Instacart is a delivery platform that partners with so-called shoppers to deliver groceries within hours of an order. The company partners with over 30 retailers across the United States and Canada.
The business model of Instacart is based on charging a delivery and service fee for every order made on its platform. The company furthermore makes money from receiving a share of the order volume, a subscription service (called Instacart Express), as well as premium ads served on its platform.
Founded in 2012 and headquartered in San Francisco, Instacart has grown to be North America’s leader in grocery deliveries. The company expects to generate $35 billion in grocery sales for 2020. The company is now able to reach 85 percent of all U.S. and 70 percent of all Canadian households.
How Instacart Works
Instacart is a food delivery and pick-up platform that lets you shop from local grocery stores online. The company partners up with over 300 retailers across the United States and Canada, amongst others ALDI, Costco, Kroger, or Sprouts.
Once an order is placed, a so-called personal shopper will pick up your groceries and deliver them to your home. These shoppers are not full-time employees, but independent contractors that are only paid whenever they deliver an order.
Once an order is made, potential shoppers in proximity receive a notification and can either accept or decline the request. The shopper that accepts the order then drives to the grocery store in question, picks up the items from the counter, and delivers them to the customer’s address.
Deliveries can be scheduled for as little as an hour ahead. Alternatively, orders can also be made for deliveries in over a week.
Since Instacart doesn’t store or sell groceries themselves, the shopper will notify users in the app if something you’ve purchased is out of stock or not available. They will then coordinate together with the customer to find a suitable replacement.
Customers can access the platform via Instacart’s website as well as its smartphone apps on Android and iOS respectively.
A (Not So) Short History Of Instacart
Instacart, headquartered in San Francisco, was founded in 2012 by Apoorva Mehta (CEO), Max Mullen, and Brandon Leonardo.
Mehta, who remains the company’s CEO to this date, was born in India and raised in Canada. He then went on to pursue his engineering degree at the University of Waterloo. He worked as a design engineer at Blackberry and Qualcomm before joining Amazon in 2008.
During his two-year stint at the e-commerce giant, he helped develop the company’s fulfillment system as a supply chain engineer. But after a while, he started feeling bored at his job and began seeking new challenges.
This resulted in Mehta packing his bags and moving from Seattle to San Francisco. During the next two years, he attempted to start over 20 companies, including a social network for lawyers or a Groupon for food.
Unfortunately, none of ideas really stuck. The reason, as Mehta would later describe, was grounded in the fact that he never deeply cared about solving a user pain point and making their lives better.
Luckily for Mehta, he did eventually find a problem space that he cared about enough. Throughout the previous decades, the grocery shopping experience remained unchanged. Long queues, extensive searches through hundreds of isles, or extensive driving times were just some of the pain points that grocery shopping entailed.
Together with his two co-founders, he began coding up an iPhone app that would go on to become Instacart. To get their startup off the ground, the trio decided to join Y Combinator. Unfortunately, they just missed the deadline for the term.
Mehta, not being phased by his previous failures, used his connections in the Valley to get in touch with the accelerator’s leadership team. Garry Tan, one of the program’s partners, told him that it would be “nearly impossible” to get in.
Being a glass half-full guy, Mehta went on to send Tan a six-pack of beer using the Instacart app. Y Combinator ended up admitting the team, but not immediately. Upon their admission, the incubator team challenged him by ordering 200 two-liter bottles of soda for a dinner event using the Instacart app.
The personal shopper assigned to the order called Mehta midway through, telling him that she couldn’t fit the delivery into her car. Instead of quitting, Mehta called himself an Uber and helped the shopper fulfill the remaining bottles of the order.
Impressed by his entrepreneurial scrappiness and creativity, the team at Y Combinator decided to admit Instacart to its program. With $120,000 in funding and an extensive network of investors, Mehta and team got to work.
The app launched weeks later in August of 2012. At first, Instacart was only available on iOS as the team believed that the most potent customers were the ones using iPhones.
During that time, Amazon and eBay just announced same-day deliveries, which was widely seen as a great innovation in the supply chain space. Meanwhile, Instacart came out with the promise of being able to deliver groceries almost instantly and up to one hour from the time the order was placed.
This helped them garner almost immediate demand on which the company capitalized on right from the get-go. Instacart had already raised two rounds of funding (a $2.3 million seed and $8.5 million Series A) led by Sequoia Capital, Khosla Ventures (Opendoor’s lead investor, amongst others), Canaan Partners, SVAngel, and Paul Buchheit, the creator of Gmail.
Especially Sequoia’s investment was seen as a major sign of trust. The Menlo Park based VC burned through tens of millions of dollars funding Webvan – a dot-com company that aimed to deliver grocery products within 30 minutes to any customer in proximity.
The company had to file for bankruptcy after three years of operation and ended up becoming a poster child for the heavy losses many investors incurred during the late 1990’s. Sequoia’s belief was (and still is) that Instacart’s situation is not comparable to the one it experienced at Webvan.
The primary reason is the wide adoption of smartphones, which allows Instacart’s shoppers to receive instant notifications whenever an order needs to be fulfilled. And due to the emergence of platforms like Uber or Doordash, customers simply became more comfortable using their smartphone for ordering purposes.
Instacart rode that wave to its fullest. The company was present in close to 20 cities across the United States two years after its inception. It used aggressive pricing tactics, such as $20 off first orders for customers or $50 bonus payments to shoppers who quickly complete offers, to grow its marketplace.
The company signed deals with some of America’s biggest retailers and manufactures, including KraftHeinz, PepsiCo, Kroger’s, or Whole Foods. The Whole Foods partnership especially was both a blessing and challenge alike.
The company’s potent customer base was welcoming the additional flexibility it could get from ordering groceries online. Several reports indicated that, at some point, orders for Whole Foods goods were making up over a third of all Instacart purchases.
In early 2016, the two parties struck a three-year deal to deepen their partnership. The agreement made Instacart the only delivery platform allowed to distribute Whole Foods goods. Meanwhile, Instacart placed some of their own employees in Whole Foods stores to help with packing. Some stores even had Instacart-only storage rooms and special check-out lanes, which sped up the pick-up process.
Unfortunately, the fruitful partnership came crashing down not long after. In 2017, e-commerce giant Amazon acquired Whole Foods in a $13.7 billion deal. The partnership was terminated just a year after. For Instacart, this meant focusing on diversification.
Within a year, they were able to expand from 200 to 350 retail partners while increasing their shopper count from 32,000 to over 70,000. At the same time, the company started to lose less money – at the expense of its shoppers.
Payments for deliveries began to vary widely, which made many order requests not worth their while. The company introduced multiple app features, such as an on-demand queue, which forced shoppers to agree to a job in seconds without being to read through payment terms. And if they declined too many of these offers, they’d end up being deprioritized.
In 2018, Instacart faced another backlash when it was caught decreasing the payout on tips. The company simply pocketed some (and in some instances all) of the tips that were made. After a huge public uproar, Instacart agreed to change its tipping policies as well as the logic it applied to its ordering queues.
Nevertheless, Instacart has (and continues to) faced numerous instances of legal claims over the ways it treats its contract workers. So far, the company has not experienced any severe legal ramifications apart from minor settlements. But a 2020 California court ruling, which forced companies like Uber and Lyft to classify its drivers as employees, could mean trouble for Instacart in the future. Legal appeals could stretch the implementation of this law for years to come.
Despite some of these hiccups, Instacart continues to grow at exponential rates. The recent coronavirus pandemic has accelerated the company’s growth to new heights. Instacart is on track to reach $35 billion in grocery sales for 2020.
Furthermore, the company turned its first ever profit in April 2020, when it made $10 million alone. To curb with demand, the company has increased its shopper count from 180,000 to 500,000 (with the goal to reach 750,000).
Today, Instacart is available in more than 5,500 stores, which allows them to reach 85 percent of U.S. households and 70 percent of Canadian households. Deliveries can be made from over 30,000 stores in North America, making Instacart the de-facto leader in the $1.3 trillion grocery delivery market.
How Does Instacart Make Money?
Instacart receives a commission every time a product is sold through its platform. It does so through a revenue sharing agreement it has with its retailers.
The company receives a percentage of the price that the item sells for. The actual amount is dependent upon the agreement it made with the retailer.
In some cases, Instacart would purposely sell the item for a higher price. The so-called price markup would be reflected on the company’s app and be additional profit the company takes home.
Fees On Delivery
Instacart charges service and delivery fees whenever an order is made. Delivery fees start at $3.99 and can get as high as $9.99.
The service fee ranges from anywhere between 5 to 10 percent. Additional fees that are applied include a heavy fee as well as a bottle deposit and bag fee. These are applied whenever an order surpasses a certain weight threshold or need to be deposited afterwards.
Instacart, similar to other platforms like Uber or Lyft, charges a higher price in times of higher demand or hardening external conditions (such as rain). This concept is referred to as surge pricing.
Instacart Express is an subscription service that regular Instacart customers can opt into. Users receive unlimited free deliveries for an annual or monthly fee.
The annual membership comes in at $99 whereas the monthly service costs $9.99. Benefits of the membership include:
- No delivery fees on orders equal to $35 or above
- Reduced service fees
- No surge pricing during high-demand delivery hours
Just like any modern-day subscription service, memberships can be cancelled instantly, granting the customer all the flexibility they need.
The Express membership does not provide the customer with a better or faster service though. This means delivery times will remain the same compared to “free” users.
As mentioned before, Instacart’s platform can be seen as a marketplace that culminates sellers (i.e. retailers), buyers, and shoppers that help execute shipments. One of the many characteristics of a marketplace is that it uses the consumer volume it generates to sell other services.
One of those services are ads that other sellers or brands can buy on the platform. These ads grant advertisers additional visibility on the platform, thus increasing the likeliness of making a sale. Examples of marketplaces that offer ads include companies such as Amazon, Etsy, or the Wish App.
Instacart has obtained a similar ads system. Advertisers on the platform, including brands such as Coca Cola or Mars, can buy promotional spots in exchange for additional visibility. The price paid depends on the type of categories and search terms an advertiser targets. In order not to overspend, advertisers can set a budget prior to starting ads.
Instacart Funding, Valuation & Revenue
According to Crunchbase, Instacart has raised a total of $2.4 billion across 14 rounds of venture capital funding. The company’s valuation during its latest funding round, announced in October 2020, skyrocketed to $17.7 billion.
Prominent investors that have poured money into Instacart include the likes of Sequoia Capital, Andreessen Horowitz, Tiger Global Management, Kleiner Perkins, Thrive Capital, General Catalyst, DST Global, and many others.
Instacart, like many other startups operating at lightspeed, does not disclose any public revenue or profit figures. In 2017, an estimate by Forbes assumed that Instacart generated annual revenues of about $2 billion.
The Information, according to internal sources, reported that the company lost over $300 million in 2019. But the recent coronavirus pandemic is believed to have benefitted Instacart greatly, allowing them to turn a net profit of $10 million in April alone.
Who Owns Instacart?
As a private company, Instacart does not disclose its ownership structure. Forbes estimates that CEO Mehta owns about 10 percent of Instacart.
That would put his net worth at $1.7 billion (given the firm’s $17.7 billion valuation), ultimately making him a billionaire.
Instacart is believed to go public somewhere in 2021. As such, its ownership structure will be revealed during the company’s S-1 filing.