Is Instacart Headed To Be America's Top Grocer?

This is an excerpt from Tuesday's (3/9) Point of Sale retail supply chain newsletter sponsored by ArcBest.

Instacart had a crazy year. Capped off by last week's funding announcement of another $265 million at a valuation of $39 billion (more than 4x where it was to begin 2020), Instacart has seen every piece of its business explode over the past 12 months. By some accounts, the 8-year-old company now has roughly 50% of the online grocery market. With an IPO almost guaranteed this year, I wanted to look back at how Instacart has gone from niche to necessity and question whether it can maintain this dominant position in a highly competitive, highly sought-after market post-COVID. 

Instacart was not Apoorva Mehta's first startup attempt. In fact, he tried his hand at more than 20 low-budget technology startups, but all either failed or eventually lost his interest. There is a story involving a lone Sriracha bottle in his empty fridge, leading to him and two of his startup friends launching Instacart to solve for quick grocery deliveries for people who, like him, lived far from supermarkets and didn't own cars. 

Mehta and his co-founders convinced Silicon Valley bag holders, including some who'd lost substantial bags on a grocery startup called Webvan when the dot-com bubble burst, that they'd solved the economic puzzle of grocery delivery by offloading the costs. 

The warehouses and complex infrastructure that drained Webvan? Let the grocers and CPG firms hold onto those. And labor costs? Fuhgettaboutit.This is the gig economy, baby. We'll contract that out. Of course, this was and is not great for shoppers, who lack basic employment protections, but it helped Instacart secure nearly $300 million in its first 36 months. 

It expanded fairly quickly by offering generous incentives to two sides of its four-sided marketplace (customers, shoppers, retailers, CPGs), including $20 off first orders and $50 bonuses to efficient shoppers. Mehta and team were incinerating cash at a rate of $25 million per month, but what Silicon Valley unicorn wasn't in 2016? 

Instacart had signed deals with grocery stores to arm them with roving assembly lines of shoppers in their stores. Additionally, the company had attracted the likes of PepsiCo PEP, Kraft Heinz KHC and General Mills GIS to buy ads in the app.

Since the beginning of 2016, there have been three major events that have reshaped Instacart's future, two of which involve Whole Foods. In early 2016, Mehta struck a three-year deal with Whole Foods to work more closely together. In exchange for delivery exclusivity, Instacart put dedicated baggers in Whole Foods stores. Some stores even set up dedicated Instacart storage fridges and special checkout lanes to increase speed. 

Then Amazon AMZN came knocking. 

While the relationship between Instacart and Whole Foods was soon severed, new doors opened. Supermarkets that had once dismissed Whole Foods's significance were suddenly terrified of being underpriced by Amazon. Over the next year, Instacart went from 200 retail partners to 350, expanded from 32,000 shoppers to 70,000, and began losing much less money.

Instacart's mission was then, and remains now, to help brick-and-mortar grocers be successful online. Since then, the company has been measuring that success by scale. Instacart continued burning cash in exchange for volume and new geographical markets to become another Silicon Valley gig economy darling.  

At the beginning of 2020, Instacart was valued at $7.9 billion, had ~130,000 contract shoppers and was by all means a well-respected upstart with a promising future — but remained highly unprofitable. 

Then COVID happened. 

The Instacart team saw the coronavirus anxiety reshaping the country before most others. By mid-February, Mehta and team were noticing unusual behavior. Disaster patterns set in as demand for canned vegetables, toilet paper, powdered milk and Purell soared, especially in early COVID breeding grounds like Seattle and NYC. Prior to COVID, Instacart sales followed grocery sales, which tend to fall off midweek, but that wasn't the case. 

"Every day we would see that the volume was 20% higher than the last day," Mehta told Bloomberg in May. "In a matter of a couple of weeks, we were already ahead of our end-of-year goal. A week later, we were ahead of our 2021 goals, and a few days after that, we were ahead of our 2022 goals. And so, at a certain point, we stopped counting."

The pandemic has supercharged Instacart's growth from every angle. "It's crazy to think about this, but in a two- to four-week period, we experienced the adoption of grocery e-commerce that we were expecting to see in a two- to four-year period," Instacart President Nilam Ganenthiran said. "We saw a 500% jump in order volume. Almost overnight, we saw basket sizes expand 35% and Instacart become a lifeline for people across North America looking to get their groceries and goods delivered. We saw things that normally are always in stock — toilet paper, bottled water — just disappear from store shelves. And we had over 500 retailers, across nearly 40,000 retail store locations, more than half of North American grocery e-commerce basically, looking at us and saying, ‘Hey, you got to be there and show up for our customers.'"

Instacart's operational struggles have been well documented over the past year. It is difficult to understate how unprepared the company's ~600 software engineers and 180,000 shoppers were to meet the needs of millions of new customers in the spring. Their models used to predict product availability proved useless, their staff logged 80-hour workweeks, and service suffered. As Bloomberg Businessweek authors Ellen Huet and Liz Chapman wrote, "Instacart became Eventuallycart." 

Instacart embarked on an Amazonian hiring spree when the pandemic began, rapidly expanding its contract shopper workforce from 180,000 to 500,000 in eight weeks. Reports from April indicated the company at the time had its eyes set on 750,000 by midsummer, but I haven't seen recent totals north of 500,000. 

Instacart made it to 2020 by arbitraging plentiful supply among supermarkets to make home delivery seem like a reasonable splurge for higher-income earners and workaholics. But the pandemic flipped the paradigm. Now the company has been dealing with limited supply and unbridled demand from a desperate mass audience that can't as easily ignore the risks those shoppers are taking to deliver to them.

I've seen a wide range of market share estimates for Instacart recently. On the conservative side is a report this month from 1010data, which states Instacart "drove significant adoption" of online grocery shopping and delivery last year to push past Walmart WMT as the market leader with 28% share. Other estimates, like that from Second Measure and The Information, indicated Instacart's share of online grocery spend topped out at 57% in April. While it has tapered a bit since then, Instacart still owns roughly half the market, according to Second Measure. 

In either estimate, Instacart has gone from bougie to basic in the matter of months. Instacart has made itself synonymous with online grocery shopping the way Uber has with ride hailing and Airbnb for short-term rentals. Rick Watson, founder and CEO of RMW Commerce Consulting, believes Instacart is "quickly headed to become the largest grocer in America, and it's already too late for incumbents like Amazon and Walmart." While I disagree, Watson has made noteworthy points across a swath of LinkedIn posts. 

Watson pointed to the 50% market share as a sizable head start in the fastest growing segment. He then touted the marketplace model's ability to scale and offer wider selection without massive capital outlays. He also detailed a revenue stream other grocers, like Walmart, have also acknowledged as a lucrative profit center: advertising. 

Prior to the pandemic, Instacart attracted and retained customers by launching new features designed to make grocery e-commerce irresistible to consumers. Then in March, irresistible turned into essential. The question now is whether essential is worth the additional cost once vaccines are widespread, mask requirements are dropped and people can shop as they did pre-COVID. 

There is no argument whether online grocery shopping is here to stay. The only debate is whether delivery will become status quo for online grocery fulfillment. I am skeptical. 

Ultimately, I believe the option that presents the best combination of convenience and cost will bring the most utility to consumers. In my opinion, that's curbside and BOPIS. Instacart's pool of potential customers has multiplied not because Americans wanted the convenience of grocery delivery, but because they wanted to avoid the risks of in-store shopping. While I'm certain a significant portion of those people have fallen in love with grocery delivery and will never enter another grocery store if they don't have to, I think it's a minority. 

(Chart: 1010data // Orange – BOPIS; White – Delivery)

But this doesn't render Instacart obsolete. Instacart makes money from delivery fees, as well as from partnerships with CPG and retailer partners. Instacart is a technology company that in many ways acts like Shopify when it comes to building online sales channels on behalf of the company's retail partners, turning technology into something they can use to create custom experiences and build online stores to connect with their shoppers. Instacart has a robust Enterprise business building websites for grocers such as Wegmans Food Markets and Heinen's.

"The breadth of ways that we're partnering with the grocery industry to do that has evolved where now Instacart Enterprise plays a more important part, where we're building websites and apps and today power the full e-commerce experience for more than 175 grocers," Ganenthiran told Progressive Grocer. "It's not just about delivery anymore. We're constantly trying to find new ways that we can add value as a chief ally to our partners and believe we can by building the technical e-commerce infrastructure for retailers big and small."

The company has also been working closely with retailers to optimize e-commerce fulfillment operations in-store. "We're deeply involved with grocers' store-planning and real estate teams on the most efficient ways to set up the store to fulfill e-commerce orders," said Ganenthiran. Instacart helps design and set up staging areas, dedicated parking spots, and pickup and order flow for their retail partners. 

And Instacart understands its future cannot be solely fueled by groceries. In September, Instacart ramped up expansion efforts even further by teaming up with Dallas-based 7-Eleven, its first national convenience store retail partner, to expand same-day delivery. 

In addition to groceries and everyday goods, Instacart has expanded its offering over the past year to include alcohol and prescription delivery (Costco COST), beauty (Sephora) and now even general merchandise (Big Lots BIG). The company plans to expand its Instacart Meals program, first launched with Lakeland, Florida-based Publix earlier this year, to more retailers in the coming months. 

I believe price will be the deciding factor in this war. Time will tell whether the average American will see grocery delivery as a reasonable splurge post-COVID. All three modes of shopping (in-store, online, delivery) will play important roles in the grocery market. But the weekly Walmart or Target run was already in the routine of Americans. If BOPIS can slash the time of that routine by 90% at no additional cost, I think it outweighs the benefits of paid delivery. 

So, is Instacart headed to be the nation's leading grocery retailer? I don't think so. But Instacart has already made itself synonymous with grocery delivery, and that position is a valuable one. The question remains though: Is it a profitable one?

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