Instacart: Shopping for groceries has never been more fun

Instacart is a clear winner among many other players who are trying to make same day delivery experience the most appealing to consumers. Google Express and Amazon Fresh, both part of tech giants with deep pockets, could not emerge as a winner in this race despite all the money that is poured into platform improvements and user engagement. To this date, no other “logistics pure-play” groceries delivery service emerged to gather enough attention from the VC community (FreshDirect has gotten some VC funding however they only exist in the NY metropolitan area and the funding they received is dwarfed by Instacart’s last round). So what is Instacart doing so differently that they are now most big grocers’ (Whole Foods, Shaw’s, Safeway etc.) preferred online vendor, and they are able to snatch $275 million from VC firms like KPCB, Andreessen and Sequoia?

Value Creation: What Instacart does differently first lies in its asset-light model. Contrary to other players who own and operate their own fleet and/or own warehouses, Instacart actually takes advantage of people who already have these assets, namely grocery stores themselves and people who are willing to work part time for delivery. They do a good job of focusing on the technology and customer engagement, which is their forte, and “outsource” the non-glamorous, asset heavy part of the job, which is warehousing and delivering (they use a shopper and delivery person who get paid on an hourly basis and get the entirety of the tips). The ingenuity of taking advantage of the sharing economy and becoming the Uber of the grocery delivery service is what differentiates them from their competitors. They use a “crowdsourced marketplace model” whereby they select among many shoppers and delivery people who make themselves available, which enables them to deliver on their “grocery delivery within the hour” promise. They even keep certan shoppers on premise, who then are able to start the orders in a very fast manner.

For the consumer, the value proposition is the following: Instacart tries to emulate having a personal shopper who looks out for your best interest. Their shoppers are trained to choose the freshest fruits and make sensible decisions while shopping (if an item is out, they don’t replace it with something completely overpriced or irrelevant). The app is very easy to use and intuitive, and has features that makes the experience delightful. Imagine you just checked out and already paid, and oh you forgot to buy butter! In real life, whether you made the purchase yourself or online, if you left the store or paid online with your credit card, you will have no butter until you make a second trip or a separate purchase.  With Instacart, you can add items until your shopper is done shopping. How thoughtful is that? Even Amazon does not have this feature. Consumers are also able to mix and match products from different grocers in one order. The experience takes away all the pain of the existing alternatives, and puts an additional spin to make the overall experience great for the consumer.

Value Capture: They either charge a premium to the list price of the item you’re shopping for, or else they have a high volume driven discount with certain retailers where you as the consumer will see the same price as in store, however Instacart will pay the grocer less. In the case of Whole Foods, they have same in-store prices, and they even were able to negotiate shopping lanes that are only used by Instacart shoppers to ensure fast delivery. They pay their shoppers and delivery people hourly pay and the tips, which is a good motivator for the shoppers to a) deliver fast service and b) do a good job. Due to the popularity of the features and the convenience of using the app they are able to attract a high number of shoppers as well as customers.

As competitors are trying to emulate some features of the Instacart experience (Google Express recently added the fresh grocery category and became a direct competitor to Instacart), it will be very hard for them to beat the brand name and the network Instacart has been able to build in such a short time. A clear win for all of us!

Sources:

http://nextjuggernaut.com/blog/how-instacart-works-makes-money-revenue-business-model/

https://www.crunchbase.com/organization/instacart

 

 

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9 thoughts on “Instacart: Shopping for groceries has never been more fun

  1. I first used Instacart during this brutal Boston winter. Having had a roommate with a car the past 4 years of living in Boston, I did not know what was going to happen to my grocery shopping habits. Renting a Zipcar was actually far less economical than the cheap delivery fee of Instacart. And when Market Basket was added to Instacart’s offering, that officially sealed the deal for me and I have never looked back.

    However, I think the model is very limited to working best in dense areas where the majority of patrons rely on public transportation. I could never see the model succeeding in an area like the suburbs of Georgia (where I am from), where cars are plenty and grocery stores are widespread. I do think, however, that even in car-dominated cities, Instacart’s business model would work well on University campuses or in contexts where the target consumer is a very busy professional and can afford to wait a day or two for groceries–particularly if the grocery store isn’t open when he/she gets off work or is located far from the commute route to/from work.

    I think their business model of offering tiered delivery fees based on peak demand times is smart, but I also think they could better take advantage of coordinating drop-offs. For example, if a pool of consumers in one area is not super time-sensitive in their grocery deliver, perhaps Instacart could offer discounts if such consumers could discover each other and coordinate a drop off time that would give Instacart delivery persons a more efficient route of business.

    All I know is, I know I won’t be hungry this winter when Spangler closes thanks to this wonderful service 🙂

  2. Agree with MR’s comment. And also agree that Instacart has been a god sent! At first I didn’t love the delivery fee, but quickly was able to get over that once I experienced the amazing shopping experience (my shopper mentioned the produce I had ordered didn’t look great, so I decided to pass!). Wish that all stores would offer the same in-store prices, but hopefully that will come with time?

  3. Love your analysis in this post, Nazli! I’d happily have labeled Instacart a winner already, if it wasn’t for this summer. I interned in Seattle, where most people would just use Amazon Fresh and had never heard of Instacart before. I also visited the Bay Area for a couple of days, only to find my friends using Google shopping express almost exclusively. I think Instacart may be the hot favorite in the Boston area because other competing services don’t exist here yet or have newly launched operations here. I’ve no idea how the service is doing in NYC area — perhaps, that may be the best sample to look at given both Amazon and Google deliver groceries there.

    Also, agree with CSS that lower price may emerge as a key differentiator for Amazon Fresh and Google Shopping Express, quickly wiping away the competitive advantage of being “easy and intuitive to use” that Instacart currently enjoys. I guess we’d have to wait and watch to see how this market dynamic unfolds.

  4. Really enjoyed reading about Instacart and the grocery delivery space. The fresh consumables category is virtually the only one that has not been cracked by Amazon or any other retail giant. As you mentioned, the asset light model for Instacart has allowed them to become a platform for many brick-and-mortar grocery stores. I would label them a clear winner (or en route to being a clear winner) if it weren’t for the ruling in California that came down on Uber this past summer. Uber has until now labeled their drivers as independent contractors instead of employees and have been able to circumvent paying out unemployment and workers’ compensation, among other related costs. In August a California labor board ruled against this categorization and in September, a federal judge in California granted class-action status to a lawsuit by drivers against Uber on this topic. How this ends for Uber will have critical impact on Instacart and other startups in the sharing economy.

    1. Great comments, definitely thought about that when I was writing this post. Perhaps I should have also mentioned that right after this ruling Instacart gave their shoppers part time employee status, which does not obligate to give them health insurance, but will force them to withhold payroll taxes and account for workers comp insurance. I like that instead of fighting the law on this like Uber and Lyft, they are embracing it and even claim this is going to improve their customer service. See this article for more detail! http://consumerist.com/2015/06/22/instacart-gives-shoppers-employee-status-says-its-to-improve-customer-experience/

  5. A wonderful service and a wonderful post about it! I am also a big fan of Instacart – I use it as frequently as twice a week. All the features you outline in your post are indeed making the life of a consumer easy (and possibly the life of a shopper a bit more annoying when last minute changes come in to the order). My question for the future success of Instacart is how does it plan to capitalize on the vast amount of data it is collecting? Some companies (such as Haagen Dazs or PepsiCo) are already trying to ride the wave of Instacart’s success by installing online promotions for customers (e.g., PepsiCo sponsors the delivery fee of $3,99 if you order $20 worth of their product). But surely in the world of big data Instacart could go much further than that. Another way to use their insights is or their own benefit: for instance it seems that Instacart’s performance is uneven across cities (e.g., Boston offers truly “Insta” delivery times whereas lead times on Manhattan are often 2+ days) which could be easily mitigated by proper data management (e.g., analyzing incomplete orders based on too long lead times and investing in extra staff to optimize the bottom line).

  6. Great post! I love using it in Boston, but following up on Shashank’s comment as a native New Yorker I haven’t heard of any of my friends using it and don’t think I will use it when I move back to NYC. I’d be curious to understand the useage of Instacart in other cities like Chicago and Washington, D.C. And I do think the ability for Instacart to figure out how to effective use the customer data will be essential for the future of the company.

    For my Field 3 project, my team was surprised to learn that many Uber drivers are also Instacart drivers during the week. The success of Instacart seems to be even more intertwined with Uber’s success than I had previously thought…

  7. Nazli, interesting post. Unfortunately, I stopped using Instacart after having used it twice a month over the past year. The reasons are the following isses with the service – at least since the last time I used it so that does not account for new features they might have recently added (and I foresee that Instacart might lose more customers if it does not do something about these issues):

    – Once your shopper starts shopping, you cannot directly add items to the shopping list and should instead contact them directly. It actually took me a while to figure out how to message the shopper, but I believe that part of the experience is avoiding phone calls and using the convenience of the internet instead

    – Delivery at the door of your place instead of a close point. This might not be the case for many people, but I live at HBS dorms and I had an incident where the shopper called me, told me she is at Aldrich, and I had to walk all the way there to pick up my things. She actually helped me carry them all the way back to the dorms, but I was shocked that she had two kids below 4 years old shopping with her.. Not that it affected my experience in any way, but I was surprised to see her shop and deliver items with her kids

    – I ordered from Shaw’s and only discovered how inflated prices are when I went to Shaw’s myself one day. I think that Instacart should be transparent about how inflated the prices are. Based on my calculations, some items were more than double the price, which is the point that made me lose trust in the company – I was offended that they were ripping me off and taking an unreasonable fee

    – Quality is a huge issue at least regarding fresh produce. It is interesting that they train shoppers, because from my experience, they do not seem to have trained them. I ordered raspberries once, and they were already rotting.. which is unacceptable, from Shaw’s first, and surely from Instacart’s shopper. I wrote a review and never received a response!

    – The website does not include all items in the store, which is annoying for someone who orders very specific items like me. I usually have to find a picture of the product and unload it, and then spend some time over the phone to make sure they get it right. The price of the product is around $4 in the store, and they charge me double that because they think it is OK to double the price when I cannot see it on the website.. and they assume in the store too

    Instacart betrayed my trust and disappointed me at multiple occasions, and hence I decided to do my own grocery shopping for the time being. Maybe I should give it one last shot, but order from Whole Foods next time.

    I think that the business model is easily replicated by other companies, or by Uber/ Lyft who have started by delivering ice cream and could easily move to the grocery shopping arena. They could partner with grocery stores, who provide shoppers, and then Uber drivers pick up the items and deliver them to your door. I do not think that Uber is very far away from doing that, but that is only my speculation. Being a first mover served Instacart well, but I do not think it is sustainable given the multiple sources of competition it will face, and the many issues with its service that I have (and potentially other people have) faced.

  8. I’m more skeptical on Instacart not because of its impressive progress up until now but how the future might turn out. If I look forward to a world where Instacart (or something like it done by Google and others) is being used by the majority of shoppers, retail stores are going to be quite upset. A significant portion of grocery sales come from “impulse” purchases. Basically that bag of chips you would never put on your Instacart shopping list but you can’t resist when you see it at the end of the aisle. CPG players pay a ton in trade investment to make this happen as well, which means even more money lost for retailers. With a pre-populated list, impulse effectively goes away. I’m not saying this is game over but it will definitely require some reaction from all players involved. Retailers and CPG will try to find ways to recreate impulse online but they will also try to block Instacart and give shoppers reasons to come into the store as well. I’m curious to see how Instacart will handle this.

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