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2017 IPO Prospects: Instacart Getting Ready to Deliver on the Stock Exchange

Posted on Wednesday, Apr 5th 2017

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According to a recent report by Food Marketing Institute and Nielsen, the online grocery shopping market is expected to grow five-fold over the next decade. American consumers will spend more than $100 billion on food-at-home items by 2025 compared with $20.5 billion in 2016. The number of shoppers buying groceries online has already increased from 19% in 2014 to nearly a quarter as of 2016. It is expected that by 2025, more than 70% consumers will be shopping for groceries online. The industry has attracted the likes of Amazon and Google, both of which have their versions of grocery shopping services. Then, there are others like San Francisco-based Instacart that focuses only on this market. After Snap’s successful recent IPO, analysts believe that Instacart may now be next on the table.

Instacart’s Offerings

Instacart was founded in 2012 by former Amazon software engineer Apoorva Mehta and Max Mullen. Instead of an online marketplace, Instacart operates a grocery delivery service that allows customers to browse online catalogs of grocery stores and schedule the deliveries directly to their homes. The company was initially set up as Maplebear and operated same-day grocery deliveries. For certain markets, it also offered deliveries within the hour. Since then, the company has expanded to allow customers to shop more than 500,000 items from local stores. It has partnered with over 135 chains including Safeway, Whole Foods, Super Fresh, Harris Teeter, Shaw’s, Mariano’s, Jewel-Osco, Stanley’s, and Costco to service in 35 markets. Besides groceries, it has also expanded into other products such as wine and pet supplies.

Instacart manages its cost model by hiring contract workers to do the shopping and delivery of the goods purchased. It also allows its customers the option of becoming part-time workers to offer these services.

Instacart’s Financials

Instacart earns revenues from three streams. First, it charges a fee directly from customers in the form of a delivery fee or a monthly subscription charge. The delivery fee on the goods depends on the size of the order and the delivery time that the consumer chooses. Like Uber’s surge fee, Instacart too has a Busy Pricing fee that applies in addition to the delivery fee during high-demand delivery times. Standard delivery prices range from $5.99 an order. Instacart also allows users to opt for a subscription based service called Instacart Express at $149/year. Instacart Express subscribers get unlimited 2-hour delivery service.

Second, through its tie-ups with retailers, it earns revenues based on the size of the orders. Finally, it earns revenues through advertisements and promotions of consumer packaged goods. Its advertisement revenue is now the fastest growing revenue model and has tie-ups with nearly 160 partners for these services.

Instacart does not disclose its financials. Its revenue is estimated to have grown to $100 million in 2015 and to nearly $600 million in 2016. Its profitability figures are unknown as well. It claims that it has been profitable in certain markets.

It has been venture funded so far with $674.8 million in seven rounds from investors including Andreessen Horowitz, Canaan Partners, Comcast Ventures, Dragoneer Investment Group, Khosla Ventures, Kleiner Perkins Caufield & Byers, Sequoia Capital, SV Angel, Thrive Capital, Whole Foods, and Valiant Capital. It recently raised $400 million this year at a valuation of $3.4 billion. An earlier round held in December 2014 valued Instacart at $2 billion. It plans to use the new funds for market expansion.

Instacart is expected to go public this year. Last year it went from 18 to 35 markets. It is expected to repeat the performance this year. It is, however, facing tough competition from bigger giants like Amazon’s AmazonFresh grocery delivery and Prime Now services. Like Instacart, Prime Now also sends people to hand-pick grocery items at stores. But for the moment, Instacart has a wider partnership network than Prime Now, which works in its favor. But Instacart does not have the deep pockets that Amazon and Alphabet have.

At the beginning of the DotCom bonanza, one of the most famous flame-outs in history was that of Webvan. Like Instacart, Webvan was an online grocery business that became rather well known for its dot-com excess era blunder. It has had several post-mortems conducted on its collapse which reveal some glaring mistakes that the company made. Webvan’s biggest problem was that it failed to realize that it needed to make money. It offered home delivery for higher quality of products at super store prices and built a fulfilment system from scratch. It offered capabilities like real time inventory tracking and delivery confirmation capabilities. All of this came at a high cost without matching revenues. Instacart is doing things differently. It is leveraging existing infrastructure of grocery stores and is focusing on delivery and customer service. It also realizes the importance of a financial model and is working on revenue streams that go beyond a delivery fee. I think Instacart has a better chance of making it than Webvan ever did. Let us see!

Photo Credit: lizasperling/Flickr.com

This segment is a part in the series : 2017 IPO Prospects

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