Instacart – How to Leverage Technology in the Pursuit of Value Creation

Founded in 2012 by Apoorva Mehta, Instacart benefited from mobile technology to instantly connect customers with shoppers via a simple tapping-to-order process. Mobile technology has enabled the creation of a so-called ‘on-demand economy’ i.e. an economic activity that fulfills consumer demand by offering immediate access and convenient delivery of goods or services. Is new technology transforming what Instacart could do and how it could efficiently operate for it to succeed? Or will it succumb to the same fate as that of its now-bust dot-com predecessors Webvan and Kozmo? (790 words)

The On-Demand Economy

Founded in 2012 by Apoorva Mehta, Instacart benefited from mobile technology to instantly connect customers with shoppers via a simple tapping-to-order process[1]. Mobile technology has enabled the creation of a so-called ‘on-demand economy’ i.e. an economic activity that fulfills consumer demand by offering immediate access and convenient delivery of goods or services[2] [3]. Is new technology transforming what Instacart could do and how it could efficiently operate for it to succeed? Or will it succumb to the same fate as that of its now-bust dot-com predecessors Webvan and Kozmo[4] [5]?
Creating and Capturing Value

Nowadays, the key for a company to succeed is ‘to rethink its business model, identifying new opportunities for creating and capturing value’[6], and to deliver on that promise by building a robust yet agile operating value.

At its core, Instacart started by creating and capturing value through the use of technology for the delivery of groceries in exchange for a markup and a delivery fee[7]. However, in order to create a long-lasting competitive advantage, Instacart needed to further create value in the value-chain i.e. customers, retailers and Consumer Good Products, whilst appropriating itself some of this added value.

 

Instagram’s Operating Model

Instacart’s platform enables a user to select a store, groceries and a delivery time for the item delivered. Once the user pays (delivery fee or monthly/yearly subscription), a shopper receives the order on his or her phone, selects the items and delivers it to the customer or to a driver who will complete the delivery. Mobile technology is the main differentiator to Webvan and Kozmo’s capital-intensive operating model. Shoppers can now be stationed at select stores, thus avoiding the need for Instacart to invest in infrastructure such as physical store[8].

 

Creating Value in the Supply Chain

By leveraging its technology and adapting its operating model, Instacart was able to develop new revenue streams and reduce its cost. By partnering with retailers – promising and delivering greater sales volume – Instacart has managed to add a new stream of revenue, based on sales generated through the Instacart platform. Further to the additional business, Instacart provides its partners access to enterprise-level software[9]. This technology offers retailers sales analytics, merchandising and inventory analytics, enabling the partner-retailer to better understand its customers and to generate higher sales [10] [11]. With certain retailers such as Wholefoods[12], Instacart has integrated its platform to the retailer’s system, cementing its place in the supply chain and making that supply chain work more smoothly[13]. Moreover, the partnership provides Instacart with access to special checkouts and a map of stores, rendering item collection more efficient and saving cost as the shopper increases the items shopper minute [14].

Instacart has also increased its revenue by working directly with Consumer Packaged Groups companies. Mobile technology and data analytics enables Instacart to offer CPGs targeted marketing through instant coupons. These coupons are targeted to the customer and redeemed more efficiently than offline coupon. According to Mehta, 80% of American consumers use coupons and CPGs spend a total of $320 billion in marketing every year. Instacart expects that CPG revenue will constitute 50% of Instacart’s revenue in the next couple of years, as opposed to a mere 15% today [15].

 

Capturing Value

Technology enables scale; as orders per hour increase, orders are batched together, the number of delivery per hour increases, increasing the unit revenue, whilst keeping its cost constant i.e. per hour wages of the shopper and driver. By leveraging technology, Instacart is able to facilitate the complex logistics of small orders, whilst lowering the costs of the personal service. Furthermore, Instacart uses predictive technology to calculate how long it takes for an order to be fulfilled, thus enabling a supervision of the efficiency of its team, whilst allowing for a better allocation of resources[16].

 

Challenges and Opportunities Ahead

Instacart faces pressures from its competitive landscape, Silicon’s Valley shifting investment climate and regulatory threat. Nevertheless, these threats can be turned into opportunities. For example, the regulatory threat has already forced Instacart to adapt, as it turned its shoppers from contractors to part-time employees. The opportunity created is that Instacart is able to train its shoppers and supervise them in its pursuit of higher shopper utilization and overall performance.

What keeps me optimistic for Instacart is that in partnering with retailers and CPGs, whilst delivering a superior service for its customers, it has built trust. Trust is an essential component to unlock the many opportunities that technology brings and it will be up to Instacart to continue leveraging trust and value creation as it builds partnerships with retailers, CPG, whilst servicing its customers.

 

790 Words

 

[1] https://techcrunch.com/2012/08/01/instacart/

[2] https://theondemandeconomy.org/

[3] http://www.businessinsider.com/the-on-demand-economy-2014-7

[4] http://money.cnn.com/galleries/2010/technology/1003/gallery.dot_com_busts/2.html

[5] http://www.slate.com/blogs/moneybox/2015/01/13/instacart_gets_2_billion_valuation_here_s_why_it_might_not_last.html

[6] https://services.hbsp.harvard.edu/services/proxy/content/56157960/56157962/1158b6f8f146cc2d02207d5ab2521095

[7] https://gigaom.com/2015/01/14/on-the-way-to-220m-in-funding-instacart-quietly-changed-its-business-model/

[8] https://www.ft.com/content/cfa4714e-0acb-11e5-98d3-00144feabdc0

[9] https://www.youtube.com/watch?v=v629Pw_ps60

[10] https://www.youtube.com/watch?v=v629Pw_ps60

[11]  https://www.ft.com/content/cfa4714e-0acb-11e5-98d3-00144feabdc0

[12] https://news.instacart.com/2014/09/07/wholefoodsmarketpartnership/

[13] https://www.ft.com/content/cfa4714e-0acb-11e5-98d3-00144feabdc0

[14] http://fortune.com/2016/03/24/instacart-profits/

[15] https://www.youtube.com/watch?v=v629Pw_ps60

[16] http://fortune.com/2016/03/24/instacart-profits/

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7 thoughts on “Instacart – How to Leverage Technology in the Pursuit of Value Creation

  1. Thank you for sharing your thoughts on Instacart, clearly a disruptive business model in the low-margin grocery space. Improvements in matching supply and demand along with diversified revenue streams has helped per unit economics in some cities (http://fortune.com/2016/03/24/instacart-profits/). The role of technology in enabling Instacart capture value is tremendous and will only get amplified with scale (especially given its asset light strategy where it does not need to invest in warehousing). That said, as Instacart grows its presence and refines its operating model, it is susceptible to hiccups along the way. In-store shoppers are an important part of Instacart’s value proposition. The recent changes to tipping with the introduction of a shared fee pool has led to widespread dissatisfaction that could derail operations during the Thanksgiving period and also leave an adverse impact on the brand image. The example you cited about the change from contractors to part-time employees likely took a toll on Instacart’s cost structure and flexibility to manage utilization during periods of low order volumes.
    I appreciate your emphasis on building trust with the customer, CPG firms and retailers. I would suggest we add in-store shoppers to the mix given their integral role. We often emphasize the role of the customer as part of the digital transformation story, but need to recognize that Uber’s drivers, Airbnb’s property owners, and Instacart’s shoppers are a vital part of each company’s respective playbook.

  2. Instacart has attracted a lot of buzz and is certainly a business whose customer value proposition and operating model are underpinned by digital technology. Some additional thoughts on challenges going forward are below:

    ♣ Optimizing the supply chain? While Uber radically optimized the value chain in the taxi industry, disintermediating and shortening it using software, Instacart has actually increased the steps in the grocery sales process: a grocery product is manufactured > purchased by a supermarket retailer > purchased by an Instacart shopper > purchased by the end consumer. Online digital innovation has successfully transformed industries and businesses by cutting the middleman and reducing the touchpoints of different businesses on a product that add to the total cost for the end consumer [1]. Many online businesses have succeeded because they enable direct business to consumer sales, and physical store distributors have suffered as a consequence (e.g. department stores)
    ♣ Labor in the digital, sharing economy: Instacart does not have the same labor advantage from its digitally enabled operating model as Uber. Instacart has to train its labor force in how to pick ripe fruit, vegetables, and provide supervision and training for grocery shopping. This has mitigated some of the labor force benefits as the company has to treat some amount of its workforce as employees instead of independent contractors [2]
    ♣ Cost competitive? It costs much more to deliver an item than the $5.99 Instacart charges shoppers, but customers are unwilling to pay more [3]. In all, Instacart’s total cost is up to 44% higher than the cost of shopping for the same basket of grocery items at a supermarket without using an Instacart shopper [4]. This is the premium paid for convenience, a critical component of the customer value proposition.

    So as Instacart tries to find other revenue streams to offset the generally unprofitable unit economics, a key challenge and question is how will the digital technology Instacart has built actually create a successful, self-sustaining, profitable business model? Is there a better way for digital technology to be used to create an operating model and profitable business model that eliminates physical stores entirely?

    ——–
    [1] ‘Consumers pay up for Instacart’s expensive business model’, Grocery.com, January 28, 2015, http://www.grocery.com/consumers-pay-up-for-instacarts-expensive-business-model/, accessed November 20, 2016.
    [2] Alison Griswold, ‘Inside Instacart’s fraught and misguided quest to become the Uber of groceries’, Quartz.com, March 10, 2016, http://qz.com/627605/inside-instacarts-fraught-and-misguided-quest-to-become-the-uber-of-groceries/, accessed November 20, 2016.
    [3] SCDigest Editorial Staff, ‘Supply chain news: Delivery wars push comes to shove at Instacart’, SupplyChainDigest, http://www.scdigest.com/ontarget/16-03-16-1.php?cid=10420, accessed November 20, 2016.
    [4] ‘Consumers pay up for Instacart’s expensive business model’, Grocery.com, January 28, 2015, http://www.grocery.com/consumers-pay-up-for-instacarts-expensive-business-model/, accessed November 20, 2016.

  3. Thanks for sharing your thoughts on the Instacart model, I really enjoyed reading your article as I think that online grocery shopping is one of the most promising field in which technology will play a crucial role in the near future.
    In a world moving faster and faster, where time management has become a main concern for most people and where women are no more dedicated full time to the house and to the family as years ago, it is crucial to help customers to reduce the time spend on food shopping and delivery. Me myself, despite loving the ritual of going to the supermarket and carefully choosing all the items to put in my cart, started to shop on Instacart and loved the efficiency and convenience in terms of time that I can save using this service.

    I found interesting that you focused your analysis not in the threat that online platforms such as Instacart constitute for traditional retailers, but how even newer technologies can affect Instacart business model itself!
    I think though that the main threat for Instacart and similar platforms will not come from new technologies, but indeed from the traditional retailers and large established technology firms.
    Large traditional retailer have the scale and can acquire capabilities to develop such platforms in house, as for example Wal Mart is doing with its ewallmart platform and through the recent acquisition of Jet.com, as well as both the giant Amazon and Google have entered this market with Amazon fresh and Google express services.
    Will Instacart be able to face the challenge of large Tech companies and large retailers? Superior customer experience and customer loyalty is the key, and I think it will be crucial for Instacart to lock-in the largest number of customers in these years lowering the subscription fees while the large companies are sill trying to catch up.

  4. Instacart is a great business model of sharing economy. However, the competition in this space seems quite severe. For examples, Google express or Amazon Fresh are all targeting this segment. Is it possible that these tech giants can copy the business model of sharing economy in supermarket? The Instacart’s CEO said it’s competitive advantages over other competitors are the relationships with the current supermarket chains, and this might be true for other smaller players. Nonetheless, is it possible that Google and Amazon quickly build up the relationship with other grocery shops? This article is really good to help us understand more about this market!

  5. Interesting post! In many ways, instacart offers more synergies with existing supermarkets than services such as Amazon Fresh or Pantry. Instacart is really more of a personal shopping service because they are sending a person in to a store to pick up your order whereas services such as Amazon Fresh or Pantry completely bypass the supermarket retailers all together. However, because Instacart is sending a shopper in to a store there are some challenges with this operating model which are not present in other competitor offerings. First, the website does not instantly sync with the stock in the store. Therefore, a customer may purchase an item on the website and then when the shopper arrives at the store, they discover that the item is not available. Additionally, when an item is not in stock in the store there is no instant feedback from the customer tot he shopper. The shopper does not have an opportunity to indicate what item they may want instead.

    Retailers are increasingly trying to utilize omnichannel to integrate and more efficiently manage stock. Is Instacart working more closely with retailers to identify ways to better sync the in-store offerings with the items listed on the website? Also is Instacart working to identify ways to allow customers to provide real-time feedback to shoppers? These adjustments to the operating model would serve to greatly improve the customer value proposition and further differentiate Instacart from competitors.

  6. Thanks so much for an interesting post. I think Instacart is such a good example for this TOM challenge and as someone who lives on campus, top of mind as a company that has used digitization as an opportunity. I echo some of the concerns above about Amazon Fresh and Google Express as big threats to Instacart. To parse this out, I would be interested to see results of customer preference studies, if Instacart (or its competitors) have conducted any. The reason for this is that I think a value proposition of Instacart is that it still allows the customer to have the shopping experience; one can follow the Instacart shopper and receive feedback on anything that is out of stock and approve substitutions. The experience of Amazon Fresh, for example, is totally different and customers likely have a preference for one over the other.

  7. Very nice post! As an Instacart user, I am very interested in this topic. I have to say that the main reason why I use Instacart today and not Amazon Fresh or Google Express is due to Instacart`s shopping experience. The on-demand digital economy is making our lives easier by reducing the amount of time we have to spend on going to buy anything from food to books, but at the same time is taking away some of the experiences that make life interesting. Companies like Instacart that can avoid this problem are sought to have a competitive advantage over its competitors.

    My main concern with Instacart though is the competitive landscape. Not only Amazon or Google, but retailers themselves have all the incentives in the world to do this by themselves and it will be very difficult for Instacart to compete against them as no one can offer a better shopping experience of its stores than the retailers themselves. Instacart should counter this by increasing its focus on creating value in the supply chain through strategies like the partnership they built with Wholefoods.

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