You want to watch a blockbuster at 3 am while the cable airs commercials, Netflix allows you to do that. You want a cab at your house without waiting for a cabbie to spot you, Uber allows you to do that. You want food delivered from a restaurant at the tap of a button, Doordash allows you to do that.
We are now living in a period where goods and services can be accessed instantly. However, until recently, grocery delivery was still a problem that no company had successfully. And this is where Instacart spotted an opportunity in 2012.
Instacart is a grocery delivery service started in the United States by Apoorva Mehta in 2012. It provides users with the convenience of getting groceries and other products from local retailers delivered to their homes. Instacart’s business model is built on the on-demand economy wherein technology is used to connect people and their required goods and services at their convenience. With the United States online grocery market expected to reach $187.7 billion in 2024, Instacart has a huge potential market to capture.
In this blog, we have provided a deep dive into Instacart’s origin story and an overview of its revenue streams.
How Instacart Works
Instacart has a very easy to understand and use interface. The user browses local stores in the application and selects the products from whichever stores that they want. The order then goes to one of Instacart’s contractors or shoppers who personally goes to the store to buy those items for you and deliver them. Items can also be picked up by users themselves if they find that convenient.
These personal shoppers are equipped with an Instacart issued card to fulfill the orders and are paid per order by the company. The users also have the ability to schedule these deliveries in advance so that the fridge never runs empty.
Instacart Founding Story
Apoorva Mehta, Instacart’s founder, did not just stumble across a multi-billion dollar idea. In fact, Instacart would never have seen the dawn of day had Mehta not been perseverant. An engineer by education, Mehta spent his fair share of time working in industry giants such as Blackberry, Qualcomm, and Amazon.
To seek a challenge, Mehta left his job and spent the next 2 years developing over 20 startups which all ultimately failed. He later revealed that none of his companies worked because he did not aim to make people’s lives easier with his ideas. However, Instacart was a different story. Unlike his previous companies, this time he actually sat down to find a solution to a consumer problem, which was the grocery buying experience. The problems of the grocery buying experience were glaringly obvious to ignore.
To set sail, Mehta along with his 2 other co-founders Max Mullen and Brandon Leonardo wanted to join the program which every start-up in the United States does – Y Combinator. The only problem was they had passed the deadline for application for that year, by two months. Unfazed, he pinged every Y-Combinator alumni in his network to establish a connection and finally managed approval for a late submission. He thought highly of the potential of his brainchild, Instacart, and believed he could capitalize on his successful business idea even though a chance this late was unheard of. He optimistically put through a presentation for Instacart which was met with a string of rejections.
In a hail mary attempt to demonstrate firsthand how the Instacart worked, he placed an order for six-pack beer and addressed it to Garry Tan, one of the partners at Y-Combinator. In half an hour he got a call from a bedazzled Gary Tan, along with an invitation for another meeting the following day.
In the meeting, he was bombarded with questions from the four partners present on how Instacart worked and why it would succeed. He left the meeting feeling pessimistic which was quickly changed when he received a call 10 minutes later expressing Y-Combinator’s interest in Instacart.
Initially, Instacart was heavily compared to Webvan, a company in the 90s that also aimed to home deliver groceries which eventually went bankrupt. However, with the emergence of companies such as Uber, which followed a similar model of creating a bridge of people offering the service and those needing it and the mass growth of smartphones, investment groups such as Sequoia Capital, Khosla Ventures were optimistic about the future of Instacart.
Instacart Business Model
With an IPO on its horizon, interested investors must understand its revenue model. Since Instacart is a private company, there are no concrete figures for its revenue but they reportedly generated $1.5 billion in 2020. It also had its first profitable month since its existence in April 2020. Obviously, the pandemic played a huge role in these numbers but it has now plunged us into a different consumer experience that is here to stay.
Instacart makes money using five different revenue streams: Delivery fees from customers, Commissions from retail partners, In-app advertising for retail partners, Price Markups on products sold via Instacart & a subscription offering called Instacart Express, under which delivery fees are waived.
Let me explain the different revenue streams in detail.
Instacart’s main source of revenue which is paid directly by the person ordering groceries is the delivery fee. It charges $3.99 for the same-day delivery for orders more than $35 for its groceries. For orders less than $35, Instacart charges $9.99 for delivery. If you would rather choose to pick up the packed order from the store or other convenient locations in the area instead of home delivery, Instacart charges $1.99. An additional fee is charged for orders involving alcohol and any order weighing more than 50lb.
2. Annual Subscription
An annual subscription for Instacart Express for $99 eliminates all your delivery fees for orders above $35. So if you order more than 25 times a year, a subscription to Instacart Express makes sense.
3. Price markup
In many cases, Instacart prices are same as the prices in-store. However, in some cases, Instacart adds a markup, which can be as high as 15% compared to the in-store prices.
Instacart has also recently launched Instacart ads. It is a platform that allows retailers listed on the platform to advertise their stores or their products by giving them placements or ad spaces on the top of lists. Following a cost-per-click model, Instacart reportedly earns around $0.75 to $1.25 per click.
5. Grocery partners
Instacart allows retailers to break into the e-commerce marketplace without building their own infrastructure. This has allowed them to form partnerships with 300 plus retailers including Albertsons, ALDI, CVS, Kroger, Loblaw, Publix, etc. This however comes at a heavy cost for the retailers amounting to approximately 10% per order as reported by The Wall Street Journal.
Instacart Funding & Valuation
After its latest round of funding, in March 2021, in which Instacart raised $265 million, the company was valued at $39 billion. In total, Instacart has raised $2.9 billion from the time it was founded. Instacrt has raised investment from top venture capital firms like Sequoia Capital, Andreessen Horowitz as well as institutional investors like Fidelity and T. Rowe Price.