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this is not quite the right question to ask, because it assumes that the delivery business is the revenue driver for instacart, and that for instacart to win, t

this is not quite the right question to ask, because it assumes that the delivery business is the revenue driver for instacart, and that for instacart to win, they need to be better at delivery than the grocery store. it's very hard to make such a logistics business work in the last mile because it's so inefficient. grocery stores know this, which is the reason they are reluctant to implement such services themselves, not because they afraid of innovation (rather, lots of pricing innovation happens in grocery stores, to squeeze what little margin they can out of the value chain). companies like fedex and ups subsidize last-mile through their much more efficient long-distance logistics operations, which people are willing to pay more for. the delivery service is actually a loss leader for instacart's underlying business, which is influencing purchase decisions through their app and getting paid for it. this is where brands compete with each other (just like shelf space in the store, which they also pay for), so it's where the money is. instacart also has fantastic shopping data tied to individual accounts that they can monetize in a number of ways. and then there is a bit of a winner-take-all element in that grocery stores are unlikely to want to integrate with more than one such service. this last part is where the valuation comes from - it's a bet that instacart can become critical marketing infrastructure for the grocery industry. like many others, i'm skeptical because it's a risky strategy, but if they pull it off, they get a big payday.

alehul 10y ago
Off-topic, but you seem to have a really educated perspective in this sector. I'm interested and working on something in it with a lot of potential (hopefully) but lack experience. You don't have your email listed, but I'd love to get in touch if you could email me (in my profile). Thanks!
- clairity 10y ago
  sure! i have been working on the "future of work" problem and so have thought a bit about the business models of on-demand companies like instacart (relative to what they pay their workers). and i've been lucky enough to have people with interesting perspectives to talk to about such things.
raiyu 10y ago
This seems a bit left field. If you were a $100MM startup I could buy this argument but at $3.4B you better believe that their valuation is tied to their gross volume of goods and revenue moving through their platform. Which is why the recently announced a change to tipping, where it would no longer be hanlded separately but instead as part of the regular checkout so as to make their revenue numbers look better. They could certainly look into an advertising model for virtual shelf space, but that will be a significantly smaller amount of money than what they are doing in grocery delivery. This is the same play as Seamless/Grubhub, and while they have a "promoted" listing which generates revenue, the majority of their revenue still comes from creating and order and doing the delivery. The real benefit to Instacart from an investor perspective is that they are taking a distributed market and consolidating it into one single player. So while some stores may do their own delivery, by consolidating that space into a single player they are able to create tremendous volume. Now, at 33% the value of whole foods that's a different matter. But there are some attractive pieces to Instacart's revenue story. They don't stock inventory, so there aren't many carrying costs, they are charging 20% on the order which means they directly benefit from customers spending more and you can quickly see that their immediate revenue model assuming they can keep costs under control is definitely enough to justify the price. The real question is how much money they are losing and if they are able to become profitable in the long run, but that will be a question that is decided well post IPO.
- misterbowfinger 10y ago
  So while some stores may do their own delivery, by consolidating that space into a single player they are able to create tremendous volume. OP's point was that shoppers typically shop at 1-2 grocery stores. Seamless/GrubHub is different because people are more likely order from several restaurants across time. clairity makes an astute point that Instacart's personalized data is more valuable than any single grocery store's data. and competing on "store shelves" allows them to negotiate with brands directly, and totally circumvent the grocery stores. .... but in order to do that, they need to capture the market, and they need their operating model to work well for long enough to meet that goal
kitcar 10y ago
>The delivery service is actually a loss leader for instacart's underlying business, which is influencing purchase decisions through their app and getting paid for it If that were true, wouldn't a heck of an easier approach have been to setup an "ad network for retail delivery apps"? I think you might be underestimating both the difficulty of the logistics side of their business, and therefore its value as well. I've never really looked into Instacart (Not available here), but I imagine a more likely Instacart investment thesis is "if local businesses were given the option to not have to manage their delivery fleet, with minimal impact on other parts of their business, would they switch? + How much can we reduce the cost of local delivery due to scale/volume, and therefore is a monopoly position in local delivery achievable?
- clairity 10y ago
  i agree with you that the logistics problem is incredibly hard but we may be disagreeing on whether instacart has cracked the problem (or even can). having talked to shoppers (instacart's workers) in the past, i don't believe they have solved the logistics challenge yet. their recent tips fiasco tells me that they're still gross margin negative and needed to fudge those revenue numbers into fitting with this valuation. it's certainly possible that they have a credible story around how they get operationally profitable with the delivery business, but that's a margin-limited business that i don't think investors will get excited about. data and services are relatively high-margin businesses and that's why i think that's the play here. but i agree that whoever solves the very hard last-mile logistics problem is going to be fabulously well-positioned (amazon, walmart, fedex, ups & uber seem to be the leading contenders). thinking that scale/volume will solve the problem is enticing, but so many companies have chased that holy grail only to fall short that i'm not sure that it isn't a mirage.
k-mcgrady 10y ago
>> it's very hard to make such a logistics business work in the last mile because it's so inefficient. grocery stores know this, which is the reason they are reluctant to implement such services themselves Home delivery has been a standard offering from all major supermarkets in the UK for 5-10 years now. It's available in built-up areas and cities, as well as rural villages. They are able to do next-day delivery and give you a 1 hour delivery window. Groceries are the same price and delivery ranges from £1-5 depending on the delivery window you select. I really don't see how Instacart could compete with that if Wallmart and the others start to offer it in the US.
- Accacin 10y ago
  Yeah it's odd that people are talking about it like this when it's 'bog standard' in the UK for a supermarket to offer home delivery.
pbreit 10y ago
Couldn't a vertical play compete effectively?
- clairity 10y ago
  it's possible, verticalization can give a cost advantage, but it also opens you up to extra customer service expenses, so i'm not sure that that's enough to overcome the expense (haven't tried to do the math though). as k-mcgrady notes in a nearby comment, groceries do home delivery in other countries like the UK, but the cost of delivery is probably now well baked into the cost of groceries. i haven't looked into how that developed - maybe delivery was successfully positioned as a premium offering with a larger surcharge and they moved down market over time and moved to a nominal surcharge (£1-5 most likely doesn't cover the cost). here in the US, there's a bit of a first mover problem since no one wants to unilaterally raise grocery prices and a delivery surcharge limits growth of the service. the other disadvantage of verticalization is that it limits access to consumer data. an aggregator like instacart will have access to comparative consumer data across stores and i think that should be far more valuable given how competitive the consumer products space is.

alehul 10y ago

Off-topic, but you seem to have a really educated perspective in this sector. I'm interested and working on something in it with a lot of potential (hopefully) but lack experience. You don't have your email listed, but I'd love to get in touch if you could email me (in my profile). Thanks!

clairity 10y ago
sure! i have been working on the "future of work" problem and so have thought a bit about the business models of on-demand companies like instacart (relative to what they pay their workers). and i've been lucky enough to have people with interesting perspectives to talk to about such things.

raiyu 10y ago

This seems a bit left field. If you were a $100MM startup I could buy this argument but at $3.4B you better believe that their valuation is tied to their gross volume of goods and revenue moving through their platform. Which is why the recently announced a change to tipping, where it would no longer be hanlded separately but instead as part of the regular checkout so as to make their revenue numbers look better. They could certainly look into an advertising model for virtual shelf space, but that will be a significantly smaller amount of money than what they are doing in grocery delivery. This is the same play as Seamless/Grubhub, and while they have a "promoted" listing which generates revenue, the majority of their revenue still comes from creating and order and doing the delivery. The real benefit to Instacart from an investor perspective is that they are taking a distributed market and consolidating it into one single player. So while some stores may do their own delivery, by consolidating that space into a single player they are able to create tremendous volume. Now, at 33% the value of whole foods that's a different matter. But there are some attractive pieces to Instacart's revenue story. They don't stock inventory, so there aren't many carrying costs, they are charging 20% on the order which means they directly benefit from customers spending more and you can quickly see that their immediate revenue model assuming they can keep costs under control is definitely enough to justify the price. The real question is how much money they are losing and if they are able to become profitable in the long run, but that will be a question that is decided well post IPO.

misterbowfinger 10y ago
So while some stores may do their own delivery, by consolidating that space into a single player they are able to create tremendous volume. OP's point was that shoppers typically shop at 1-2 grocery stores. Seamless/GrubHub is different because people are more likely order from several restaurants across time. clairity makes an astute point that Instacart's personalized data is more valuable than any single grocery store's data. and competing on "store shelves" allows them to negotiate with brands directly, and totally circumvent the grocery stores. .... but in order to do that, they need to capture the market, and they need their operating model to work well for long enough to meet that goal

kitcar 10y ago

>The delivery service is actually a loss leader for instacart's underlying business, which is influencing purchase decisions through their app and getting paid for it If that were true, wouldn't a heck of an easier approach have been to setup an "ad network for retail delivery apps"? I think you might be underestimating both the difficulty of the logistics side of their business, and therefore its value as well. I've never really looked into Instacart (Not available here), but I imagine a more likely Instacart investment thesis is "if local businesses were given the option to not have to manage their delivery fleet, with minimal impact on other parts of their business, would they switch? + How much can we reduce the cost of local delivery due to scale/volume, and therefore is a monopoly position in local delivery achievable?

clairity 10y ago
i agree with you that the logistics problem is incredibly hard but we may be disagreeing on whether instacart has cracked the problem (or even can). having talked to shoppers (instacart's workers) in the past, i don't believe they have solved the logistics challenge yet. their recent tips fiasco tells me that they're still gross margin negative and needed to fudge those revenue numbers into fitting with this valuation. it's certainly possible that they have a credible story around how they get operationally profitable with the delivery business, but that's a margin-limited business that i don't think investors will get excited about. data and services are relatively high-margin businesses and that's why i think that's the play here. but i agree that whoever solves the very hard last-mile logistics problem is going to be fabulously well-positioned (amazon, walmart, fedex, ups & uber seem to be the leading contenders). thinking that scale/volume will solve the problem is enticing, but so many companies have chased that holy grail only to fall short that i'm not sure that it isn't a mirage.

k-mcgrady 10y ago

>> it's very hard to make such a logistics business work in the last mile because it's so inefficient. grocery stores know this, which is the reason they are reluctant to implement such services themselves Home delivery has been a standard offering from all major supermarkets in the UK for 5-10 years now. It's available in built-up areas and cities, as well as rural villages. They are able to do next-day delivery and give you a 1 hour delivery window. Groceries are the same price and delivery ranges from £1-5 depending on the delivery window you select. I really don't see how Instacart could compete with that if Wallmart and the others start to offer it in the US.

Accacin 10y ago
Yeah it's odd that people are talking about it like this when it's 'bog standard' in the UK for a supermarket to offer home delivery.

pbreit 10y ago

Couldn't a vertical play compete effectively?

clairity 10y ago
it's possible, verticalization can give a cost advantage, but it also opens you up to extra customer service expenses, so i'm not sure that that's enough to overcome the expense (haven't tried to do the math though). as k-mcgrady notes in a nearby comment, groceries do home delivery in other countries like the UK, but the cost of delivery is probably now well baked into the cost of groceries. i haven't looked into how that developed - maybe delivery was successfully positioned as a premium offering with a larger surcharge and they moved down market over time and moved to a nominal surcharge (£1-5 most likely doesn't cover the cost). here in the US, there's a bit of a first mover problem since no one wants to unilaterally raise grocery prices and a delivery surcharge limits growth of the service. the other disadvantage of verticalization is that it limits access to consumer data. an aggregator like instacart will have access to comparative consumer data across stores and i think that should be far more valuable given how competitive the consumer products space is.