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INSTACART: Fresh Food Fast

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Crowdsourcing grocery delivery to get it to your door fast

Business Model

“Instacart is building the best way for people anywhere in the world to shop for groceries, solving problems and creating a magical experience for our customers.” 1  Instacart, founded in 2012 by Amazon alum Apoorva Mehta,  provides an on-demand grocery delivery service, collaborating with supermarkets and crowdsourcing personal shoppers to bring customers food from their favorite stores in as little as one hour.  The company is able to deliver value to its three primary constituents – customers, stores, and personal shoppers – because of its strongly aligned business and operating models.  As a result, Instacart is experiencing reported double digit revenue growth, rapid geographic expansion, and plenty of VC investment.

Operating Model

Every element of Instacart’s operating model is thoughtfully designed to drive toward implementing the business model and delivering on the company’s value proposition.  In addition, it has allowed the company to disrupt the food shopping/delivery experience and scale rapidly.  In two short years, Instacart has gained a foothold in 15 key urban markets across the U.S.

Scope/Boundary

While its business model could support any type of brick and mortar retailers, Instacart kept its focus solely on the grocery industry.  Mehta knew that most grocery store and food markets were not well-positioned to deliver this kind of on-demand service to its customers.  Instacart spent three years refining processes and technology to streamline order fulfillment, building the company’s expertise and reputation.  Only now is the company branching out to other retailers – including pilots with Target and alcohol vendors.

Facilities – Or Lack Thereof

Like most companies leveraging the shared economy, Instacart has little to no PPE (no warehouses, vehicles, or heavy equipment.)  This has allowed the company to focus its capital expenditures on developing its processes, technology, and human capital.  Its major competitors, AmazonFresh and FreshDirect, serve as distributors and must build/acquire costly infrastructure to support their operations.

Technology & Processes

The technology and processes are designed to maximize the customer experience.  The website is simple to use, allowing customers to select their local market, search for items, and fill their cart.  Before checkout, the customer can add notes about replacements should any of their items be out of stock.  The customer then schedules their delivery timeframe, ranging from two hours to the next day depending on their schedule.  Once the customer has completed the purchase, the order is then passed along to a personal shopper.  Shoppers are usually dedicated to one store and utilize the Instacart shopper app to quickly locate all items in the order.  Many stores have a designated cash register for Instacart’s use, allowing shoppers to avoid lines.  Finally, the basket is delivered to the customer.  In the past, the shopper delivered the product, but now Instacart is experimenting with dedicated shoppers and dedicated drivers.

The entire throughput time per order has been streamlined to less than 2 hours. According to Mehta, other process improvements are in the works.

Human Capital

Instacart has close to 500 full-time employees, but the bulk of their operations are carried out by their thousands of personal shoppers.  Shoppers are typically underemployed individuals seeking flexible part-time work, such as students or mothers.  They have the potential to earn $15-30 an hour through base salary and shopper tips.  Initially, shoppers were considered independent contractors, not eligible to receive any benefits.  However, as is the case with most companies leveraging the “shared economy,” many contractors felt a lack of loyalty to the company and turnover was high.

Instacart launched a pilot in Boston to experiment converting shoppers to part-time employees. This allowed greater oversight and hands-on training, resulting in higher levels of service, both in quality of selection and efficiency, and a markedly improved customer experience. In June 2015, the company announced that they would make this opportunity available for any employee and anticipated 75% would make the switch.

Quality and User Experience

As a customer myself, I can attest to the easy ordering, laser-fast delivery, outstanding customer service, and perfect selection. Shoppers call to verify replacements and text to let you know they are on the way. Mehta designed the entire operating model to optimize the customer experience.

Conclusion

What I find most interesting about Instacart is that its operating model constantly evolves to better support the business model.  In addition, they have iterated their pricing model several times, as well.  This is the case for many innovative startups, I would imagine, as they pioneer, test, measure, iterate, and improve various aspects of their operations strategy.  However, most companies could benefit from this startup mentality of continuous improvement, flexibility, and adapting to new technology and competition.

9 thoughts on “INSTACART: Fresh Food Fast

  1. I love Instacart! As a mom and full-time student, I can’t possibly explain how much value this service has created for my sanity. I appreciate that they are investing in their human capital by offering part-time positions and benefits to their delivery drivers – I wonder if Uber will take notice and follow suit. It is interesting that Mehta decided to squarely focus the scope/boundary on grocery stores first. The rationale for getting great in one market before expanding is great, but Drizly has already tapped the alcohol delivery service and I wonder if that was a missed opportunity for Instacart to tackle earlier. Overall, I agree that this is clearly a winner. I think they will have to start getting creative to keep their competitive advantage, but they are certainly ahead of the curve. Great read!

  2. While I haven’t yet used Instacart, I love the concept. One criticism I have heard about grocery delivery services, including Instacart, is that produce selection often isn’t to the customer’s standards. There appears to be a conflict in incentives between (i) customers, who only want the highest quality, (ii) grocery stores, who want to minimize waste, and (iii) personal shoppers, who want to maximize volume through speed. Perhaps the solution lies in pricing, both through tipping (as you mentioned) and tiering produce by quality.

    It’s interesting that LaToya mentions Uber. There’s definitely the potential for head-to-head competition as Uber leverages its logistics network to rapidly expand to other verticals, but I actually think this would be a great partnership (or Instacart could be a strong acquisition target for Uber). Their core competencies are quite complementary with Instacart’s ability to quickly and accurately pick and buy groceries, and Uber’s strength in getting cargo from point A to point B through its scale.

    I’d also be interested to see Instacart drive down throughput times on frequently purchased items (potato chips, soda, flour, etc.) by having their personal shoppers carry inventory in their vehicles. I think it would unlock the potential for a lot of impulse orders. It could also function as a substitute to the candy shelves at the checkout for customers who have already placed an order.

  3. In a world that families are getting smaller and smaller, and women are now part of the business world, Instacar’s business model is really appealing. Spending hours per month doing groceries is definitely not a possibility to many people anymore. However, people are still price sensitive and buying online can be considerably more expensive. With Instacart, we can compare prices in different stores (which is impossible to physically do on a regular basis), maximizing the value for the consumers. In addition, Instacart’s “asset-light” operating model is also very efficient, since the company does not need a lot of working capital and capex to fuel its future growth. Congratulation on the post!

  4. Instacart has scaled well and is solving a real pain point (also thanks to the huge investments it has received). The biggest concern I have is that this is a very low margin business with low barriers of entry. Instacart was not profitable as of Jan 2015. The cost of delivery is high and people are not willing to pay high premium for the convenience they get, when a grocery store is usually around the corner. Moving from contractual workers to part-time employees would further hurt their margins.

    Another concern in this shared economy space is the regulatory laws for contractual labor. Like Uber, they can also get in trouble and be asked to provide similar levels of benefits to their freelancers. They would need to work closely with the state government authorities and make sure that they are on the right side of law. Changes in their employment structure can have huge impact on their business model.

  5. I am also a huge Instacart fan, but agree with Palak that the economics of this business (combined with the low barriers to entry) create challenging dynamics at scale. Right now Instacart makes very thin margins on its orders despite marking up the prices on specific SKUs- see this interesting read from the WSJ that breaks down its potential per-order gross margin (http://blogs.wsj.com/digits/2015/01/13/heres-how-instacarts-grocery-delivery-pricing-model-works/). To drive greater profitability, they will need to either increase fees they demand from the grocery stores, increase item mark-ups or raise the ~$3 delivery fee they charge the consumer. Any consumer-facing move risks slowing user growth and impacting retention, which could create the right environment for a new competitor to emerge. Having said that, investors will be looking for Instacart to achieve profitability to support its $1B+ valuation. Ultimately I hope that Instacart’s strong base of loyal customers will convince grocery stores to support the service at a higher fee so business model is sustainable into the future!

  6. As the business scales, focus can also create conflict between host stores and Instacart employees. Imagine a casual grocery shopper meandering down the aisle, but you now have this army of personal shoppers running around with a sense of urgency. At what point do Target stores start noticing a deterioration of their customer experience? The remote distribution warehouses may be too far for Instacart, because it needs to guarantee a fast service. But one option could be to let Instacart personal shoppers work out of a store’s on site inventory store room. But this may require reconfiguration and retooling of the space, and Instacart may be asked to share costs. I love the idea, but remain skeptical about Instacart’s ability to continue avoiding investments in the physical assets it utilizes for its services.

  7. First line typo – “focus on speed can also create…”

    1. This is a great post! It’ll be interesting to see how this story plays out. Scaling off-line is a tough challenge, and we’ve definitely seen elements of this fail among startups that have provided on-demand labor in food and and elsewhere. I’d be curious to know if Instacart has been revenue-generating on net for their grocery partners instead of cannibalizing sales that would have otherwise happened offline.

  8. Thanks Caitlin, I am a big fan of Instacart as well! One other obstacle they face around growth is that certain big retailers (e.g., Trader Joe’s) have banned Instacart from entering their doors because they want to maintain full control over the consumer’s experience and aren’t willing to cede control to a third party service provider. I wonder in the long run how much this strategy would actually hurt TJ’s, and whether Instacart will be able to convince TJ’s to enter a partnership once they are able to gain critical mass of customers.

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