🥕 Unpacking Instacart's IPO
Overlooked #155
Hi, it’s Alexandre from Eurazeo. I’m investing in seed & series A European vertical solutions (vSol) which are industry specific solutions aiming to become industry OS and combining dynamics from SaaS, marketplaces and fintechs. Overlooked is a weekly newsletter about venture capital and vSol. In this post, I’m digging into Instacart’s upcoming IPO and strategy to become a vSol for the grocery industry.
On Aug. 26th, Instacart made public its S1 to start trading on the US public market. It plans to IPO in September. It was a long awaited for several reasons: (i) Instacart submitted a first S1 draft to go public in May 2022, (ii) the tech IPO market has been completely dry in the last 18 months, (iii) Instacart reshuffled its internal valuation several times going from being valued $39bn to $12bn. Together with Arm and Klaviyo, Instacart is part of a first batch of private tech companies that will go public in September and that will give the tone for what will happen for other potential tech IPOs in the coming quarters (e.g. Stripe, Databricks, Gusto).
Instacart was founded in 2012. It has been a major contributor to the digitalisation of the US grocery sector, pioneering online delivery thanks to a mobile app that empowers consumers to order online from their favourite retailers and thanks to a network of independent contractors called shoppers picking, packing and delivering grocery items to consumers. It raised $2.9bn in capital from top-tier investors like YC, Khosla, Sequoia, a16z, Kleiner Perkins, DST, General Catalyst and Coatue. It had several near-death experiences including when in 2015, the company had a negative $14 gross margin on every order or when Amazon acquired WholeFoods in 2017 which was generating 43% of Instacart’s GMV. Instacart also rode an unexpected black swan with covid which brought the company to another dimension growing its GMV by 303% from $5.1bn in 2019 to $20.7bn in 2020. It brought a massive influx of consumers and retailers to its platform when everyone was stuck at home and had to order online to get their groceries delivered.
In July 2021, Fidji Simo became Instacart’s CEO replacing Apoorva Mehta who was Instacart’s original founder and CEO. Fidji opened a new chapter for Instacart focused on delivering sustainable profitable growth based on three main levers: (i) building a powerful advertising platform for CPG brands, (i) selling SaaS to retailers to digitise their operations online and in-store as well as (iii) making Instacart more affordable to address price sensitive grocery consumers.
In this paper, I’ll unpack Instacart covering the key learnings from studying its business, its history, its suite of products, its market, its financials as well as the key risks and opportunities it’s currently facing.
Key Learnings
“On a long enough timeline, everyone sells ads.” When a platform business (e.g. a marketplace, a social network, a physical or digital store) reaches a sufficient scale, it can add advertising as a revenue stream to boost its revenues and more specifically its bottom-line as advertising is a high margin business model. Instacart has fully understood this mantra and generated $740m in advertising revenues in 2022 accounting for 29% of its total revenues.
Organic acquisition as main growth driver for an early stage consumer business. You cannot build a successful consumer business if you rely mostly on paid marketing. Instacart only started to spend significantly on marketing in 2021. Before that, it relied almost entirely on organic acquisition (word of mouth, referrals) to boost its top-line.
Adding monetisation layers overtime to increase your take rate as a marketplace. Instacart’s monetisation combine multiple revenue streams which are stacked on top of each other including (i) a service fee and subscriptions revenues paid by the end consumers, (ii) a platform fee paid by the retailer on transactions on the Instacart app and on transactions on the retailers’ digital properties managed by Instacart as well as (iii) advertising fees from CPG brands advertising on Instacart and on retailers’ digital properties managed by Instacart.
Following the Amazon’s playbook of building a consumer product and leveraging all the tech built like AWS to sell it to third parties. Instacart is becoming a vertical SaaS specialised in the grocery sector selling to retailers the technology it built internally for its consumer app (e.g. advertising network, website & app builder, fulfilment technology, etc.). To strengthen this positioning as vertical SaaS for grocers, Instacart has also acquired companies selling complementary technology to retailers (e.g. Caper providing smart carts) to have an end-to-end offering to help retailers digitise both their online and offline operations.
Riding market momentums. During its company journey, Instacart managed to ride several temporary market tailwinds: (i) being compared to Uber and Airbnb at its inception as a player able to disrupt a category leveraging the sharing economy, (ii) leveraging Amazon’s acquisition of WholeFoods in 2017 to sign many retailers afraid of being disrupted by Amazon, (iii) riding covid in 2020 to boost its acquisition of consumers and grocers in a world in which grocery delivery had become an absolute necessity. Riding these tailwinds was essential for Instacart to reach the necessary scale to make its model profitable.
Fighting Damocles swords. Instacart is operating with two Damocles swords over its head. First, the lack of fragmentation on the retailers side of its marketplace (Instacart makes 57% of its GMV from 4 retailers and the top 5 retailers in the US have a 47% market share). Second, the re-qualification of the work status of its 600k independent contractor shoppers.
Focusing on the hard things. Instacart’s core moat is to be a “unique translation layer between the digital world and the physical world” transforming a digital order on a mobile app into a real grocery bag delivered 2 hours later. It implies building the technology to connect to the retailers’ infrastructure and to empower shoppers with tooling to process orders.
Celebrating cents. Like DoorDash, Instacart has become a successful business because it obsessed over unit economics. In 2015, it was loosing $14 in gross margin per order. Today, it makes $7 in gross margin per order. “Sweating literally every penny is what has made Instacart successful. It has put us in a position where our unit economics are really strong in a market where there’s been a lot of attempts at doing what we do and attempts that have been unsuccessful” said Fidji Simo.
History
Instacart’s journey from inception in 2012 to IPO in 2023 can be divided into three acts:
Act 1 (2012-2019): growing Instacart as a consumer app to digitise grocery shopping.
Act 2 (2020-2021): riding the covid wave and the tech bubble.
Act 3 (2022-today): achieving durable profitability and planting the seeds for long term revenue growth based on advertising paid by CPG brands, SaaS sold to retailers and on making Instacart more affordable.
Act 1 (2012-2019): Growing Instacart as a Consumer App
Apoorva Mehta founded Instacart in 2012 at 26 years old. He was born in India and he grew up in Canada. He worked for 2 years at Amazon as an engineer on Amazon’s fulfilment system. He left Amazon and Seattle in 2010 to move to San Francisco to become an entrepreneur. He worked on 20 different startup ideas (including building a social network for lawyer and a platform to book office hours from famous tech people) which all failed before creating Instacart.
“I pivoted 20 times before coming up with the idea behind Instacart. After leaving my job as a logistics engineer at Amazon, I spent two years building about 20 “minimum viable products” focused on solving problems in the enterprise, consumer and advertising markets.” - Apoorva Mehta
Apoorva joined Y Combinator’s accelerator in 2012 after bribing Garry Tan to accept him in the batch - despite a late application - with a pack of beers sent via the Instacart’s mobile app. Contrary to Apoorva’s other ideas, Instacart had an immediate product market fit with people sharing organically the service to their friends. Instacart started without striking any partnership with retailers. It was sending gig workers to pick & pack orders into non-cooperative stores. Groceries were delivered by these shoppers in 2 hours and with a 15% mark-up. At the end of the year, Instacart raised a $2.3m seed round with Khosla, Haystack and Initialized Capital.
Between 2013 and 2019, from the outside, Instacart had the usual journey of a successful US consumer startup expanding across the US and Canada, growing exponentially and raising back-to-back rounds from top investors including Sequoia (series A and D), a16z (series B), Kleiner Perkins (series C), Coatue (series E), D1 (series F) and Tiger (series F).
But, internally, Instacart had also massive ups and downs:
In 2015, Instacart reached $100m in annualised revenues in January but had to initiate a major company shift towards positive unit economics as it was operating the business at negative gross margin losing as much as $14 on every order. It implemented key actions like batching orders, reducing delivery time (”every minute was worth 25 cents of gross margin”), adjusting the labour model for shoppers and reaching density to have economies of scale.
In 2017, Amazon acquired WholeFoods. It was a major event in Instacart journey as WholeFoods was Instacart’s largest retail partner generating as much as 43% of its GMV. Following the acquisition, WholeFoods left Instacart as Amazon was using its logistics network to deliver orders and all major retailers started to work with Instacart which was perceived as an antidote to Amazon’s arrival in the grocery sector.
Act 2 (2020-mid-2021): Riding the Covid Wave and the Tech Bubble
When covid burst in Mar. 2020, it brought Instacart into another dimension. Despite Instacart’s massive scale, it started to record 10% weekly growth rates - a growth that you could almost only expect as a seed stage company reaching product market fit. Online penetration in the grocery sector quadrupled from 3% in 2019 to 12% in 2022. Instacart was the main beneficiary because it had the technology and the fulfillment network based on its shoppers to support the consumer demand when most retailers were lagging behind in digital ordering and delivery.
Instacart leveraged this unique period to expand beyond the grocery sector onboarding retailers in categories like beauty (Sephora), electronics (Best Buy), home goods (Office Depot) or pet food (PetSmart). It also attracted additional capital increasing its valuation from $7.8bn in October 2018 to $39bn in March 2021.
Act 3 (mid-2021-today): Achieving Durable Growth & Profitability
In July 2021, Fidji Simo became Instacart’s CEO replacing Apoorva Mehta. It opened a new chapter for the company focused on durable growth and profitability. Instacart had to work hard to make its business ready to go public by downsizing its valuation to match the new market reality following the tech market crash and to adjust its business to a paradigm craving for durable profitability and growth.
Instacart’s next act is focused on three main pillars:
Advertising from CPG brands: Instacart has built a massive advertising business which generated $740m in revenues in 2022 accounting for 29% of its total revenues. 5k CPGs brands are relying on Instacart to advertise their products on the Instacart’s app and on the digital real estate of retailers managed by Instacart. Instacart is progressively rolling-out more engaging advertising tools including videos and shoppable recipes.
SaaS revenues from retailers: Instacart has repurposed technologies used to run its consumer app to offer it as a SaaS to retailers. It also acquired multiple companies selling to grocers (e.g. Caper building smart carts and smart counters) in order to build an end-to-end SaaS platform for retailers to digitise both their online and in-store operations.
Affordability to increase Instacart’s addressable market of North American consumers: Instacart started as a service mostly for affluent and digital savvy households. In recent years, it launched multiple initiatives to attract more price sensitive customer segments which is key because price is the main purchasing factor in grocery. It started to accept Electronic Benefits Transfers for people benefitting from a Supplemental Nutrition Assistance Program (SNAP). It refreshed its membership program to offer more savings (e.g. no delivery fees on orders over $35, 5% credit back on pickup orders). It also added a Deal Tab on its app to showcase promotions from retailers and coupons from CPG brands.
In parallel, Instacart is working on younger expansion projects like (i) integrating generative AI into its app, (ii) having a more dedicated offering for B2B orders and (iii) leveraging fresh food purchasing as a healthcare benefit that could be subsidised by the State, insurers or non-profits.
Product Overview
Instacart is a 4-sided marketplace intermediating interactions between consumers, shoppers, retailers and CPG brands.
Consumers purchase goods on the Instacart mobile app or on retailers’ digital real estate managed by Instacart.
Shoppers pick, pack and deliver orders made by consumers either on the Instacart’s mobile app or in white-label digital properties managed by Instacart for retailers.
Retailers acquire new customers on the Instacart’s mobile app and accelerate their digital transformation thanks to Instacart platform.
CPG brands advertise online to consumers on Instacart’s mobile app or on retailers’ digital real estate managed by Instacart.
Instacart App
Instacart App is Instacart’s core product. It has 7.7m monthly orderers and allows consumers to order from 1.4k retailers and 80k stores accounting for 85% of the US grocery market. Instacart accounts for 5% of its top 20 retailers’ total sales (vs. 0.6% in 2018). Initially, it empowered consumers to shop online from their favourite grocery retailers, have their items picked up and delivered by a personal shopper. Today, Instacart supports multiple categories of retailers beyond grocery (beauty, home items, pet foods, etc.) and multiple fulfilment options (quick delivery, same day delivery, next day delivery, pickup).
Instacart introduced a membership in 2013 called Instacart Express. In 2022, it rebranded its membership to call it Instacart+. It includes benefits like waived delivery fees, lower service fees, cash back on pickup orders, family features and exclusive deals. It costs $99 per year. Instacart+ consumers save on average $30 per month. Instacart has 5.1m members (10.9% YoY growth). If we take the overoptimistic assumption that they all pay $99 per year, it would imply that Instacart+ is generating $504m in revenues accounting for 19.6% of total revenues. Instacart’s membership is a key ingredient in Instacart success as members purchase more, purchase more often and will use the app longer than non members. In H1-2023, members accounted for 59% of Instacart GMV. Non-Instacart+ members are spending $223 per month and ordering 0.5x per week while Instacart+ members are spending $461 per month and ordering 1.0x per week.
Instacart Platform
Instacart Platform is Instacart’s product suite dedicated to retailers to digitise their business. It works with 550 retailers including Publix, Sprouts and The Fresh Markets.
Instacart Platform can be broken down into 5 different modules:
E-commerce: grocers can rely on Instacart to power their digital properties in white label (website + app) or include only specific features to augment their own digital properties (e.g. payments, recommendations, loyalty). It gives retailers a branded version of Instacart for their customers. It handles in advance online orders for B2B requests or prepared food. It offers recommendations for out of stock orders or for complementary items. It manages payment processing accepting all the modern payment methods including BNPL and Supplemental Nutrition Assistance Program (SNAP) payments. It can integrate your loyalty program within Instacart+. The Instacart’s consumer app is also part of this e-commerce offering as it’s a platform to bring new customers to the retailer.
Fulfillment: end-to-end fulfillment technologies to power pickup and delivery.
In-store: hardware and software to transform retail locations into connected stores including smart carts, a scan & pay solution (the consumer checkout autonomously from its mobile phone), Foodstorm to manage made-to-order meals and catering, smart tags, smart checkout counters, and Eversight to automate and test new prices and offers.
Ads: helps retailers to use advertising to improve their profitability by either promoting directly their private label or by leveraging the Instacart Ad Network to enable third party brands to advertise on their digital storefronts.
Insights: verticalised business intelligence platform for grocers with specific indicators like out of stock, search intents and basket composition.
Online, Instacart wants to be a Shopify equivalent for retailers powering their online store. In-store, Instacart wants to help retailers to bring their offline stores into the digital age making the checkout seamless, augmenting the shopping experience with digital tools, making the shopping experience omni-channel and making stores ready to support both in-store and online orders. Instacart helps retailers to build a truly omni-channel experience for their consumers which is crucial because omni-channel consumers are the most valuable consumers a retailer can have.
“When a grocer has a customer that shops both online and in-store, that customer is more valuable, more retentive than just an online customer or just an in-store customer. If we can help all of our retailers turn their in-store customer into both in-store and online or an online customer into both in-store and online, that’s actually going to benefit everyone in the industry.” - Fidji Simo (Instacart’s CEO)
Instacart Ads
Instacart Ads is a digital advertising network for FMCG brands to advertise on the Instacart’s mobile app and on all the digital real estate managed by Instacart for retailers. It works with 5k GPG brands including groups like Mondelez, Unilever, PepsiCo, Nestlé or Constellation Brands.
Instacart offers multiple ad formats for both branding and sales conversion:
Sponsored product ads: product placement in the shopping journey.
Promotions: offer promotions to drive product trial or to become a shopping habit.
Pages: unique page for brands to tell their story and showcase their products on Instacart.
Shoppable display ads: ad banner combined with a selection of products.
Display ads: classical ad banner.
Shoppable video ads: video ad combined with a selection of products.
Instacart Health
Instacart has the conviction that eating fresh food is a key lever to a healthier living and envisions a world in which healthcare stakeholders will be willing to subsidise the purchase of fresh food. 10% of Americans struggle to access to fresh food and 100m Americans suffer from diet related diseases. Instacart wants to be the platform were subsidised fresh food is purchased.
Non-profits, insurers and employers can create a Fresh Fund program which allows their beneficiaries to shop on Instacart for selected fresh products. Instacart works with Partnership for a Healthier America on this specific use case. Healthcare stakeholders can also leverage Instacart to pre-build for their beneficiaries healthy shopping carts and shoppable recipes.
Insights on the Grocery Market
Driven by covid, grocery digital penetration quadrupled from 2019 to 2022 to reach 12%. There is still a strong room for growth when you compare it to other sectors and when you look at long term projections estimating digital penetration in the grocery sector could reach 35% in the long term.
An average US consumer is spending $438 per month on grocery, is doing grocery shopping 1.6x times per week, is spending 60 hours per year in grocery stores and has a $100 average order value (AOV). In comparison, Instacart 7.7m monthly orderers spend on average $317 per month on the platform with a $110 AOV. If we accept Instacart’s assumption that it has a consumer base relatively homogenous compared to the entire US population (even if it’s more squeezed towards high income and urban households), it would imply that Instacart reaches a 72% grocery share of wallet within its customer base.
US retailers are underspending in IT compared to other sectors. In 2022, they spent $14.2bn on enterprise IT representing only 1% of their total sales compared to 25% for telcos, 11% for air travel and even 4% for hospitals.
The retail sector in the US is relatively concentrated with 20 grocers accounting for 68% of the total US grocery market. Walmart has a 25% market share, Kroger a 8% market share and Albertsons a 5% market share.
Shopping habits can be broken down into 4 categories: weekly shopping (recurring and planned shop to buy grocery and household items), bulk stock-up (less frequent shop for groceries and household items that you will purchase in large quantity), convenience (frequent top-up shop to replenish missing items) and special occasions (shopping for a known special event like a gift or a holiday).
Operating & Financial Metrics
How covid impacted Instacart? Instacart used covid not to squeeze as much revenues as possible but to maximise its change of dimension. Instacart quadrupled its GMV in 2020 while being already at massive scale growing from $5.1bn in 2019 to $20.7bn in 2020. This business growth was only partially translated into monetisation as revenues only doubled over the same period going from $735m to $1.5bn.
How Instacart’s revenues have evolved overtime? Several insights can be learned from Instacart’s sales evolution: (i) Instacart’s first 20 months were truly impressive in terms of revenues growth going from $0 to $75m in revenues in 2014, (ii) besides its early years, Instacart had two growth peaks when it successfully rode industry events (Amazon’s acquisition of WholeFood in 2017 which pushed retailers on the Instacart platform in 2017 and 2018 as well as covid in 2020), (iii) Instacart has a 8.8% take rate on its GMV which is lower than what it used to have (14.3% in 2019) before reaching the scale to be profitable with the pandemic.
How Instacart is doing today?
In the last 12 months, Instacart made $29.4bn in GMV (growing 6.5% YoY) and $2.9bn in revenues (growing 39.7% YoY).
Instacart’s GMV growth is decelerating at an important pace (20.1% in 2021, 15.7% in 2022 and 9.9% in the LTM). GMV is driven by both orders and AOV. Orders in the past 6 months were almost flat (0.5% YoY growth) and AOV is slightly growing (3.6% YoY growth from $109 to $112) due to inflation.
Instacart’s ability to monetise its GMV is impressive. It has increased its take rate from 7.1% in 2020 to 9.9% in 2023 with advertising revenues now accounting for 28.2% of total sales and 2.8% of total GMV. It would have been interesting to have a breakdown of revenues between what is coming from retailers and what is coming from consumers to see how Instacart’s balance of power with retailers is evolving.
On its unit economics per order, Instacart makes $10 in revenue on average out of $110 AOV (9.1% take-rate). Consumers pay $16 on average per order. $9 goes to the shopper and $7 goes to Instacart. Instacart also makes $3 per order from advertising making a total of $10 in revenues.
On its costs structure, Instacart has completely reshuffled its unit economics. On the one hand, it has massively improved its gross profit, its ops & support costs as well as its G&A. On the other hand, it has massively reinvested in R&D and has started to invest significantly in marketing when growth was mostly driven by organic acquisition before 2019. In the last 12 months, Instacart managed to have a 13.9% EBIT margin compared to a -5.1% EBIT margin in 2020 and a 2.4% EBIT margin in 2022.
How much Instacart is doing in advertising revenues? In the last 12 months, Instacart made $819m in revenues from advertising growing at 29% YoY. Advertising accounts for 28.2% of Instacart total sales and for 2.8% of its GMV. Many transactional marketplaces like Etsy (25% of total revenues) or Amazon (10% of marketplaces revenues) have introduced advertising as revenue source but none of them have reached Instacart’s level in terms of contribution to total revenues.
Key Opportunities
Making Instacart More Affordable
In grocery, price is the major purchasing factor for consumers. It’s more important than all the other factors on which Instacart has a superior value proposition compared to traditional retailers like selection or convenience. Having your grocery items being marked-up, paying a service fee and a delivery fee on a regular basis is too expensive for most American consumers.
If Instacart manages to make its service more affordable, it could expand its addressable market of American consumers it can target as well as increase its share of wallet in its customer base. In Nov. 2021, Instacart introduced several features to go in this direction adding (i) a Deals Tab in its app featuring deals from retailers and coupons from both retailers & CPG companies, (ii) a new delivery option in which you have lower/no delivery fees if you place your order more than 24 hours in advance, (iii) 5% cash back from Instacart+ members on curbside orders (vs. delivery at home) and (iv) a Dollar Store Hub to find dollar store deals from dollar stores like Dollar Tree, Family Dollar or 99 Cents Only Store. In Aug. 2023, Instacart was also the first retailer to support SNAP (Supplemental Nutrition Assistance Program) benefits across all the States in the US.
To go further in this affordability direction, Instacart could make its membership a subscription that will make your purchase on Instacart clearly more affordable than going to to the grocery store (e.g. no price mark-ups, no service fees, cash-back, etc.). It could also leverage its relationships with CPG brands to attract coupons only usable on Instacart to make certain products cheaper on Instacart than in grocery stores.
Transforming Instacart into a Vertical Solution (vSol)
“What I discovered when I joined Instacart was an opportunity that was much bigger than just online grocery delivery. What I saw was a massive trillion dollar category of grocery that was going to be disrupted by technology, and the ability to be a company that could become the technology backbone for that entire industry.” - Fidji Simo (Instacart’s CEO)
If you follow this newsletter, you know that I’m passionated about vertical Solutions (vSol) which I define as industry specific solutions which aim to become the system of records of the industry they serve and which can combine business model dynamics from SaaS, marketplace and financial services.
I believe that Instacart has the opportunity to build a vSol for the grocery industry. It started with an uncommon angle for a vSol because Instacart is known for its consumer business enabling anyone to order online their groceries and have them delivered at home by a Instacart’s shopper. But Instacart’s consumer business can be compared to Doctolib’s marketplace to let anyone book a medical visit or to Mindbody’s marketplace to let anyone book a beauty appointment. It’s the consumer facing part of a broader platform also monetising B2B businesses (doctors for Doctolib, beauty professionals for Mindbody and grocers for Instacart).
In fact, Instacart followed Amazon’s AWS playbook of repurposing the technology it built for its B2C business to build B2B products. Instacart started to offer retailers the possibility to have a branded website and mobile app for digital ordering powered by Instacart and to have fulfillment operations also powered by Instacart. Today, Instacart has a full platform called Instacart Platform to help retailers digitise their operations both online and in-store. In the S1, you can read that “Instacart is building all the services retailers need to invent the future of grocery and transform the consumer experience.” US retailers are spending $14.2bn or 1% of their total sales on enterprise IT. It proves that there is an opportunity to build a SaaS business doing several hundreds of million in ARR by selling technology to retailers.
Growing the Advertising Business
In the last 12 months, Instacart generated $819m in revenues from advertising accounting for $29% of its total revenues and 2.8% of its GMV (vs. $67m and 1.3% take rate in 2019). It works with 5.5k brands including Nestlé, Pepsi and Campbell’s. Instacart’s ads deliver a 15% incremental sales lift.
Instacart launched Instacart Ads in 2015. Instacart launched several advertising formats including sponsored product ads, promotions, brands’ pages, display ads, promotions as well as shoppable display and video ads.
For CPG brands, Instacart Ads offers an immediate, measurable and strong ROI on ad spend contrasting with in-store marketing which is hard to measure especially since most retailers are reluctant to share sales and consumer data with them. Moreover, Instacart as an ad network is more efficient in a privacy sensitive world because it’s only based on rich first party data that Instacart collects on its customers.
In the US, CPG brands spent $200bn annually to advertise their product. There is an ongoing shift from offline advertisement to online due to a higher ROI and to an increase digital penetration in the grocery sector.
Going forward, Instacart can increase its take-rate from advertising by: (i) adding more brands on its ad exchange, (ii) increasing its share of wallet in CPG brands’ spending on digital marketing, (iii) launching more engaging ad formats like shoppable recipes automatically adding items into a cart based on a recipe that you want to cook or advertising in Ask Instacart’s generative AI search tool. Amazon has a 7-8% take rate on its marketplace coming from advertising which shows that there is a path for Instacart to 2-3x its own take rate.
Key Risks
Dependency to Retailers
Instacart is a 4-sided marketplace between retailers, CPG brands, shoppers and end consumers. The usual playbook to build a successful marketplace is to intermediate transactions between fragmented parties. Retailers in the United States are not fragmented with the Top 5 US retailers (Walmart, Costco, Kroger, Sam’s club and Publix) capturing a 47% market share.
The lack of fragmentation on the retailers side is a fundamental weakness in Instacart’s model making the company dependent to large US retailers. It has already impacted Instacart in its history when it lost WholeFoods following Amazon’s acquisition in June 2017. WholeFoods accounted for 43% of Instacart’s GMV but the company successfully rebounded from this churn attracting all the retailers which were scared by Amazon’s entry in the grocery market.
Today, this threat is still present. In 2021, Instacart was generating 79% of its GMV from 4 different retailers. It managed to decrease this figure to 57% of its GMV in 2022 but it still significant.
Many retailers believe that they’re not aligned with Instacart as Instacart is eating the margin in an industry with razor thin margins and is trying to des-intermediate the relationship retailers have with end consumers. As a result, several retailers are building in-house fulfillment operations with picking, packing, curbside and at home delivery. Walmart is probably the best illustration as it has a 38% market share of the online grocery market which is higher than Instacart 29% market share.
Gig Economy Risk
Instacart’s model relies on shoppers who are picking items in-store and delivering them to end consumers. Shoppers are independent contractors like Uber or DoorDash’s drivers. A regulation risk exists on this gig economy model. US States or the US at the federate level can implement regulations including a minimum salary for workers, increased employers benefits or even a potential re-qualification as full time employees. These regulations could significantly impact Instacart’s cost structure and make its model less profitable - if not structurally unprofitable.
GMV & Orders Growth Plateauing
Instacart’s GMV and orders growth is starting to plateau. In H1-23, Instacart only grew its GMV YoY by 4% and its orders by 0.5%. It managed to grow its revenues by 31% over the same period because it improved its monetisation from end consumers, retailers and advertisers. If the situation continues in the next quarters, Instacart’s revenue growth curve could also start to plateau.
It can be a proof point that Instacart is reaching the limitation of its addressable consumers market in the US (i.e. affluent U.S. urban households purchasing their grocery online but not buying from Walmart and WholeFoods which have their own online delivery operations). It’s even more worrying that this is happening while Instacart has massively increased its marketing budget to acquire new customers in the past couple quarters.
Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋