrupt/
  3. http://www.forbes.com/sites/briansolomon/2015/01/21/americas-most-promising-company-instacart-the-2-billion-grocery-delivery-app/#a55d7cd48586
  4. http://fortune.com/2016/03/24/instacart-profits/

 

 

 

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5 thoughts on “Instacart – Leading the way for grocery deliveries

  1. While I see the theoretical value proposition to customers, stores and temporary workers, I am not convinced that Instacart will mature into a highly profitable business on its current trajectory. On-demand urban services have greatly risen in popularity among VCs and end-users over the past few years, but it is hard to see attractive margins. Even with the delivery fee, select mark-ups, and store referrals, it is difficult to pull in enough money to pay for drivers to go on shoppings runs. If they were to somehow outsource the logistics side of the business to someone with scale and simply act as an online interface, the unit economics may look more attractive. I’m just skeptical of all these companies using their own delivery fleets.

  2. Thanks for your post, Rahul! Like dk_22, I am not convinced that Instacart is a winner for the long haul. First, I wonder how transferrable the Instacart format is to smaller cities and suburban areas. Right now, I believe that the company operates only in major U.S. cities; in places where a greater percentage of the population owns a car, does the Instacart value proposition still hold? Second, I question whether or not Instacart will be able to convert a high enough percentage of “traditional” grocery shoppers to the online delivery format. As you point out, preferences are so specific when shopping for food that ordering over an app may be hard. It would be interesting if Instacart can employ technology that makes the act of shopping online almost as good as – if not better than – the in-store experience. For example, imagine a virtual reality-like experience where you can “walk” down the store aisles via your smartphone. And finally, I have personally found the user experience to be inconsistent and frustrating. Product information is often missing or I found out later that my item is stocked out. Instacart still needs to find a way to better connect to stores’ inventory.

  3. Thanks for the post!

    Like those above, I am unfortunately also unconvinced that the Instacart delivery model makes sense in the long run. Product selection, especially for fruits and produce, is so personal that it is difficult to “train” people to do this correctly, as preferences vary. Similarly, I worry about scalability, attractiveness of this service by region, and the ability to make a healthy margin after paying the Instacart employees. If this business model was so successful — what would stop grocery stores from simply offering the same option and capturing the value instead? It seems they are watching Instacart to see if its a space they should be playing in and I fear they will ultimately decide it does not make sense.

  4. I would like to add another concern around competition from existing big tech companies like Amazon and Uber. From the consumer’s perspective a big impediment to adopting this online grocery shopping is the delivery cost. Instagram could be hurt by big competitors figuring out a business model in which they can financially justify no delivery fee. An example is what Amazon is doing with Prime Now, including the service as part of the prime membership bundle. Unfortunately these digital service companies end up playing a promotion game to both gain new consumers and retain current consumers, leading to unattractive economics.

  5. I enjoyed your post, and think Instacart is a great example of a #winner from digital transformation. My wife and I have been heavy Instacart users during the winters in Boston, when going to the store ourselves would require getting all three of our children dressed up in snowsuits. My biggest concern about Instacart (or rather, the valuation it receives) is that the benefits of scale in this business aren’t immediately clear to me. For example, just because a platform like Instacart “owns” Dallas doesn’t necessarily mean that another platform might not emerge as the winner Houston. In other words, the scale advantages might be mostly local. And even within a single city, isn’t it possible that multiple platforms could compete effectively with each other, with both drivers and customers simply finding a way to multi-home?

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