September 18, 2023
Instacart’s plan to go public means there is a great deal of valuable new information available on its size, performance, and strategy that was previously unavailable.
Unfortunately, this information is sprinkled throughout a 399-page S-1 document filed with the SEC!
To spare you from having to wade through that document, we did the work to identify what’s relevant and interesting for eCommerce leaders inside consumer brands.
Today’s report will provide some foundation for understanding how it reports its business, as well as unpack its growth trajectory versus peers.
In Part 2, we explore its advertising business.
Let’s dive in…
Instacart’s Business Model
Instacart operates a four-sided marketplace that includes Consumers, Shoppers, Retailers, and Brands:
- Consumers use Instacart to order groceries online
- Shoppers are utilized to pick, pack, and deliver goods
- These goods come from retailers’ stores
- Brands manage their product content and invest in retail media to acquire customers on the platform
Through the Instacart Marketplace, its team of 600,000 contracted shoppers fulfill online orders (primarily grocery) for delivery or pickup at 80,000+ retail locations across 1,400+ partnerships with national, regional, and local retail banners.
Many retailers rely on Instacart for not only the Shopper network, but also the digital traffic it brings to their storefront and the technological expertise it offers in enabling an omni-channel model.
In addition, the Instacart Enterprise Platform offers a variety of eCommerce and fulfillment capabilities for retailers’ owned and operated eCommerce sites and stores.
Instacart also operates its retail media network, Instacart Ads, with 5,500+ brands investing in advertising placements on the Instacart marketplace, translating to the average brand spending $129k on the platform in 2022.
This relatively small average amount suggests the majority of advertising dollars are coming from the largest CPGs spending millions, while a long tail of brands is spending a small amount.
Historically, brands have liked Instacart for its impressive reach across many retailers, strong reporting, and continued innovation in the areas of ads. In addition, Instacart provides a great way for brands to reach coveted higher income shoppers:
Even brands that did not make Instacart a priority early on realized that their products were listed nonetheless, and they thus needed to at least monitor the platform to ensure their content looked good.
All of these elements remain largely true, but the industry has adjusted in two fundamental ways since the early days of Instacart:
- Digital, including building a retail media revenue stream, is now a strategic priority for every grocer, and many are concerned partnering with an intermediary like Instacart is risky over the long term
- Brands have dozens of new media networks to choose from that have launched since 2020, making it a more competitive field for CPG media budgets
Instacart positions itself as “the leading grocery technology partner” with a vision of “building the technology that powers every grocery transaction”.
While it does offer delivery services for non-grocers, it seems almost 100% committed to the grocery category.
Retailers outside grocery must be wondering about their future with Instacart considering this positioning. Similarly, brands outside grocery will likely be less inclined to focus on Instacart as a retail media platform because of this grocery focus, at least in the near term.
Revenue, GTV and Other Need-to-Know on Instacart’s Reporting
Instacart segments its business into two buckets:
- Transaction Revenue (71% of revenue): Service, delivery, and Instacart+ membership fees paid by consumers, as well as service fees paid by retailers
- Advertising and Other Revenue (29% of revenue): Primarily retail media revenue from brand advertisers
Both Transactions and Advertising are growing quickly in 2023, up 34% and 24%, respectively through the first half of 2023. Advertising has become a bigger mix of Instacart’s business over the years, growing 9 percentage points since 2020 as it has benefited from the significant retail media tailwinds in the market.
Another relevant metric Instacart reports is Gross Transaction Value (GTV), which reflects the value of goods sold through Instacart.
GTV includes product prices, taxes, customer tips, membership fees, and any other fees or costs incurred by the consumer for orders completed through Instacart Marketplace and the services part of Instacart Enterprise Platform.
This metric serves as a read on underlying consumer demand on Instacart, while revenue, which can vary significantly from GTV is the best read available for how Instacart is doing capturing that consumer demand from a financial perspective.
For example, unlike revenue growing 31% year to date, GTV has only grown 4%, decelerating from 16% Y/Y in 2022. GTV is under-pacing Transaction Revenue as it doesn’t include the revenue benefit from an increased batch rate, reduced shopper incentives, customer fee optimizations, and reduced customer appeasements and refunds compared to a year ago. Similarly, GTV does not get the benefit of greater ad spend.
Year-to-date growth lags omni-enabler and online grocery peers
We compared Instacart’s GTV to the Stratably eTailer index comprised of 14 pure players spanning marketplaces (like Amazon and Wayfair), DTC platforms (Shopify and Big Commerce), and other Omni-Enablers (DoorDash and Uber Eats).
For context on size, Instacart’s $28.8bn GTV (2022) puts it towards the top of the index, roughly 3x the size of the index median. Looking at its Omni-Enabler peers specifically, Instacart is comparable in size to Uber Eats’ Gross Bookings in the US and roughly half the size of DoorDash’s Gross Order Value.
While Instacart slightly outpaced the index average in 2022, growth has slowed this year to 4% compared to 12% for the index, 10% for Uber Eats and 24% for DoorDash.
Omnichannel players with significant exposure to grocery, like Walmart (up 25% YTD), Kroger (up 14%) and Sprouts (estimated to be up 12%), are also growing much faster than Instacart.
Consumers are buying fewer items per grocery order and shifting towards lower-priced product categories in response to macroeconomic pressures.
Instacart is likely feeling this to an even greater extent given consumers can face higher product prices, delivery fees and membership fees on the platform compared to relative to other online grocery options seeing faster growth, such as Walmart’s and Kroger’s store pickup options.
Instacart (and others) expects the macroeconomic impacts to continue in the near term, but still feels optimistic on its long-term growth prospects based on further expansion of eCommerce penetration and the unique value it provides customers, retailers, brands, and shoppers.
Its revenue growth strategies for the future include:
- Attract New Customers and Expand Use Cases:
- Grow online penetration and increase customer access
- Expand offerings, use cases, and selection
- Grow Instacart+ membership program
- Offer greater personalization and improved customer experience (through AI)
- Deepen Offerings to Retailers:
- Expand use cases and capabilities and expand beyond grocery
- Pursue opportunistic acquisitions that bolster technology and capabilities
- Pursue international opportunities
- Increase Brand Success and Support Emerging Brands:
- Secure greater advertising investment from brands
- Add more emerging and non-grocery brands
- Develop new advertising offerings
- Expand advertising technology to more retailers’ sites
Sound structural economics with Advertising a tailwind to profitability
Instacart’s operating profit turned positive in 2022 (+2% margin) and hit +18% margin in 1H23. This may be surprising to some as digital-first grocery platforms have generally gotten a bad rap regarding profitability and overall business viability.
The company has been able to grow profits at a faster rate than Gross Transaction Value (GTV) through improving fulfillment efficiency and its growing advertising business.
Reaching profitability has been no easy feat for Instacart considering grocery’s razor thin margins. There is only so much a grocer can be expected to pay for omni-enablement services even when considering incremental sales opportunities.
Similarly, consumers have been under greater pressure from inflation, limiting Instacart’s ability to charge higher prices on items and/or collect more fees to drive profits.
Thus, advertising is a significant component of this profitability trend.
For instance, using digital advertising peer operating margins as comparables, advertising is estimated to be accounting for at least half of Instacart’s profits in the first half of 2023.
In addition to advertising, there are a few key profit levers available to Instacart most pertinent to brands:
- Large Average Order Value (AOV): $110 AOV makes for favorable economics compared to other omni-enablers with basket sizes closer to $30.
- Multiple Use Cases and Fulfillment Options: Instacart helps consumers across multiple trip types (like weekly shop, convenience and bulk stock-up) with multiple fulfillment options (like pickup, same day delivery and no rush delivery). This has increased engagement and order frequency, and therefore profitability.
- Capital Efficiency: Instacart doesn’t own inventory and doesn’t have a large physical footprint which allows it to avoid high costs and capex vs different online grocery models (e.g. Amazon, Gopuff, Getir, HelloFresh, etc.).
So should brands be focused on Instacart?
While Instacart’s not the fastest growing online grocery platform at the moment, it drives a significant amount of online grocery GMV, has a leading-edge advertising platform, and is positioned to accelerate growth as consumer headwinds ease. Further, Instacart is now investing more heavily in customer acquisition than it did in the past to reaccelerate growth.
What brands can expect from Instacart:
- Continued innovation within advertising
- Emerging and non-food brands: greater attention than what you may have received in the past
- Established brands: potential increase in competition if emerging brands increase ad budgets and focus
- Opportunities to expand internationally
- Potentially less attention to retailers and brands outside of grocery