Instacart has thrived in the pandemic. But will it last?
160,000 businesses closed down between April and September of last year, according to a Yelp study. That's around 800 closures a day. By November, the US had lost ~25% of its small businesses and shed more than 22 million jobs.
Yet Instacart (and other tech firms powered by gig workers) thrived. In fact, it was Instacart's best year.
Growth the VC way: no profit required
Instacart is the second most valuable food delivery service (behind DoorDash) in the US, notching a $17.7 billion valuation after a $200 million investment in October and bringing on Goldman Sachs banker Nick Giovanni as its new chief financial officer.
In the last two years, the company's gig workforce has doubled to more than 500,000 workers. And now more than 500 companies — including Kroger, Aldi, Sam's Club, Publix, and Costco — use Instacart to deliver people anything from laptops to groceries to 46 individual drinks.
But Instacart, like many of its VC-backed peers with billion-dollar valuations, is still in the red. It has only posted a single profitable month in its entire 9-year history, and that was April 2020. So, naturally, Instacart is expected to IPO sometime in 2021.
Aggravated retailers voice concerns
Instacart charges roughly a 10% to 15% commission on each order depending on the retailer, which means retailers often aren't able to turn a profit. And while San Francisco-based Instacart has enjoyed a pandemic-fueled windfall, some retailers are losing their appetite.
In addition to grocery chains like Kroger pushing their own virtual shopping, curbside pick up and delivery options, more retailers — like Festival Foods — are griping about Instacart's steep fees.
Here's Mark Skogen, CEO of Skogen's Foodliner:
We don't think we make money from an Instacart order.
Skogen's operates 33 stores under its Festival Foods brand and began offering its customers Instacart access in 2019.
Additional fees are often passed to the consumer but cut deep into grocery stores' already thin margins. The Hustle rightly notes that Instacart's business benefits from its producing partners' advertising, enabling it to reap additional exposure from free promotion.
But Instacart isn't worried about the enmity. They continue to expand outside of the food delivery industry, and in the last 12 months have signed several new partnerships, including high-profile brands like Sephora, Dick's Sporting Goods, and Staples. Despite the steep commissions, Instacart's share of the online grocery market was about 48 percent in June, up from 30 percent in February.
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Will Instacart's pandemic success be short-lived?
Some are beginning to speculate that tech-driven food delivery businesses are enjoying only a temporary boon. A recent CNN article claimed that Instacart was using a bait-and-switch technique to lure drivers in with big tips, only to modify their amount later. And as vaccinations continue to become available — albeit with a botched rollout — many contend that demand for food delivery services will wane in 2021 and beyond.
We're already seeing many restaurants ditch platforms like Grubhub and DoorDash, which has led to the CEO of Grubhub going on the defensive in an interview with the Chicago Tribune. Restaurant owners cite how the third-party delivery providers often charge about 30% per order, nullifying their ability to make profits.
If you want to ditch Instacart, check out some of these alternatives — including goPuff, Shipt, Rappi, and FreshDirect — or check if your grocery store offers its own virtual shopping option.
What do you think about Instacart's prospects in 2021 and beyond? Should retailers find new solutions? Please share your thoughts.
My rule-of-thumb understanding of restaurant finances pre-2020 is that cost of goods sold is about 1/3 of revenues, real estate is about 1/3, and staff is about 1/3. There's a tiny margin, which can go up the more alcohol is sold.
I do think consumer behavior will be forever changed by the last year, and ordering in via services like Instacart won't go away. If you were to start a new restaurant optimized for that, you'd realize you don't need the front-of-house staff or the expensive real estate. Instacart's 10% to 15% cut could come out of those savings, and you might do as well as you'd have done in the old model. Maybe better!
So, that model may be sustainable for a new type of restaurant, while being unsustainable for most existing restaurants. I really, really miss going to restaurants, and I feel really bad for the restaurateurs who are navigating this period. I hope they are able to bounce back 100% ASAP. But even if they do, I think the new consumer behavior is established (never bet against laziness!) and there will be a growing trend of kitchen-only restaurants opening specifically to sell through the likes of Instacart in a way where the numbers make a lot more sense.
I work Instacart in my free time. It's too bad that these tech companies take such a big commission. I understand it may be necessary for their own overhead, but we may be seeing many more retailer-branded apps. Panera and Starbucks come to mind. The other big players may get into the game, too.
Grocery or restaurant delivery isn't very new. The gig economy may have woken these guys up to the power of online ordering, but maybe we'll see more of these places hire their own delivery drivers again.