The future of grocery delivery is here! But is it sustainable?
Founded in 2012, the on-demand grocery delivery startup Instacart, was chosen as the number one company in Forbes’s 2014 America’s Most Promising Companies list. As the company is valued at more than $2 billion and with more than $100 revenues in 2014, many attribute the company’s strong business model to its rapid growth.
As the Uber of grocery shopping, Instacart’s business model is connected to the on-demand economy. Instacart provides a platform that connects personal shoppers with customers. Using technology, the company facilitates quick home deliveries (up to one hour) and offers value to the shoppers, customers and even retailers.
As opposed to other players in the on-demand sector (Uber, Airbnb), Instacart operates in a non-regulated environment. Moreover, it provides a service that compliments as opposed to disturb to current practice. Thus, it appeases the entire ecosystem and potentially limits the resistance from current stakeholders and even provides a growth opportunity for the entire industry.
- Users: convenience, ease of use, accuracy, quick delivery and a vast selection.
- Shoppers: flexible working hours, “extra” money.
- Retailers: as Instacart operates within the current system, it presents an opportunity for retailers to gain incremental sales (and potentially bigger basket size).
Instacart operates as a platform connecting shoppers and customers and therefore doesn’t own any warehouses, inventory or run their own delivery system. The method relies on:
- Users placing their order via the app or the web based interface. They pick the desired store, products and replacement (if needed) and finally chose a convenient date and time for the delivery.
- The Shoppers receiving the orders and manually collecting the product in the physical store and delivering those to the user.
Payment is performed through the Instacart app after the user receives the products and can include a tip for the shopper.
The model is agile per shifting demand and is asset light with technology enabling to create fast and efficient connections between shoppers and users.
So how do they make money?
Instacart revenue model is based on a delivery fee (~$3.99, higher for 1-2hour delivery) combined with up to +20% mark up on store price.
As the company doesn’t own any physical facilities, the majority of its costs are based on shoppers salaries ($15-30 per hour) and compensation and technology maintenance and development costs.
Thus, this model represent potential to high profit with relatively limited risk.
But wait, is it profitable? Is it sustainable?
Instacart clearly has a strong business model supported by an operating model that allows the company to create value to the entire ecosystem with limited costs (as it holds no inventory or physical warehouses). But what might be the potential challenges? How can it continue to create value?
- Even with the rapid growth, Instacart’s profitability is not clear. Despite the cost structure, with revenues based on delivery fee and price markups, the question remains whether the company can make sufficient money from orders to justify the valuation.
- On the retailer frontier, despite the potential to incremental growth, current gain is still limited (e.g. for Whole Food, the company’s largest retail partner, online sales represent less than 1%). Therefore, in an attempt to reduce prices for customers, approve efficiency and increase potential sales to retailers, Instacart partnered with certain retailers to formalize a new pricing relationship.
- In the future, despite the potential for scale, there is a risk that growth won’t be incremental to retailers thus shaking the balance of the ecosystem.
- Lastly, as Instacart relays heavily on it’s available employees, it’s exposed to labor market fluctuations. As it offers limited security and long term benefit to employees, the ability to asses and control availability is limited.
In conclusion, with a great value proposition and a strong business model, Instacart is on the road to continues growth. But for how long and would this growth be profitable? Depends on how the company plays its next moves.