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Good morning! It's Friday, September 29th. Instacart IPO’d last week and dropped in value despite having strong fundamentals. Let’s take a look at Instacart’s business model and how it grew to dominate the delivery industry.

THE FEATURE

Instacart Is Winning With Their Asset-Light Business Model

During a funding round two years ago, Instacart was valued at $39B, but the company IPO’d last week at just $9.3B, and its market cap has since declined to $7.9B.

Instacart’s dismal opening isn’t an outlier– the Federal Reserve raising borrowing costs to tame inflation has caused many high-flying startups to lower their valuations.

However, unlike most other startups, Instacart has a rock-solid business model that generated $428M in profits last year alone! So, let’s break down Instacart’s success and figure out how they monopolized the grocery delivery industry.

What’s The Business?

Following 20 failed ideas, Instacart founder Apporva Mehta finally had his lightbulb moment in 2012 when he opened his fridge to see nothing but hot sauce. Mehta realized there was a massive hole in the e-commerce industry: you could purchase everything online except for groceries.

By the summer of 2012, Mehta had coded a working prototype for Instacart and had submitted multiple funding requests to startup accelerator Y Combinator. Mehta finally secured $225K in funding after using Instacart to deliver a 6-pack of beer to the president of Y Combinator.

Today, Instacart controls the lion’s share of the third-party grocery delivery industry, delivering 73% of all intermediary sales. For comparison, Doordash comes in second with 10%, Uber in third with 5.9%, and all other third-party services make up the remaining 9.7% of intermediary deliveries.

Though Instacart didn’t have a successful IPO, many market experts believe this is the result of external economic conditions and changing investor sentiments on the tech industry. That’s because the company has been massively successful in the last 12 months with $2.9B revenue at a 25.66% profit margin (basically unheard of among gig economy companies).

How They Win: Making Stakeholders Happy

Instacart’s 25.66% profit margin is a result of its asset-light model. It doesn’t need trucks or warehouses to operate, instead leveraging an existing network of grocery stores and the personal vehicles of gig workers.

This asset-light model only works because Instacart provides a favorable value proposition to each of its three stakeholders.

Consumers

The primary draw for consumers is Instacart’s capacity to cut out time spent in grocery stores, and the platform makes sure to remind them of this. When users go on Instacart, they see a running total of the estimated time they’ve saved from ordering groceries online. The platform also speeds up grocery selection through personalized recommendations based on user shopping history, location, and purchase patterns.

Instacart offers premium subscriptions for $99/year that come with unlimited deliveries, cheaper service fees, and no surge pricing. A recent Instacart filing showed that Instacart+ members represented an impressive 57% of the company’s gross transaction volume.

Gig Workers

Experienced Instacart workers who know how to use the platform's tools and streamline their pick-up routes can average between $30-50 an hour.

In addition to the flexible scheduling options, which are available to all gig workers, Instacart makes their shoppers’ jobs easy with digital maps that show the quickest in-store routes for picking up order items.

Retailers

With 13.7M users on Instacart’s platform (about twice the population of Arizona), retailers are eager to tap into its consumer pool and expand their reach. However, many retailers don’t want an intermediary company performing their deliveries because they want to retain a direct relationship with their consumers.

That’s where the Instacart Enterprise Platform comes in, which provides retailers with end-to-end tech solutions for all their e-commerce needs. Basically, retailers gain access to Instacart’s API and can use their own employees to fill orders.

Key Observation

It’s not easy to create a successful business based on being a middleman between retailers and consumers– primary parties will always be looking for ways to cut you out.

Instacart overcame this obstacle by providing legitimate value as an intermediary for each of its stakeholders, making it so no one wants to cut them out of the deal.

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