Unicorn or Supernova: Can Instacart Sustain Its Meteoric Rise?

Let’s talk about Instacart.

More specifically, the soaring fortunes of the grocery delivery company, boosted by the COVID-19 pandemic, and the sustainability of Instacart’s growth and popularity – not to mention its ballooning valuation.

Over the past decade, retail sales have been steadily migrating online, and according to the US Census Bureau, e-commerce reached nearly 12% of retail sales in Q1 of 2020. The brunt of that migration had, however, been largely driven by non-food categories, such as books (54.9%), electronics (42.7%), toys (39.8%), and apparel (28.9%), according to eMarketer data.

Groceries had for a long time appeared to be immune to the e-commerce contagion, with the percentage of food and household products sold online hovering in the low-single-digits. Last December, digitalcommerce360.com reported that in 2019 online grocery accounted for 6.3% of the $682 billion in total supermarket sales in the U.S. Somehow, shopping for food and household items appeared to be a different kind of experience – one that the vast majority of shoppers seemed to prefer to do in person at a brick-and-mortar supermarket.

Then COVID-19 struck the U.S. in March, and all of that changed – dramatically. Scared to go to the store, turned off by empty shelves, or unwilling to wait in long lines, consumers turned to online grocery shopping in droves. This week, The Wall Street Journal reported that online grocery sales rose 65% in May vs. March of this year, with 43 million customers buying food online (compared to 39.5 million in March). The largest U.S. supermarket chain, Kroger, just disclosed that its digital sales grew by a whopping 92% in the first fiscal quarter, which ended May 23. Similarly, Walmart’s e-commerce sales jumped 74% in the first quarter, and other major supermarket chains all reported stellar online grocery sales growth.

Grocery delivery services – both owned and operated by retail chains (such as Shipt and Peapod, subsidiaries of Target and Ahold, respectively) and independent ones (such as Instacart) – were the immediate beneficiaries of these extraordinary circumstances and the resulting changes in consumer behaviors. Since March, Instacart orders reportedly increased fivefold, the company reported its first-ever profitable quarter, and added 300,000 new gig workers and another 18,000 customer-service reps.

In early June, Instacart raised $225 million in new growth capital (it had already raised nearly $2 billion prior to that) at a post-money valuation of $13.7 billion, almost doubling the company’s worth from its last investment round in December 2018. A pretty astounding valuation, in my opinion. For context, Kroger, a publicly traded company that operates nearly 2,800 supermarkets in 35 states and generates revenues of over $120 billion, is currently valued at just over $25 billion.

COVID-19 is the second ‘black swan’ event in recent years to give Instacart an external boost. The first one was the acquisition of Whole Foods by Amazon, which back in the spring of 2017 threw the supermarket industry in a frenzy, causing a mad rush of investments in e-commerce product development and acquisitions by top grocery chains. Both events created significant positive externalities for Instacart, and both times, the company has proven to be ‘in the right place, at the right time’ to capture the windfall.

But how likely is this winning streak to last in the long run?

On the optimistic side, Instacart has developed a first-mover advantage in pioneering a platform service that creates real value for consumers, retailers, and gig workers.

Uber for Groceries

Instacart’s shopping platform offers consumers the ability to place an online order with a nearby store, and have it assembled and delivered (or prepared for pick-up) by a field force of independent gig workers it calls “shoppers”. Just like Uber drivers, Instacart shoppers receive star ratings from their customers, which determine their likelihood of getting a customer batch assigned to them. Instacart partners with over 350 national, regional and local retailers and can deliver orders from more than 25,000 stores in over 5,500 cities in North America. Its service can reach more than 85% of U.S. households and 70% of Canadian households.

For many consumers, the proposition Instacart offers is irresistible. The convenience of shopping online, from the comfort of their home, at whatever hour they choose, and having all these bags of groceries delivered same-day to their doorstep, sometimes within the hour, is going to keep them hooked.

An Easy Button for e-Commerce

The service Instacart offers is a great pre-packaged solution, especially for retailers who don’t have a developed e-commerce offering and delivery services of their own. It’s an ‘easy button’ to instantly enter the e-commerce game with a sophisticated and established solution.

In the early days of the COVID-19 crisis, as consumers flocked online for their groceries, many of them experienced order cancellations, no available timeslots, lost or delayed deliveries, as the less-than-robust e-commerce platforms of their traditional grocery stores were drowning under the surging demand. Even Amazon had to temporarily close its Prime Pantry delivery service, as it faced an avalanche of orders tied to the coronavirus outbreak. For a great many retailers and consumers, being able to lean on Instacart’s robust technology platform and delivery workforce was a godsend during that time.

The Instacart Bump

Normally, when a tech disruptor, like Instacart, enters a technologically lagging marketplace, like grocery retail, its success comes at the expense of incumbent players. And few retailers harbor the illusion that Instacart is anything but a competitor. But the company has gone out of its way to paint itself as a partner and a complementary service that is a win-win-win for consumers, retailers, and its own shareholders. And there is some early evidence of a complementarity effect that suggests that Instacart creates incremental revenues and jobs, rather than just syphoning them away from traditional supermarkets.

In February 2020, a study by NERA Economic Consulting assessed the impact of Instacart in four states, and concluded that the company’s entry into these markets resulted in a significant incremental lift in grocery revenue and local job growth. Full disclosure: the study was sponsored by Instacart, but nonetheless the results are impressive. The analysis examined Instacart activities in California, Illinois, New York, and Washington, and concluded that adoption of its services by local supermarkets drove an additional $623 million in revenues for these chains and created over 23,000 new jobs for them, including additional cashiers, stocking associates and deli counter clerks, who would not have been hired had the retailer not partnered with Instacart.

On the pessimistic side, while Instacart’s model fulfills a real niche need, which is at present greatly amplified by the COVID-19 crisis, its long-term staying power will face headwinds from ingrained consumer behaviors and retailer economic interests.

The Sanctity of Grocery Shopping

During the shutdown caused by the pandemic, I took over the role of primary shopper in my household and was reminded how important – almost sacred – is the act of choosing and bringing home the food for my family. And I don’t believe I’m the oddball exception. For the majority of consumers, grocery shopping is a deeply personal experience. Seeing, touching, carefully selecting the food they buy, getting inspiration and ideas in the store, discovering new products are all a part of how shopping for groceries should be.

The idea of a stranger touching their food and stuffing it in big bags or boxes is a turnoff. The COVID-19 ordeal will definitely have a lasting effect on consumers’ willingness to buy food online, but the majority of grocery shoppers are expected to return to their old routines of going to the supermarket and browsing the isles and fresh sections of their favorite stores.

The Value of First-Hand Customer Relationships, and Data

Probably even more important to the long-term outcome is the retailers’ point of view. Retailers’ entire business model is predicated on a direct, personal relationship with their customers. A personal touch, a local presence that builds a lasting connection and invites the customer to keep coming into the store. Grocery stores are particularly deeply embedded into their local communities, and the personal interaction with their customers is key to the success of their brand.

In addition, by fostering these direct personal relationships, retailers have earned the right to develop what is now their most valuable asset – the household-level purchasing and loyalty data of their first-party audiences, down to each individual SKU they bought. For most grocery chains, that rich transaction-level data, tied to an individual customer ID, is now a jealously guarded strategic crown jewel. It is parsed out a sold to CPGs and data aggregators, like IRI and Nielsen, and leveraged by retailers to drive a range of ‘alternative profit streams’, such as data insights and targeted digital media.

When a third party, like Instacart, comes in between the retailer and its customer, that direct personal connection is replaced by a very different relationship. The retailer has no ability to communicate with the customer and position its brand appropriately – it just appears as one of the many local supermarket logos the customer can choose from on the Instacart website. The in-store interaction, inspiration and delight retailers strive to create with their displays, broad selection, and product merchandising are gone, and replaced with a gig worker robotically completing a list of tasks as quickly as possible with zero regard for the store atmosphere.

Instacart also replaces the retailer as the ‘point of purchase’ (or POS) the customer interacts with and pays, thus capturing all the transaction data retailers so covet and protect. The POS is where all promotions – discounts, deals, coupons, loyalty points – are activated, so the retailer surrenders that valuable real estate to Instacart as well. Between the data, promotions and merchandising, retailers’ access to nearly $100 billion in CPG trade marketing funds could be jeopardized if they were to be disintermediated from their end-customers by a player like Instacart.

The Importance of the In-Store Experience, and Eyeballs

Retailers spend millions on creating an attractive and enticing shopping experience in their stores. Supermarkets are meticulously merchandised and, through strategic placement and cross merchandising of products, are designed to generate trial of new products and inspire impulse purchases. The inviting store atmosphere, the friendly associates, and the wide selection of beautifully displayed products is what supermarkets compete on. It’s how they differentiate from each other and win market share.

The weekly (sometimes daily) trip to the store, which for groceries has long been how millions of people shop for their food and household necessities, has also resulted in another new prized possession for retailers – millions of eyeballs of engaged, verifiable first-party audiences. These massive audiences fuel highly profitable media and marketing profit streams that are an increasingly meaningful component of retailers’ financials. The Kroger 2019 Fact Book boasts that 11 million households visit their stores daily – an audience that rivals those of the most highly rated TV shows.

When the shopping trip starts at Instacart, all of that differentiating in-store experience is lost, and so is the retailer’s ability to impact shopping behaviors to grow the basket or increase household penetration. As importantly, lost too are the millions of eyeballs that retailers monetize in the form of in-store media and marketing revenues funded by CPG and other major advertisers.

Remember Triad Retail Media?

In my 33 years of working with retailers, with a few rare exceptions, I have rarely seen them to be innovators, leaders, or even early adopters, of disruptive change – especially technology-driven change. The large capital investments that would take away from store renovation budgets, the threat of operational interruptions by tinkering with store systems, and a culture fiercely focused on the in-store product selection and merchandising (rather than technology innovation) have always stood in their way.

They are, however, generally fast followers – often piloting a new technology or business model with a third-party partner, but eventually, if it proves to be a highly profitable or strategically differentiating capability, they – especially the major chains – make the effort and investment to bring it in house. Will that happen with the Instacart service they are now experimenting with?

One useful analog case is that of Triad Retail Media. The company was an early player in the marketing technology space that focused on harnessing retailers’ audiences and POS transactions and loyalty data to create a premium-priced, better personalized and measurable digital media business. Its successful partnership with Walmart ushered in the era of retailers as media companies.

Triad was founded in 2004, and in 2007 it signed an exclusive agreement with Walmart and Sam’s Club to sell digital media, including online banner ads, targeted emails, and digital promotions, powered by their POS and loyalty data. Triad would share a portion of the revenues back with the retailers. By 2015, Triad was serving multiple retailers, including CVS, Staples and Kohl’s, and its gross revenues were estimated to be $500 million, with over $120 million in net revenues. In 2016, it was acquired by WPP for $300 million. At that time, Amazon successfully accelerated its digital advertising business, causing the concept of ‘retail media’ to go mainstream, which them prompted all major retailer to scurry into the space.

By early 2019, media had become a core pillar of most major retailers’ strategic growth plans, and Walmart ended its long-time collaboration with Triad, and brought all media planning and agency services in house into its Walmart Media Group (WMG). Triad lingered for another year, tried (unsuccessfully) to get acquired, and eventually ended up selling its technology assets and team to Sam’s Club. In April 2020, WPP shuttered the company.

Will the Instacart story go the same way? Or will it manage to successfully coexist with brick-and-mortar retailers’ own e-commerce investments? Or even create incremental value for shoppers and retailers?

It depends. First, on whether consumers continue to shift more and more of their grocery buying online or if they revert to old habits. Second, it also depends on how attractive or strategically important e-commerce capabilities become for grocery retailers. If they develop into a core growth strategy, retailers are likely to in-house them. My expectation is that large retailers will do just that – they will watch and learn from companies like Instacart, and when the time is right, they will eliminate the middleman.

On the other hand, if the Instacart platform proves to be unlocking net new revenues for retailers, and the cost to build and maintain sophisticated e-commerce platforms proves too high for brick-and-mortar chains, then the Instacart model may have real staying power, and maybe even justify what currently appears to be an outlandish valuation.