Instacart’s S-1 recently dropped, as they prepare to IPO and go public in the very near future as the leading platform in the ultra-competitive, online grocery space.

As a result, an array of compelling data points have dropped that merit a much deeper investigation of the business model, how it has evolved over time, and what to look for in the future.

Instacart Business Model

One key takeaway from this business model, which in many ways is very complex and has a lot of moving pieces, is that the Canvas is not nearly enough to gain an understanding of the business model.

CBCV (Customer Based Corporate Valuation) techniques are required, as we we will see more below.

Instacart Quick Snapshot

Many other companies have unsuccessfully tried to be dominant grocery platforms.  Only Instacart with both B2B offerings and a consumer-facing marketplace has succeeded. 

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S. Kodali (Forrester) – LinkedIN

• the company was founded after raising a $2.3 Million Seed Round in 2012
• they have raised a total of $2.9 Billion across 19 rounds
• they hit a $39 Billion valuation in the middle of the COVID era in March ’21
• the latest valuation in Q4 ’22 was around $13 Billion

How does Instacart Work?

Instacart is a self-described “grocery technology company” with two sides to their marketplace model and a series of adjacent pieces to supercharge the business model, at least in theory:

• Consumers download the Instacart app and place grocery orders

• Grocers/Retailers receive the order for either pickup or delivery:
  • Instacart offers delivery, where the order is fulfilled and delivered to the consumers home
  • Instacart offers pick-up, where the consumer picks up the order themself from the business

• Instacart offers an Instacart+ Membership with Free Delivery (on orders over $X) and other benefits; they had more than 5 million members at the end of June 2023

• on Delivery orders, Instacart “Shoppers” fulfill and deliver the orders; these are ‘gig economy’ workers who are paid a % fee and earn a tip in many cases from the end customer

• CPG (Consumer Packaged Goods) Brands will advertise their products on Instacart to consumers; ‘Advertising and Other’ accounted for about 27.6% of Instacart’s revenue in 1H ’23, while about 72.4% came from Transaction revenue on grocery purchases

We can see below, in the original post from 2021 analyzing the Grocery Delivery market, that the model today has evolved slightly since 2021 in terms of the fee structure.

eGrocery Analysis (2021)

Grocery retailing is fundamentally a low margin business. Depending on the format or how developed the market is, EBITDA margins generally range from 4 to 8% and EBIT runs between 2 and 5% of net sales.

Foley Retail Consulting

Since grocery is a low-margin business at its core, it makes sense that Instacart has evolved the model from beyond delivery into one that includes Advertising and other related “Partner” services to become a grocery technology company.

They offer an entire Enterprise Platform to grocers and retailers that enables the ‘Store Managers’ to track the fulfillment of the order from end-to-end, among a number of other possible functions.

Instacart Revenue Model

All of these pieces get pretty messy when trying to piece together how exactly money flows through the Instacart platform and to who, so here is Instacart’s way to break it down:

Retailer and customer fees together were 14.2% of GTV in 2021 and 14.9% of GTV in 2022, translating to $16 per order for each of those fiscal years. We have historically managed these fees together as a percentage of GTV and expect to continue to optimize both customer and retailer fees to reflect the value we deliver across a range of use cases.

S-1 pg. 105

GTV = Gross Transaction Value, so if the average order on Instacart = $110, $16 of that flows back to Instacart gross, but not net, as we can see below.

As you can see, the rough translation on a $110 order is:

• an undefined cut from the retailer’s margin (‘Net of Retailer Fee’)
• an undefined amount that goes to the (gig economy) “Shopper” who physically pick the food out from the grocery store, bundle it, and deliver it to the end customer – Shopper Earnings were 8.2% of GTV in 2022 (pg. 105) + they keep 100% of tips
• $7 in transaction revenue (~markup of goods, fees) + $3 in advertising revenue = $10 in total revenue
• $3 Cost of Revenue for fulfillment, etc.
• $7 in Gross Profit

The ‘Gross Profit’ is what flows through towards all of the Operating Expenses+ that the company has. You can imagine that with a $7 Gross Profit on each order, they would have to do a huge volume in order to reach profitability, as we can see from their S-1 highlights below.

Is Instacart Profitable?

We can see from the above graphic reference to “Adjusted EBITDA.”

EBITDA = Earnings Before Interest Tax/Depreciation/Amortization

This means that the company is profitable at the time of the IPO after crossing that threshold earlier in 2022.

We can see the increase in ‘Income from Operations’ between 1H ’22 and 1H ’23, going from $62 Million to $269 Million.

After Taxes, etc. the company earned $242 Million in Income in the first half (1H) of 2023. When comparing the Operating Expenses to 1H ’22, we can see that virtually every line item was stable or trending down, meaning the company meaningfully increased their top line (from $1.126B to $1.475B) without proportional OpEx increases in that same time period.

This would generally be called ‘operational efficiencies.’

Combined with other efficiencies, this has allowed us to decrease fulfillment costs per order from 10.2% of GTV in the fourth quarter of 2019 to 7.1% of GTV in the second quarter of 2023.

S1: pg. 112

In theory, this aligns with the general pitch of a ‘grocery technology company’ to the market, which is that the $100s of millions spent on technology eventually produce economies of scale and margin power as the business reaches a certain threshold.

Nevertheless, questions remain as we get into the Customer side of the business model.

For reference, below is a synopsis of the above in a Canvas format. The CBCV Analysis continues below.

Instacart Business Model Canvas

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Instacart Customer Cohort Analysis

The basic premise of these types of consumer businesses is that there are New Customers and Returning Customers. The business model only really sustains itself at scale if a large enough % of the customers become “Repeat Customers.” Simply put, loyalty is what pays.

The above diagram is what illustrates this concept, broadly. There is a Customer Acquisition Cost (CAC) to acquiring New Customers.

In the case of Instacart, the AOV (Average Order Value) converts to a ARPU (Average Revenue Per User) once we factor in:

• the average gross margin per order (stated as $7 above) is the “revenue;” it is somewhat difficult to definitively pin down what the exact ‘revenue’ is because of the split between consumer/retailer
• as membership costs change the calculation (ie. non-members pay no delivery fees on order over $X, while members do), the monthly AOV between both customer groups is $317 (S1: pg. 1), which would translate to ~3 orders per month
• it is not clear how many months per year ‘active monthly orderers’ would order, but suffice to say it would be multiple, and from there on out those same “active orderers” would hopefully stay with the company for years
• for those who do not become customers for >1 year, this is reflected in churn, whereby a member would potentially cancel their membership after 1 year (they offer annual memberships only) or a non-member would only use the service once

This general flow is reflected in the Instacart Cohort Analysis:

We can see a few major trends from this data:

• The 2020 Cohort (Covid Cohort) still drives the largest % of GTV relative to all other Cohorts – we can see this in the Annual Cohort data
• New Customers do not drive a large % of GTV, as Instacart states several times in the S-1 that monthly AOV improves dramatically over time – we can see this in Quarterly Cohort data
• They have a larger % of ‘above-average income earners’ relative to the U.S. market and a larger % of Urban consumers – the question is, what Cohort(s) do those consumers belong to?

Simultaneously, we can see that CAC increases materially year-over-year, with it currently sitting at about 2.4% of GTV in 2023. What does this mean?

It means that they are spending on Customer Acquisition, but a lot of the material benefits (ie. returning customers, margin drivers) are not flowing through. Why?

We will explore that further down, but fundamentally, Instacart themselves explain this in the S-1:

Many customers initially access Instacart to take advantage of certain promotions, such as discounts and other reduced fees … however, these customers may be lower intent users of Instacart with reduced engagement or total spend compared to customers that we acquire organically, may never convert to paying Instacart+ members, or may discontinue using Instacart after they take advantage of our promotions.

S1: pg. 35

The TLDR is that organic customers are, in a sense, more likely to become engaged, higher-spending customers over time. Thus, as we can see in the quote below, they are planning to invest in ‘brand marketing’ to acquire more customers organically.

To date, we have not meaningfully invested in brand marketing, and the majority of customers have come to Instacart through organic channels. We believe we have a significant opportunity to build awareness to fuel new customer acquisition, and we plan to prudently invest in brand marketing and other awareness campaigns in the future. 

S1: pg. 233

What does this all mean?

Instacart+ Members

In the Intro, we see mention of ‘monthly active orderers:’

“Instacart invented a new model for online grocery shopping by offering consumers on-demand delivery from the stores they know and trust. We help our retail partners reach 7.7 million monthly active orderers who spend approximately $317 per month on average on Instacart.”

S1: pg. 1

When we look at the relative breakdown of Instacart+ members to that #:

Looking at the GTV from members at 57% coupled with 5.1 million members (against 7.7 million ‘actives’), we would expect the member GTV contribution to be 66%+ or even higher because that’s how power laws typically work relative to loyalty.

Especially since those members spend, on average ($461), double the non-members ($223) per month.

After some research into the footnotes and various definitions, we can start to surmise that there is a relatively large % of the member base that is not “active.”

The full definition of a ‘monthly active orderer’ is not fully defined in the S-1. It could be something like those who make 2 or more orders per month. The problem with the above emerges when we think about the implications of only 3.1 of out of 5.1 Million members potentially being ‘active.’

There is no way to determine exactly how many members are active and/or what the churn rates are. These are mathematical inferences based on what is presented and knowledge of other business models.

Doing a fairly rudimentary sentiment analysis on something like TrustPilot, however, adds more credibility to this possibility.

There are too many bad Reviews for this sentiment about the service being hit or miss for these to be ‘anomalies.’ That being said, it appears to be a reflection of the ‘unpredictability’ of the Customer Experience (CX), as many users still love the service and Instacart remains at the top of the ‘grocery delivery’ food chain.

Can we infer that the weak part of the model seems to be the ‘gig economy’ Shoppers who ultimately shape the Instacart CX ?

It certainly seems possible.

Instacart Shoppers Revenue Model

The vast majority of shoppers are full-time shoppers, who are independent contractors that pick and deliver orders. The remaining shoppers are primarily in-store shoppers, who are the Company’s employees and only engage in various in-store duties, including picking orders, and do not engage in any delivery services.

S1: pg. F14

• Shoppers – 600,000+, 2/3 female, avg. 9.9 hours per week (S1, pg. 175) – choose whether or not they want to accept an order
• Different from ridesharing (like Uber) or food delivery because nearly half the time is spent in store – most of the time, shopper pick, pack, and deliver these orders
• Instacart has a guaranteed ‘minimum batch payment’ of $10 for full-service orders and $5 for delivery only orders
• ‘independent contractor’ classification vs. some other grocery delivery services use employees
• CartStar Shopper Rewards Program classifies Shoppers into Gold – Platinum – Diamond Tier (S1: pg. 228), giving top shoppers the priority access to certain batches
• Shoppers have their own mobile app that enables them, once onboarded, to purchase items with a virtual credit card to shop on behalf of customers
• Shoppers can choose instant payment or get paid on a weekly payment cycle

In most instances, Instacart shoppers pick, pack, and deliver these orders, but retailers can also use our technology to enable orders that are picked and packed by their own employees, or use a combination of the two.

S1: pg. 183

We can see in the S-1 (pg. 166) that Instacart views itself as a “platform” that helps connect buyers to shoppers, effectively, rather than a ‘grocery delivery service.’ From strictly a business model perspective, this starts to shed some light on how they have grown so quickly and reached profitability, but it does leave the ‘Customer Relationships‘ side open to future competition.

Instacart Competition

Some competitors such as Thrive (ship-to-home) and Amazon (offers same-day delivery via Fresh and Whole Foods) aren’t oriented around gig-economy type ‘Shoppers.’ Although as we will see below, that doesn’t guarantee better customer service outcomes for every service.

As the market expands and competition increases – along with potentially margin compression and increased CACs – the Customer Experience will likely remain important to ensure customer loyalty.

All in all, Rules of 3s typically indicate 3 platforms will rise to capture ~70 – 80% of the market, and Instacart seems well on pace to be in the Top 3 over the longer term; nevertheless, there are alternatives for grocery delivery :

Shipt

• Owned by Target, similar model to Instacart (membership model, shoppers are independent contractors) but support seems to be done by Target employees. Review are generally much more positive (see TrustPilot), although there is clearly room for improvement in different areas

Thrive Market

• Founder-owned, investor-backed Thrive Market has no physical stores and as mentioned above, offers only ‘ship-to-home’ products. They focus on organic products (not fresh), supplements, clean beauty, and other items that can be easily shipped to their members. Review are generally fairly positive (see TrustPilot), and although there are complaints, many seem to be happy with the customer service. Spud would be a somewhat similar equivalent in the Canadian market (organic+ focus), but they offer delivery.

Amazon Fresh

• Remember that Amazon bought Whole Foods in 2017, so part of the Amazon Fresh value prop is the delivery tie-in to the Whole Foods ‘distribution’ of physical stores, offering one and two-hour delivery for a fee. Additionally, Prime Members are able to purchase off Amazon Fresh and have it delivered to their home. Fulfillment is done by Amazon employees. Reviews across many sites indicate a dissatisfaction with various levels of the service.

Walmart+ and Spark

• Walmart offers an on-demand delivery service to Walmart+ members that are fulfilled and delivered by Spark drivers, not dissimilar to the Instacart model. Reviews across many sites indicate a significant level of dissatisfaction with the grocery delivery service.

Food Delivery Services

• Uber, Doordash, and virtually all major food delivery services have expanded into grocery in the last several years. Through an analysis of the reviews of many of the pureplay ‘grocery delivery’ services listed above, we can see that many dissatisfied customers will switch to a food delivery service (gig economy model) to get grocery delivery. But those services don’t always get glowing reviews either, so it may be temporary.

Dark Store Competitors

• Those ‘dark store’ competitors that survived the bloodbath in the market after the pandemic restrictions were lifted and the market peaked (mid to late 2021) may be able to start competing in local niches in the market if they can offer a competitive service (given the tight margins) and good customer service.

Instacart Market Share (Grocery Delivery)

There is a lot of discrepancy in different reports on Instacart’s market share relative to the other big players, but the above-linked research seems to paint a good picture of the current market.

The expected Rule of 3s likely points to heavy competition among those top players, with some uptrends noted for the food-delivery players. How this plays out over the mid-term will be dependent on a multitude of factors.

Summary of Instacart Business Model Analysis

The takeaway from all of the above is that:

• Instacart has done something epic in a lot of ways, which is to build a scalable and profitable business model in the ‘grocery delivery’ sector. This is very impressive if we think back to not only WebVan in the Dot-Com bubble, but all the other “e-grocers” who failed after the COVID boom
• Instacart Ads leads to not only a material revenue stream for the company, but a sort of “buffer” against their core transactional business model as competition increases
• Nevertheless, there are doubts about the whole ‘delivery’ model for Instacart if the CX (Customer Experience) continues to be unpredictable; there seems to be a large enough % of members who remain loyal based on a cursory look at the Cohort data, but New Customers may be churning at a progressively quicker rate
• The business model could start to come under pressure if loyalty and active engagement across the member base declines; competition is fierce, and we saw the emergence of the ‘promiscuous consumers’ in the Food Delivery space where they use multiple apps at once

In the Food Delivery space, we have seen ‘promiscuous’ customers using multiple different Food Delivery Apps. A lack of customer loyalty would create big problems long term for eGrocers, so we will need to maintain a close eye on how app usage plays out over time in relation to customer loyalty.

BMi – eGrocery

But now that the company is profitable and about to load the war chest with more capital in the IPO, they will likely start to make multiple moves to shore up their position as market leaders and prepare to take the top position in the ‘future of grocery’ market opportunity.

Grocery is the largest category in all of retail, with an annual spend of approximately $1.1 trillion in the United States in 2022. Despite the size of the market, grocery has historically been significantly slower to move online compared to other consumer categories. Online grocery penetration took 10 years to triple from 1% of total grocery sales in 2009 to 3% in 2019 and just three years to quadruple to 12% in 2022. Market penetration could double or more over time.

S1 – pg. 1

As we can see in the end-to-end business model analysis, Instacart pioneered the model that is a hybrid B2C/B2B model with a reliance on technology and a partial gig-economy workforce. Many other competitors are now copying their model, but concerns remain around customer loyalty relative to CBCV-type models.

This means there will be openings in the market for ‘niche competitors‘ inevitably, simply because people will pay more to have a high-quality delivery service. But the platforms like Instacart are likely to emerge as the dominant players because of their ability to raise capital and rapidly scale the offering into new markets.

More Grocery Business Posts

Business Model Innovation – eGrocery

Thrive Market Membership + Business Model

Business Model Trends – Dark Stores

CBCV – Customer Based Corporate Valuation