Instacart – a US $7.6 billion online grocery delivery startup

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| The European | 23rd October 2018
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The online grocery delivery industry is growing at a fast pace. This industry has two large players vying for market dominance; Amazon and Walmart. The US grocery market is estimated at US $800 Billion. Online grocery delivery has not even tapped 10 percent of the US grocery market.

 

One of the startups in the online grocery delivery industry is Instacart. Instacart was founded in  2012. The company is based in San Francisco, USA. It serves customers in two countries, the USA and Canada.

 

Latest News (16 October 2018)

 

Instacart raised US $600 million in a funding round. The latest funding round values the company at US $7.6 billion.  D1 Capital Partners, a hedge fund, led the funding round.

 

In this post, we will discuss the business model of Instacart and the strengths and weaknesses of this online grocery delivery startup.

 

Instacart’s business model is to pay a mix of contractors and employees to pick, pack and deliver groceries to its customers. The company does not “list” important facts and figures (number of employees, average number of daily deliveries, etc.) on its website, which is unusual for a business valued at billions of dollars.

 

Ars Technica (19 November 2017), a tech and business review website states:

 

“Instacart only has about 300 full-time employees (almost entirely based at corporate headquarters), but it has hundreds of thousands of part-time, in-store shoppers (who shop and deliver customer orders) and independent contractors”.

 

Fastcompany.com (16 October 2018) reports:

 

“50,000 Instacart shoppers deliver groceries from 15,000 stores in 4,000 cities, and the company has signed up more than 300 grocery partners”.

 

Forbes (12 December 2017) gives its own estimate of the customer count and revenue of Instacart. The publication says that Instacart has 500,000 customers and US $2 billion in revenue.

 

Bloomberg (16 October 2018) reports:

 

“The startup increased the number of grocery retailers on its platform by 50 percent to 300”.

 

Instacart’s business data had to be aggregated from different sources. This indicates that it’s about time that the company discloses its own version of business operations on its website.

 

Human Resource Management

 

Instacart has been sued multiple times by its “shoppers” for inadequate wages.

 

The “commission per delivery” paid to shoppers is calculated by computer algorithms. Two important variables of these algorithms are:

  • Service region (state and city)
  • The number of “shoppers” available on any day (the higher the count the lesser the pay)

The per item delivery fee does not take into account the weight of the package (for example, the fee for delivering a crate of water bottles is the same as delivering a single bottle of juice)

 

Recode (18 September 2018) states: “Instacart was sued by some shoppers and ultimately settled for $4.6 million in early 2017. It has messed with shoppers’ tips, and earlier this year, even withheld some of those tips by accident due to a “software bug”.

 

At a recent “Recode’s Code Commerce Conference” held in the New York City, Apoorva Mehta, the CEO of Instacart said:

 

“Yes, we have made mistakes in the past, and we have debt with our shoppers. The reality is that we have 50,000 shoppers on our platform and this number is growing really, really fast. So we need to do much, much better here”.

 

Although Mehta has voiced that improving relationships with “shoppers” is now the “core focus” of the company, human resource management at the company needs to be fixed immediately or else “shoppers” might leave and join Amazon, which is on an aggressive hunt for “shoppers” to meet its sales growth resulting from the acquisition of Whole Foods.

 

Marketing

 

The CEO of Instacart, Apoorva Mehta, says: “Most of the company’s previous two cash injections of $200 million in February and $150 million in April hasn’t been spent yet. Nevertheless, the company took the new funding in order to be more aggressive about hiring and marketing”.

 

At the same time, Mehta also says:

 

“We’re planning to invest a lot more in marketing. We want to make sure more and more people even know about the fact that people can get their groceries online.”

 

Bloomberg (16 October 2018) reports:

 

“Many prospective customers still don’t know the company (Instacart) exists”.

 

A startup which has not utilised millions of dollars raised earlier gives a negative impression. The problems at the company were growing and yet the funds were not used for improving business operations.

 

Competition

 

Two important developments will give a hard time to Instacart’s business.

 

Uber Technologies Inc is considering expanding its business. The Uber Eats program at the moment offers only meal delivery. The CEO of Uber is keen to enter into grocery delivery business.

 

Whole Foods was a major Instacart partner. After Amazon’s acquisition of Whole Foods, its stores now prioritise Amazon’s delivery workers over Instacart’s.

 

Future Prospects

 

Instacart has managed to acquire around US $1 billion from investors. However, Instacart is not gaining traction because the funds raised so far are yet to be utilised for managing and growing the business.

 

Instacart must map a long-term business vision and strategy. Human resource management requires an overhaul. To get the brand recognised, aggressive marketing campaigns must be launched.

 

Instacart should also consider investing in technology. Amazon spends huge sums on designing predictive shopping algorithms. Instacart should study how Amazon uses tech in the online grocery delivery business model.

 

The untapped potential of online grocery delivery industry is huge. However, these companies will only survive if they market their brands aggressively, focus on employee retention techniques and invest in big data architecture. 

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