Instacart makes money by charging customers a delivery fee as well as marked up products from some stores. This direct, unsubsidized approach is problematic.
In January 2015, the company capped a period of furious growth with $220 million in series C funding that valued it at $2 billion, and last month it was reported to have secured an investment of unknown size from Whole Foods.
This past December, Instacart raised delivery fees and hiked the price of its membership program by 50%. It also laid off 12 full-time recruiters and announced plans to slow hiring in 2016. (…)
In January 2015, the Wall Street Journal reported that not all Instacart orders “eke out even a small profit.” This past fall the Economist wrote that Instacart was “rumoured to lose around $10 on each order it fulfills.” Instacart declined to answer questions about its finances.
Quartz makes a good point about the scaling potential, or lack thereof, of Instacart:
It’s unclear whether Instacart, which now operates in 18 markets nationwide, can reap similar benefits from scale. Unlike Uber, which can shave off valuable seconds to improve the customer experience, Instacart is delivering within hourly windows. And the groceries it’s providing will only ever be as good as the store they’re coming from.
Uber makes its narrow margins work with staggering volume, and fares that are often lower than those offered by taxis. But Instacart is trying to compete on convenience, and it’s an open question whether customers are willing to pay the premium—especially when companies like Amazon have trained us to expect fast shipping for free. Even in New York City, charging $11.99 for delivery on $30 of groceries feels like the price of an extravagance, rather than a routine time-saver.
The signs of trouble at Instacart are slowly piling up.
The Wall Street Journal:
Contract drivers in the company’s hometown of San Francisco who collect prepacked bags from grocery stores will earn $1.50 a drop-off, a cut of 63% from the previous guarantee of $4. Instacart is also slashing by 50% to 25 cents the commission it pays for each item in an order drivers collect when shopping in stores.
In some cases, the changes amounted to huge pay cuts for the company’s lowest rung of workers, resulting in hourly rate decreases of 40 percent or more, according to six current Instacart employees and contractors. A high-performing Instacart worker in one major city once made more than $25 an hour thanks to their speed; that person will now make $15 for the same work.
Bloomberg, on the other hand, is reporting on a promising expansion of Instacart’s business model (which comes surprisingly late in the life of the startup):
The grocery delivery startup is working with General Mills Inc., Nestlé SA, PepsiCo Inc., Unilever NV, and other consumer goods makers to cover the cost of delivery or provide other discounts when customers buy their products. In addition to the coupons, the companies pay Instacart to advertise on its website. Since introducing the program about six months ago, it now accounts for 15 percent of Instacart’s revenue, said Apoorva Mehta, the company’s chief executive officer.
Shoppers can find discounts when filling up their carts with brands such as Degree, Doritos, DiGiorno, Häagen-Dazs, Quaker Oats, and Stella Artois. Instacart ads promise free delivery if you spend $10 on Red Bull, or consumers can get 75 cents off any Dove soap. Mehta compares the ads to those offered on the side of Google search results. “It’s like AdWords for groceries,” he said.
Add to this partner shops like Whole Foods, which plans on investing in Instacart and sign multi-year delivery deal according to Re/code, Costco, Target and other, which usually list items at Instacart without markup, and you can see a silver lining at the horizon. (Instacart gets a commission from its partner stores.)
But in fact, I think this points even more to the bull case for Amazon and Uber for sustainable grocery deliveries:
- “AdWords for groceries” decreases the cost customers have to bear directly; lots of brands seem to be up for this (which makes sense)
- In contrast to Instacart both Amazon and Uber have benefits from scale as for both grocery deliveries would be part of a package, it helps them to max out their capacity.
- Add brick-and-mortar partners and the threshold to at least a contribution margin of zero per delivery does not seem too far off.
The same argument that can be made for UberRUSH -leveraging an existing logistics infrastructure- holds true for Amazon, and more so: When, not if, Amazon starts rolling out its own delivery network, why should the company then not deliver everything possible through this system instead of ‘just’ ordinary goods ordered online at Amazon?
Models like HelloFresh (recipes and ingredients for meals rather than a supermarket style offering) will work dedicated but they might profit heavily from partnering with strong delivery partners. (And UberRUSH and Amazon might just become such partners within a few years.)
But other than that the online food market is still very much an open question.
Instacart is confident it can grow into a sustainable business—so much so that the CEO said he doesn’t plan to raise venture capital again.
Well, add an imminent Whole Foods deal with a strategic investment and an accompanying partnership aggreement and one can see a goal not a symptom here: Instacart doesn’t want to take more venture capital. Why would it not want to? If its model works, taking more money to aggressively grow across the US and maybe even go international would make more sense. Not taking capital and instead drastically cutting costs indicates the numbers are not looking too good. And an investment round with a lower valuation would not look good for Instacart. Especially for Instacarts model it would be problematic: partnership deals with brands (ads) and stores (commision based). You want to look like a winner or at least like a strong partner. Or else you start getting the short end of the stick in negotiations.
According to Bloomberg, Instacart said it’s “profitable” in four cities, including San Francisco and Chicago. (the two biggest and most mature ones)
- Re/code: “Whole Foods to Invest in Instacart, Signs New Multi-Year Delivery Deal”
- Are Delivery Costs For Food Too High For Dedicated Startups?
- Chinese Food Delivery Startup Ele.me Might Show The Way For The Future Of Delivery Hero Et Al
- How Amazon is Expanding its Uber-Like Delivery Service Amazon Flex
- UberRush And The Battle For The Last Mile