On April 17, Techcrunch reported that Instacart, the Y Combinator alum and grocery startup, could potentially raise a big round of financing that would value the two-year old company at $400M. Instacart, which has raised $10.8M to date, is a web and mobile app for grocery deliveries. With the use of “Personal Shoppers”, customers can order grocery items from local stores as well as big grocery chains such as Whole Foods and Costco. The company operates independently with no requisite affiliation with the stores. Instacart makes money through delivery fees of $3.99/order and by marking up grocery items by as much as 30%. “Personal Shoppers” are considered independent contractors and paid per delivery. It is currently serving San Francisco Bay Area, Los Angeles, New York City, Chicago, Boston, Washington, D.C. and Philadelphia.
My personal experience with grocery deliveries
I first heard of Instacart in March 2013 while living in Palo Alto with a startup, Kalibrr. We used it once because of a discount code; not knowing that grocery items were marked up and despite the company’s promise of delivering within the hour, that was not necessarily the case. We have not used Instacart again after that.
However, I am a big fan of grocery delivery services in general since I dislike grocery shopping and have mostly been car-less while living in metropolitan cities. In New York City, most grocery stores deliver but they still require for you to show up and pick up the items yourselves. Still, it was a convenient way to shop without having to lug the bags around the city. In Boston, I had a great experience with the Peapod grocery service. My only complaint was that I was limited to picking items from Stop & Shop – not exactly my favorite grocery store.
Whether it’s Instacart in Palo Alto, Peapod in Boston or Whole Foods in NYC, the reasons I would use a grocery delivery service are similar across the board:
- Convenience. Without a car, carrying groceries from the store is a pain. Also, grocery stores in big cities are relatively small which makes grocery shopping stressful and time consuming (due to the volume of shoppers).
- Time constraints. There are times when there is simply no time to go to the store and buy the essentials. This can only happen if you have the sudden urge to invite a bunch of friends for a dinner – I’ve been know to do that (at least before motherhood).
- Ease of use. If using the service gives the same amount of headache as simply showing up at the store then it’s not worth it. The headache can come from the time window for the grocery, the in-app user experience, and the quality of the grocery items especially for fruits and vegetables. Except for the time window, I’ve mostly had positive experiences with the services I’ve used.
I actually did not consider pricing, having the belief that the differences were too minimal. That is, until Instacart which I perceived to be too high of a markup for it to be worth the money.
Who are the players in grocery delivery?
With this recent news of Instacart’s impending round of financing, it got me interested in the grocery delivery landscape in the US. Most of us know of Amazon’s determination to dominate the market with Amazon Fresh but it is less well-known that Google is also testing the service. Apart from Instacart, here are the major players so far:
- Amazon Fresh. Initially started in Seattle, WA, it has since expanded to Los Angeles and San Francisco. In order to access the service, customers have to subscribe to Amazon Prime Fresh for $299/year and includes all the benefits of Amazon Prime. Notable features within the subscription includes Dash, a device that allows customers to add items to the grocery list by saying or scanning grocery items. Another feature called Prime Pantry was recently added for heavy and bulky items, though this is also available to Amazon Prime members.
- Google Shopping Express. The same-day delivery service was first introduced in San Francisco and the San Jose peninsula area on March 2013. Customers can shop from big retailers such as Target, Costco, and Whole Foods for $4.99/order after a free 6-month trial. It has recently expanded to Los Angeles but still limited to Google employees.
- Peapod. The company is the oldest of the bunch, which was started in 1989 in Illinois. The company claims to be the world’s first e-commerce only company and has since been acquired by a Dutch company Royal Ahold in 2001. Groceries are from Ahold USA companies: Stop & Shop and Giant Food Stores. The service is available in: Chicagoland; Milwaukee; southeast Wisconsin; Indianapolis, IN; Connecticut; Massachusetts; southern New Hampshire; New York; New Jersey; Maryland, VA; Washington, DC; Philadelphia, PA and southeast Pennsylvania. Customers are charged a per delivery charge which varies on the delivery time window that the customer chooses; averaging around $8/order.
- FreshDirect. First introduced to New York in 2002, the company differentiates itself by delivering organic and locally grown produce as well as freshly prepared meals. It has since expanded to Philadelphia in October 2012. FreshDirect charges $5/delivery.
- Walmart To Go. The service for same-day delivery of general merchandise was launched in October 2012 in Northern Virginia, Philadelphia, Minneapolis and San Jose/San Francisco. It has since included grocery deliveries for Denver, CO and San Francisco. Starting at a minimum order of $30, it charges customers $5-$7/order.
What is the play for Instacart
With the entry of massive companies like Amazon and Walmart, it is difficult to envision the profitability of Instacart. While big companies can leverage their logistics and play with razor thin margins, Instacart has to mark up grocery items to remain profitable; a move that might scare away price-sensitive customers. Scalability becomes a problem as well since the company relies on contractual foot-runners to do the deliveries. Complaints regarding delivery times can only increase as they expand and acquire more customers. These are definitely top of mind for the founder and CEO, Apoorva Mehta, who used to work in Amazon’s fulfillment optimization engine.
There’s also a question on the lack of affiliation with grocery companies. At the moment, the startup is still under the radar but would Whole Foods eventually catch on and crack down on the Personal Shoppers and Instacart’s pricing? If the grocery chains enforce a revenue affiliation program with Instacart, that could further cut into the company’s profits.
With these questions in mind vis-a-vis Instacart’s potential valuation, investors might be gearing Instacart as an acquisition target rather than as a viable business model. A company like Amazon with ambitions of dominating the $500B grocery industry can certainly leverage the company’s rapid expansion in major cities (7 cities in 2 years), growing customer base, and its last-mile delivery system with their Personal Shoppers. It doesn’t hurt that the CEO/Founder is a former Amazon exec.
May 9, 2014 update: Instacart is now in Seattle; Google is out of beta in LA; and Amazon Fresh is also now in LA.