Can Instacart Keep Delivering After The Pandemic?
poorva Mehta pauses for a moment to consider the past ten months of chaos. A year ago, he was running Instacart as a popular app that was gaining momentum. Then last spring came a massive Covid-fueled boost. Things quickly morphed into a nightmare: striking shoppers, inventory shortages and the challenge of meeting the kind of blistering demand Mehta wasn’t expecting until at least the next presidential election.
As it turns out, the tribulations of March were just the beginning. As the country’s leading grocery delivery app, Instacart is now besieged by a growing number of well-funded competitors. Mehta himself is under pressure to justify a valuation that more than doubled during those 10 months to $18 billion, a highly anticipated public offering and a strategy aimed at proving Amazon—when it comes to supermarkets, at least—has it all wrong. Understated and wonky, Mehta deftly sidesteps any hint of urgency.
“I’m playing a 20-year game,” he says, sporting a T-shirt in his sun-filled home office north of San Francisco, when asked about Instacart’s IPO and the CFO he hired away from a 20-year stint at Goldman Sachs to help with it. He happily shifts the conversation to the long term. “Grocery is the largest retail category in the world, and yet it’s still not digitized. We’re excited by what the future looks like.”
That future is one in which traditionally tech-averse supermarkets are transformed into digital fulfillment outfits that stock, promote and package groceries for pickup or delivery. For customers who order $35 or more, Instacart charges as much as $9 per delivery—or free delivery with an annual $99 subscription. The grocers pay too, forking over an average 10% per order, a painful proposition in an industry where net margins have historically averaged 2% or less. Mehta says the high fees are necessary to cover the hundreds of Instacart engineers, designers and technicians toiling to turn a purely physical transaction into an almost entirely virtual one. So far he has signed on 600 retailers including Costco, Wegmans and Eataly.
They can use the help. Years of decreasing profits have fueled a spate of mergers, bankruptcies and consolidation. The sector’s wafer-thin margins don’t easily support Instacart’s fees, forcing many grocers to inflate their prices on the app. At the same time, though, no one can ignore the sudden shift feeding Instacart’s rise: Online grocery purchases have jumped to 10% of the $1 trillion industry, more than triple what they were at the end of 2019. Of course, that hypergrowth underscores one of the biggest risks of all: that significant chunks of Instacart’s customers will return to picking out their own produce once the pandemic passes.
“We saw five years of growth in a matter of five weeks,” says Mehta, a former supply-chain engineer for Amazon and member of the 2015 Forbes 30 Under 30 class. “And the growth has continued. We grew over 300% year-on-year.”
He can blame—and thank—the coronavirus for that. During the first two months of pandemic panic buying, Instacart was delivering more food than Walmart, America’s largest grocer, according to data firm Second Measure. At the time, it was second only to Amazon. The number of chains Mehta serves increased by 60%. There are now 500,000 Instacart shoppers cruising more than 45,000 stores across the U.S. and Canada; revenue has hit $1.5 billion.
Each purchase is becoming more valuable, too. According to an investor presentation obtained by Forbes, Instacart was grossing more than $3 per order by mid-2020, up from a loss of more than $2 per order at the start of 2019. Since the pandemic started, Mehta has delivered three consecutive quarters of positive cash flow as measured by earnings before interest, taxes, depreciation and amortization. That’s a first for the company, which was losing a whopping $15 per order as recently as 2015.
Of course, turning a profit is easier when you’ve outsourced the sizable real estate footprint normally required to operate a food business. Instacart has no warehouses, no stores, no freezers, no delivery trucks—pretty much no physical assets at all. What it does have is the intellectual property that powers its app and the people who maintain it. All that existing (and expensive) brick-and-mortar infrastructure is paid for by supermarkets, while Instacart’s hourly delivery people are contract workers who pay for their own transportation and their own health care. This setup has helped Mehta raise $2.5 billion in eight years from blue-chip investors that include Andreessen Horowitz, Sequoia and Khosla Ventures. Mehta holds an estimated 10% stake in the firm, making him a billionaire.
