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Instacart is getting ready to change things up as they go public, according to The New York Times. After the new CEO, Fidji Simo, took the reins in 2021, “The board of directors asked her to find new ways for the company to earn money.”
Before starting in her role, Simo proposed to Instacart’s board a closer collaboration with grocery retailers. She recommended acquiring startups like Caper, a firm behind an electronic shopping cart that enhances customer and retailer experiences. Acting on her suggestion, Instacart purchased Caper in October 2021 for $350 million. While grocers initially feared competition from Instacart, Simo reassured them of the company’s intention to be partners, not competitors.
Beginning in 2019, Instacart allowed “food brands to pay for better placement in the company’s app. Brands had questioned whether the ads were helping, so Ms. Simo commissioned studies demonstrating their efficacy, two people familiar with the company said.”
Simo also devised a strategy to offer software tools to grocery firms to enhance shopping experiences. Subsequently, she engaged with these companies by visiting them and hosting their executives at her Carmel, California, residence.
Last year, Simo expressed her vision of leading Instacart’s “third act,” emphasizing software tools for retailers and aiming to rival Amazon’s grocery delivery and aid grocery digital transitions.
According to the NYT article, “Nearly a third of Instacart’s $2.5 billion in revenue last year came from its ‘highly profitable’ ads and software division, according to its prospectus. In the first half of this year, Instacart’s $406 million in revenue from ads and software helped propel it to $242 million in profit.”
Instacart is demonstrating how a traditionally unprofitable gig-oriented business can approach public markets by diversifying into more profitable sectors and distancing from its gig-economy origins. The journey wasn’t easy for the company, marked by financial losses and the 2021 departure of its co-founder, Apoorva Mehta, due to board disagreements.
Meanwhile, Uber, Lyft, and DoorDash are some of the most widely used and recognized companies in the digital app realm, but even those companies “have never turned an annual profit.”
Instacart’s co-founder, Mehta, wanted to change that. By using collected data from customer purchases, the app would be able to promote products to its users in the same way Amazon had been doing with its data.
Now, four years after Instacart began selling ads on its platform, their studies concluded that any negative impact on their customers was minimal, so they decided to increase the amount of ads provided.
This may provide some hope for success in advertising, but Instacart still grapples with various challenges. Its dependence on major retailers such as Kroger and Costco poses a risk if they decide to opt for competitors. While last year saw an 18% rise in grocery orders, this year’s first half showed no growth compared to the previous year. This stagnation might impact its advertising business if there aren’t sufficient delivery customers to target with ads.
According to U.S. News & World Report, Jeremy Bohne, the founder of Paceline Wealth Management in Boston, believes Instacart is a major force in grocery technology, collaborating with stores that represent 85% of the U.S. grocery sector. The company is diversifying its model and reducing reliance on delivery by pivoting toward online advertising, which constituted 30% of its revenue last year.
However, Bohne suggests that Instacart’s real competition might be in-store sales, especially during economic downturns.
As Wharton management professor David Hsu told Barron’s, “The ad business is just starting to ramp up and it remains to [be] seen how well it does.” Ultimately, Instacart has made “an ambitious play with a lot of uncertainty.”
BrainTrust
Ken Morris
Managing Partner Cambridge Retail Advisors
Shep Hyken
Chief Amazement Officer, Shepard Presentations, LLC
Nicola Kinsella
SVP Global Marketing, Fluent Commerce
Discussion Questions
Are there other avenues that companies like Instacart should be looking at to increase revenue and profits? If Instacart succeeds with its focus on ads, do you think others will follow suit?
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Instacart is reliant on advertising to drive profit. However, advertising relies on it being a successful delivery company and serving a wide range of customers. This, in turn, relies on it being able to service the large retailers. And therein lies the risk: over time more of those large retailers are likely to want to internalize ecommerce operations and will perhaps move, at least somewhat, away from Instacart. At present, Instacart gets 43% of its gross revenue from just 3 retailers, so the downside is very real. Plus let’s not forget those same retailers are also chasing advertising dollars via their own media networks, putting them into potential conflict with Instacart. I think Instacart has much better prospects than many delivery firms, but it is a firm that is too dependent on other retailers for my liking.
Neil, good point on the concentration of business. That would be a big red flag for professional investors.
Today’s big story is “Instacart is demonstrating how a traditionally unprofitable gig-oriented business can approach public markets by diversifying into more profitable sectors and distancing from its gig-economy origins.”
Meanwhile, DoorDash et. al. are some of the most widely used and recognized companies in gig business models, but even those companies “have never turned an annual profit.” There is a message here. Maybe the business model doesn’t work.
Turning a decent profit has always been the most difficult task in grocery. Instacart is smart to realize that its future is not in clogging up the aisles. But what grocers need to be cautious about is what Instagram is already very good at: data. And data, in all retail but especially in grocery, is gold.
I believe that your customer in retail is your biggest asset, and sharing or giving that data away is a mistake. Disintermediation is the risk here and Instacart is clearly a disruptor. Today it’s ad dollars, tomorrow it’s all of grocery.
Companies like Instacart can focus on B2B services to modernize retail companies and drive revenue. Selling ads, fulfillment and delivery services, data insights and smart carts could protect Instacart’s (and retailers’) margins.
More tech enablers will watch Instacart’s ad performance and prepare to imitate it. Fidji Simo’s Facebook ad background and Instacart’s cross-channel reach set Instacart up for success.
This is a natural move for Instacart. And if those ads include coupons, something that will make their offering stickier – especially in a down market. Google, Meta, Amazon, Walmart, Target…. all make money on ads, and I see no reason why it should be different for Instacart. That said, they’ll have to invest in making sure their ad platform provides a good experience for retailers and brands. The other piece of gold ads would give them would be a lot of valuable data on ad effectiveness which could potentially be monetized as well.
Personally, I think this is a beautiful case study that shows how to take their original model and build off of it. It makes total sense to create ads and promotions based on the customer’s use, just like Amazon does. I applaud Instacart for figuring this out. I’m sure others in this space will be developing their version of this.
Instacart’s foundation is anchored – for better and worse – in delivery and good delivery services expand consumer choice, not limit it. If the company’s focus on ads works, and is sustainable, I would assume its “partners” will attempt top disintermediate it.But, none of this touched the real question which is where is the defined benefit for the consumer? Discounts? Maybe, but I don’t think that’s enough since most ad schemes tend to push products consumers don’t buy. So, color me bearish until Ms. Simo starts talking about research that shows consumers are being offered something they can’t find anywhere else.
There’s a big battle for ad revenue underway, and while Instacart’s primary interface with shopper looks appealing, it’s primary retail partners are unlikely to cede this opportunity.
Though Instacart is delivering profit today from ads, it might struggle in the years ahead. The proliferation of ad networks being rolled out by large companies will, at some point, reach saturation, and all networks could experience challenging headwinds. If I were an investor in Instacart (which I’m not), my interest would be in the data disruption capabilities Instacart should bring to its customers and partners. There are mountains of data in grocery that can be harnessed in innovative ways, and Instacart has already revealed some of its analytical capabilities to the market, which have been impressive. Perhaps they should double down.
I agree with your forecast that we’ll see saturation in the ad networks. It’s becoming standard practice. As the cost increases for basic entry into these ad networks, I think the age-old pattern will repeat itself.
Only the established brands will be able to afford entry.
New brands with more exciting products will find other places (like direct to consumer) to get their products off the ground, attracting consumers to the new platforms where the action is happening.
Instacart is supposedly a home delivery company. Advertising represents a potentially lucrative revenue stream for them but highly dependent on success in their delivery business. The founders should sell when they can.