Delivery app Instacart’s $400 million funding round is expected to provide a shot in the arm to an industry that can use one, experts say.
“This will help fuel growth of online grocery which, to date, has been one of the laggards of the e-commerce sector,” says Neil Saunders, managing director of retail at retail research agency GlobalData, formerly known as Conlumino.
Instacart’s funding may also help grocers that might not otherwise sell online to reach new shoppers.
Instacart plans to double the number of U.S. markets it’s in by the end of this year to 60 from 30, which is how many it operated in at the end of 2016, says Nilam Ganenthiran, senior vice president of business development at Instacart.
If that expansion goes as planned, the delivery service will have expanded access to online grocery ordering in the U.S. “like never before,” says Keith Anderson, vice president of strategy and insights at price monitoring firm Profitero. “I think this helps a brick-and-mortar retailer who is never going to develop their own ordering interface to compete with Amazon and doesn’t want to train their own staff. It lets them respond to the threat now that helps them retain the shoppers they’ve already got that may try online grocery. It may also help them reach shoppers that aren’t already shopping their stores today.”
“In some ways, the Instacart platform levels the playing field between the pure play e-commerce specialists with their technological skills, and traditional physical retailers,” Saunders adds.
Instacart works with a number of retail chains in the Internet Retailer 2016 Top 500, delivering groceries and pet products from the likes of Costco Wholesale Corp. (No. 8), Target Corp. (No. 22) and Petco Animal Supplies Inc. (No. 114), among others.
Experts say Instacart’s rapid expansion is helping the delivery service get a head start on Amazon.com Inc. (No. 1) in the online grocery market, but it’s no head-on challenge to the leading online retailer. Amazon Fresh is available in 11 markets in the U.S.
“It’s more of an insulation for the local grocers against Amazon Fresh than it is a big offensive shot across Amazon’s bow. It’s more about how these brick-and-mortar players remain stable,” Anderson says. “Amazon won’t really feel this. It certainly complicates Amazon’s overall value proposition, and Amazon, to the extent that they want to grow their Fresh business, they will have to rethink their offering there.”
“We have a great deal of respect for Amazon and the business they’re building,” Ganenthiran says. “What Instacart is trying to do is allow brick and mortar to compete more effectively in an increasingly Amazon world.”
While Instacart has been expanding rapidly, experts say it remains to be seen if the company can start making a profit.
“Despite its rapid growth, Instacart is still not profitable, which is understandable given the embryonic nature of the company,” Saunders says. “By the end of 2017, I’d expect Instacart to be a much bigger entity, which will help attract more grocery players for partnerships and bolster advertising revenue from CPG (consumer package goods) firms and others who want to promote their wares.”
Instacart makes its money off delivery fees charged to shoppers as well as partner fees charged to the grocery stores from which it delivers.
The delivery service’s expansion plan will involve new hires in the coming year, though Ganenthiran didn’t specify how many employees will be added to Instacart’s current 310 corporate employees. He says the company will hire data scientists, engineers and operations professionals as it builds into newer markets. The vast majority of Instacart employees are contractors that pick and deliver groceries in the markets Instacart is in.
“Our 135 retail partners work with us because of our fantastic customer experience but also because of our innovation,” he says. “This capital allows us to continue to hire great data scientists and engineers to build the great stuff that our retailers are asking from us.”
Instacart has three pricing models. Shoppers can pay as they go, a model in which Instacart charges a fee starting at $5.99 per delivery. The company also has a membership model, similar to Amazon’s Prime program, called Instacart Express with two tiers: Shoppers can choose a $149 annual membership fee or a $15 monthly membership fee, both of which include free delivery in as little as an hour on an unlimited number of orders over $35. Amazon Prime offers such perks as free two-day delivery on eligible products, free video and music streaming and online photo storage, for a $99 annual fee.
Instacart Express accounts for “more than double the proportion of our deliveries than it did six months ago,” Ganenthiran says, declining to provide membership figures. Ganenthiran also says Express customers order between 4-5 times per month and “they’re ordering frequently and they’re ordering big baskets,” he says. As a whole, Instacart shoppers spend an average of $100-$120 per order.Favorite