Executive Summary:
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.
Instacart makes money via commissions, various fees, subscriptions, advertising, interchange fees, and selling items itself. The firm operates on a three-sided marketplace business model.
Founded in 2012, Instacart has grown to be North America’s leader in grocery deliveries. It has raised over $2.9 billion in funding thus far.
What Is Instacart?
Instacart is a food delivery and pick-up platform that lets you shop from nearby stores.
While Instacart is mostly known for groceries, it also sells electronics, apparel, toys, and so much more.
The company partners with over 500 retailers across the United States and Canada, including ALDI, Costco, Kroger, or Sprouts.
When 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.
Instacart also offers curbside pickup at select retail locations, meaning customers can order online and then pick up their order in person.
Customers can access the platform via Instacart’s website as well as its smartphone apps on Android and iOS respectively.
Instacart is available at more than 40,000 stores while offering a product catalogue of 500 million+ items.
A (Not So) Short History Of Instacart
Instacart, headquartered in San Francisco, was founded in 2012 by Apoorva Mehta, Max Mullen, and Brandon Leonardo.
Mehta was born in India but raised in Canada where he completed his engineering degree at the University of Waterloo. Post graduation, 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, Mehta helped develop the company’s fulfillment system as a supply chain engineer. But after a while, he started feeling bored 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 those ideas really went anywhere. The reason, as Mehta would later describe, was grounded in the fact that he never deeply cared about solving a user pain and making their lives better.
Luckily for Mehta, he did eventually find a problem space that he cared deeply enough about.
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.
It was only a matter of time until more complex industries like groceries would be disrupted, though. Together with his two co-founders, Mehta 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 type of 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 had 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 immediate demand on which the company capitalized on right away. 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.
Meanwhile, Target acquired Shipt, one of Instacart’s biggest competitors, in a deal worth $550 million. For Instacart, this meant focusing on diversification and expansion above anything else.
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. Instacart 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 shoppers 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 continued to grow at exponential rates. The coronavirus pandemic accelerated the company’s growth to new heights, allowing it to turn a profit for the first time in April 2020.
To curb with demand, the company has increased its shopper count from 180,000 to 500,000 (with the goal to reach 750,000).
Instacart also shifted its focus away from groceries only, which are traditionally a lower margin business, toward delivering all kinds of goods. This put them in direct competition with companies like Postmates or Target-owned Shipt.
The exponentially increasing demand for deliveries as well as excessive money printing throughout 2020 and 2021 enabled Instacart to significantly up its valuation, too. In March 2021, it raised $265 million at a post-money valuation of $39 billion.
Rumors about a potential IPO began to emerge at the same time. And to founder Mehta’s credit, he got out when the party was still ongoing. Back in June 2021, he stepped down from his role as CEO and was replaced by Fidji Simo, a high-ranking executive at Facebook that was responsible for the launch of its dating product, among others.
Simo was faced with a variety of challenges, including workers that staged nationwide protests over issues such as pay or unfair rating systems. Meanwhile, key executives, such as the firm’s Head of Payments, also began to depart Instacart.
And despite continuing to expand its business, for instance by launching 15-minute grocery deliveries in March 2022, the firm’s woes continued. Rising inflation and interest rates continued to weight on the company to the point that it even scrapped its IPO plan after confidentially filing in August.
The government came crashing down on the company, too. In October, Instacart agreed to pay $46.5 million to settle a 2019 lawsuit filed by the city of San Diego, which stated that the platform had misclassified workers.
How Does Instacart Make Money?
Instacart makes money via commissions, various fees, subscriptions, advertising, interchange fees, and selling items itself.
Let’s take a closer look at all of these in the section below.
Revenue Share
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 then pockets 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 instances, 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.
However, in most cases, the price is simply set by retailer that Instacart works together with. Pricing policies for each retailer are made transparent on its app and website.
Fees
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.
In some cases, Instacart even charges a pick-up fee whenever the customer decides to pick up the order by himself or herself.
Instacart, similar to other platforms like Uber or Lyft, charges a higher price in times of greater demand or hardening external conditions (such as rain). This concept is referred to as surge pricing.
Subscriptions
Instacart+ is a 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 subscription include:
- No delivery fees on orders equal to $35 or above
- Reduced service fees
- No surge pricing during high-demand delivery hours
- Access to exclusive offers
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.
Subscriptions can be a highly lucrative revenue stream for delivery companies. Not only do they generate predictable income, they also incentive customers to order more often.
Other delivery services that have adapted subscription offerings include Gopuff, DoorDash, or Shipt.
Advertising
Whenever an app or website is able to amass millions of users, it becomes a potentially attractive spot to advertise on. Instacart is no exception to that rule.
The platform offers a variety of different ad formats for the brands it works together with.
One of the most prominent options are sponsored listings, which appear whenever a user searches for a certain product, while browsing the app, or during the checkout.
However, the company has since introduced a variety of other ad formats. Back in October 2022, for example, it launched Shoppable Videos, which upon clicking takes users to a customizable landing page that features a curated product selection.
Other ad formats include coupons, brand pages, and display ads, with the latter appearing throughout the user’s browsing journey.
Instacart provides brands with a self-service ad platform where they can create campaigns and bid on keywords, among other features.
The platform’s ad offering is monetized on a cost-per-click (CPC) basis, meaning brands pay whenever a user clicks on an advert.
There are a variety of reasons why brands, in particular retailers and CPG brands, would want to promote on Instacart. First and foremost, they will tap into a dedicated customer base that only accesses Instacart for their shopping needs.
This may be particularly appealing to newly launched DTC brands that need to raise awareness for their products.
Second, Instacart’s closed-loop ecosystem enables the platform to offer much better trackability of ad campaigns. Instacart knows exactly if a user that clicked on an ad actually checked out and if so, what products he or she purchased. Measuring ROI is therefore much more accurate.
Interchange Fees
Back in July 2022, Instacart, in partnership with Chase and Mastercard, introduced a new credit card for customers.
The card would enable customers to earn cashback rewards of up to 5 percent on various purchases from groceries to hotels.
Instacart generates revenue from the credit card via so-called interchange fees, which are charged to the merchant that accepts a payment.
Interchange fees for credit cards normally float around the 2.5 or so percent mark, plus fixed fee charges of another $0.10.
Instacart then shares portions of that revenue with both Chase and Mastercard in exchange for issuing the cards.
Selling Items Itself
Instacart, in an effort to compete with the likes of Gopuff, began to sell groceries and other items that the firm itself sources.
Deliveries occur out of specifically designed micro fulfillment centers (also called dark stores) that stock commonly demanded goods like water, bananas, eggs, and so forth.
These fulfillment centers are placed in strategic locations that are close to as many customers as possible. Naturally, that means they are often located in city centers.
And since it is Instacart that operates the facility, it has real-time access to product stock and other types of data.
But instead of getting a commission, Instacart makes money from its instant deliveries by selling the products it offers at a profit.
These rapid delivery services, to keep storage costs low and products from not expiring, mostly focus on essential items that have consistent demand (such as water).
Instacart also benefits from already having an extensive supply of shoppers, which makes it much easier to scale up the service. It also has access to purchasing data and can thus stock its own fulfillment centers with products that are popular on the core platform.
A last benefit is that it can cross-sell existing customers. For example, if someone orders a meal from nearby a fulfillment center, Instacart would offer them the option to top up their order with items the platform sells by itself.
The Instacart Business Model Explained
Instacart operates what is commonly referred to as a three-sided marketplace where it connects customers with retailers and shoppers.
As a result, it needs to build up liquidity on both sides of the spectrum. Smaller retailers that do not have the capital to operate their own fleets are somewhat of an easier sell, simply because Instacart provides them with additional income without necessarily affecting their core business operations.
To that extent, Instacart has also launched a white-label product called Connect, which enables you to tap into the firm’s shopper fleet and fulfillment capabilities via an API.
Not only would this increase the dependence retailers have on Instacart but also allow the firm to monetize its fleet and facilities even if consumers are not using its app.
However, grocers need to be cautious as Instacart has begun to enter their territories with the launch of its own dark stores. On the other side, grocers can also utilize those dark stores via the previously-mentioned API.
Apart from the API, Instacart has introduced a variety of other features that are beneficial to its retail partners. For example, Instacart can group orders from two retailers into one, it offers dedicated POS systems for faster checkouts, and more.
All of this wouldn’t be possible without the firm’s lifeblood, which are the gig workers that pack and deliver products on a contractual basis. As I’ve mentioned above, Instacart has had its fair share of problems with shoppers, ranging from nationwide protests to large fines.
In recent times, the company has recognized how important they are, though. Throughout 2022, Instacart added a variety of features that would help shoppers, ranging from in-store navigation to an improved tipping and rating system.
After all, if there aren’t any shoppers making deliveries, then there’s no revenue that is being generated. More importantly, shoppers are one key pillar of Instacart’s platform business model strategy.
First unveiled in March 2022, the Instacart platform is set to power delivery capabilities for all kinds of retailers. Not only can they tap into the firm’s supply of shoppers but use the firm’s own POS system, shopping carts, and even ad solutions.
The suite of services is sold on a modular or group basis, meaning customers can choose whether they want to only use one product (fulfillment, for example), multiple, or all combined.
Both the platform as well as ads allow Instacart to break out of the low margin businesses that are groceries and deliveries. Since the marginal cost of selling a piece of software is near zero, almost all the revenue that Instacart generates through those channels is pure profit.
Meanwhile, the core business will likely operate at around zero percent profit margins. By keeping prices for both retail partners (= commissions it charges) and customers low, Instacart ensures that there’s a steady inflow of customer demand.
And that demand is then used as leverage to sell ads and software to other businesses. Interestingly, Amazon has done something similar with its ad business, which runs on top of the e-commerce marketplace.
The other advantage of Instacart’s platform play are the lock-in effects it creates. A retailer that runs their whole operation on Instacart is unlikely to switch to another provider due to the immense complexity and costs involved.
This would eventually give Instacart enough bargaining power to raise prices at (almost) will. Right now, the firm has not disclosed any pricing structure for its Platform product (which is why I did not mention it in the previous Money Making section). I’d assume it’s likely going to be based on a recurring subscription basis, though.
Its dark stores are another potentially appealing business line given what types of products Instacart sells and the existing demand it can tap into.
Interestingly, Instacart has also made inroads away from transactional shopping towards inspiring customers. Back in September 2022, for example, it introduced an Instagram-like shopping feed.
Previously, the firm unveiled a partnership with TikTok to allow users to purchase items and dishes they see on the short-form video app.
To that extent, the firm continues to expand from its original focus of grocery delivery towards facilitating purchases for all types of products, ranging from electronics to clothing.
Instacart Funding, Valuation & Revenue
Instacart, according to Crunchbase, has raised a total of $2.9 billion across 19 rounds of venture capital funding.
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.
The last time Instacart publicly disclosed its valuation was during a March 2021 funding round where it raised $265 million at a $39 billion post-money valuation.
However, The Information reported that Instacart has since cut its internal valuation to $10 billion as a result of market conditions.
Revenue wise, Instacart now likely generates over $2 billion in annual income. The Wall Street Journal previously revealed that the firm generated $621 million in one single quarter, which would put the firm’s annualized turnover at around $2.4 billion.
