Instacart: Changing the game for groceries
Instacart promises to change the way we buy and sell groceries, but what can it really offer?
Founded in 2012, mobile-app based Instacart promises to change the way you shop for groceries by making it more convenient to have groceries, when you want them, where you want them, from wherever you want them. A model of highly efficient operational–business alignment, the company has shifted its revenue stream to reflect maturing market dynamics, enabled by a flexible operational model. As such, it has demonstrated the its ability to react and adapt to a changing landscape, a promising indication of future performance.
Adding value to Customers and Clients:
From a consumer value standpoint, Instacart boasts the biggest assortment of items of any competitor in the space, and with the most diverse number of store options, customers can order from multiple stores in one order. In return for modest premium pricing, Instacart delivered consumers convenience and quality in addition to groceries.
Initially, Instacart’s business model was based on item-level markups plus a small delivery fee. Ordering online, customers paid a 15-20% premium on products from stores such as Trader Joes, Whole Foods, Costco or local-market retailers. In the last 18 months the company has expanded its business model to include revenue-sharing partnerships (most notably with Wholefoods). In this new model, Instacart charges customers the same prices as can be found in stores, further incentivizing consumers to shop through the app. Rather than charging customers the premium mark-up, retailers instead pay Instacart a percentage of basket revenue.
The value-add for retailers is multi-faceted. Firstly, retailers partnering with Instacart have demonstrated an increase in incremental sales volume – adding customers who would otherwise not shop there. More importantly, Instacart shoppers also have much lager basket sizes, on average 2.5X an in-store purchase basket sizes, increasing store revenue per customer. This incentivizes retailers to view Instacart as a valued partner and drives their willingness to share the resulting revenue stream.
Additionally, Instacart adds value to retailers by acting as a partner rather than competitor. They help protect stores from incumbent delivery giants like Amazon, to whom the grocery delivery market is highly appealing. Instacart essentially acts as a plug and play Logistics+SaaS provider to retailers, providing a delivery and logistics service that is not within a grocery store’s core competency. Retailers do not have the capacity to create this offering themselves, nor would it be worth it for them to do so. By building relationships now, Instacart simultaneously protects its business in the future by protecting and partnering with brick and mortar retailers. Retailers provide the infrastructure, inventory and revenue, and in turn Instacart provides the operational capabilities that outlets desperately need.
Instacart’s operational and business models are tightly tied. Unlike traditional competitors, like Fresh Direct, which require vast capital to develop their infrastructure and which maintain their own inventory, Instacart’s primary cost is labor. The company utilizes a labor force primarily made up of contracted workers who are matched, via their proprietary app, with a customer order to fill and deliver. As markets achieve scale, the order fulfillment process is decoupled. Orders are prepped in advance by specialized store-shoppers, and then picked up for delivery by different shoppers, effectively batching the inventory preparation process and increasing both the speed and capacity of the labor force. Specialized shoppers have a much higher speed and quality output, and specialized delivery allows drivers to deliver 3 to 4 orders at a time. Instacart has also opened staging areas within high-volume partner stores, further decoupling the process for order preparation, and further increasing system efficiency and profitability.
Recently, Instacart began to offer shoppers the option to work as part-time employees rather than contractors. An operational decision, this also has significant revenue implications. With an increased ability to retain and train part-time employees, Instacart positioned itself to offer an even more valuable value proposition to the customer (better able to pick the right produce, etc.) and more importantly improve their own operational efficiencies (know the stores better, able to work faster and lower costs for the company).
What really sets Instacart apart and provides a meaningful competitive advantage is the technology behind and enabling, their operating model. The logistics batching and tools (the app) used to shop are critical to company success and are not easy to develop or scale. Coupled with their partnerships and first-mover advantage, it becomes clear that Instacart has created a meaningfully deep moat for competition.
As they focus on the next stages of expansion, the operating model provides ample space and flexibility for business growth in new industry segments. For example, the company has discussed the potential to move from grocery into other high-frequency categories such as pharmacy. Given the existing proprietary back-end infrastructure already in place, ability to scale and manage a labor force, and skill in developing retailer relationships, it seems clear that Instacart is primed to leverage their operational knowledge successfully into other markets and segments and that the business will quickly follow.
- Instacart Employee Interviews, October 2015
Student comments on Instacart: Changing the game for groceries
Great post Sophia! In terms of the business model, I love that Instacart has started to move away from item-level markups to revenue sharing partnerships. Initially I hated the idea of using Instacart because I knew they were sneaking in increased margins, and there was no way for me to easily compare say the Instacart price vs. the price I’d see in Whole Foods. But their ‘same price’ guarantee has me hooked now.
However, I wonder how possible this business model is with retailers who have a smaller margin / mark-up to play with. Whole Foods carries the most premium items, so I can see why they would be willing to part with a % of their margin, but this may be more difficult for lower cost guys (for example, Star Market in Boston still carries Instacart mark-ups).
Nice post, Sophia! I agree with Arkesh that removing iterm-level markups and ensuring the same price in Whole foods is a strategic move and will significantly promote its app. I am just a little bit concerned with the scalability of its operating model. I didn’t see its financial data and not sure how profitable it is right now. More training and transferring from contracted workers to part-time or even full-time workers will significantly increase its operating cost and further eroding its operating margin. The acquisition cost of new customer is another concern of scalability. Once the app hits a critical mass, whether the app could still acquire new customer at a low cost still remains a question for me.
As one of Instacart user I found this very interesting to know more about the company. I’ve always wondered about the delivery process and didn’t know that the order process is decoupled and prepared by specialized store-shoppers/delivery person. I believe this enable them to increase the speed and capacity of the labor force, however this seems like easily replicable as well. Are there any severe threats from competitor or new innovative model?
A very interesting business model that I just recently came across as a user. Operational challenges faced by Instacart are numerous: from feeding the app real-time with all the products and price points available at each retailer store (I am guessing through back-end IT system integration and with a store by-store mechanism given that the service is based on proximity), to ensuring a right sizing and availability of labor force. Furthermore, although removing mark-ups on products was necessary to remain competitive and gain scale, Instacart’s margins are currently very thin and this business model is still subject to the threat of new entrants, which would be most likely welcomed by both retailers and customers. As such, key questions to be answered are: how can operational processes be further optimized (e.g. shopping bags removed) to increase margins? Is there any further automation that could take place? And how can Instacart protect its relationships with retailers to prevent new players from entering this space? Is there any additional revenue stream that could be included with reaching a certain scale (e.g. advertisement)?
I am a huge Instacart fan! Moving here, I realized that it’s not easy to get around in an American city without a car and grocery stores are usually a bit outside of the centre. Instacart has conveniently solved this issue for me. On a broader level, with a higher percentage of women in the business world, this business model becomes very appealing as working moms are likely to be happy to pay a premium for convenient online ordering of groceries.
However, how sustainable is a business that operates on very low margins in an environment with low barriers to entry? As far as I know, the company is not profitable yet and not all orders make a profit.
Great post Sophia!
I did a bit of work on assessing the online grocery delivery space at my previous job and found that the strong and steadily increasing demand for online grocery delivery services as well as the sudden entry of well resourced and potentially industry disruptive players such as Amazon and Google have spurred erstwhile reluctant traditional grocers to play catch up and focus on developing competitive online offerings, despite intrinsically difficult economics within the market (upfront capital costs, expensive maintenance, lower margins). Many grocery retailers as you say are choosing to slowly wade into the market in a measured fashion through third party providers, rather than building out software, warehousing, and distribution platforms internally.
What are your thoughts on how grocers who have made the decision to self-build their platforms will fare relative to those who are partnering with third-party providers like Instacart? It will be very interesting to see how this space develops.
Great post! I can’t help but think that the reason Instacart has been so successful in the US is that the large grocers just don’t have the infrastructure yet to fulfil online orders quickly and effectively. Building out that back-end takes time, and of course investment. I have no doubt that online grocery will continue to grow, and the grocers will be forced to react.
I just wonder how defensible the Instacard model really is. Can’t help but think that when the US catches up with more developed online grocery markets such as the UK, grocers such as Walmart, Trader Joes and Wholefoods will be offering quick, easy delivery at a low price… and Instacart will risk disintermediation.
Great post! As an avid Instacart user, I totally agree with the value they are able to deliver to customers. It is truly a great service, particularly now that they have partnered with Whole Foods. One thing I would consider though is their ability to offer items from multiple stores in the same order. While, this is certainly a nice benefit to the consumer, as you mention above, logistically, I would imagine this is highly inefficient. One delivery person would need to travel around to multiple places in order to complete the order. One way to address this would perhaps charging a premium for multi-store orders (they might already do this…I’m not sure). In any case, these multi-store orders will also increase the company’s order through-put-time (#buzzword). It’s an interesting trade-off because the company would have to make a decision in which value delivered to the customer would need to be sacrificed in order to optimize the system. I’m not sure what the right answer is there, but it’s an interesting dilemma.