Hailed as “America’s Most Promising Company” in 2015 by Forbes Magazine, Instacart is an interesting take on online grocery delivery. Instacart uses the sharing economy-based business model to connect personal shoppers with customers, and its relatively low costs (compared to owning its own warehouses to store food or its own fleet of dedicated delivery trucks like the long-defunct WebVan) allow it to scale to other markets with impressive speed, launching in some cities in a matter of 2 weeks.
In January 2015, Instacart received $220 million in investments and was valued at 2 billion dollars. In 3 ½ years, Instacart has grown to 300 employees, partnerships with over 100 retailers, and thousands of shoppers across 18 cities in the US, including San Francisco, New York, Los Angeles, Seattle, Chicago and Boston. Though they do not publicly report revenues, it is plausible that Instacart has been the fastest-growing online grocer in the US over the last 24 months on the basis of new local market entry alone.
In December 2015, Instacart announced price increases via a company blog post. The increases affect the following services:
- Two-hour delivery window for most cities: from $3.99 to $5.99 (50% increase)
- One-hour delivery window for most cities: from $5.99 to $7.99 (33% increase)
- Instacart Express membership fee: from $99/yr to 149/yr (51% increase)
Instacart’s Evolving Revenue and Pricing Model
Since its launch in 2012, Instacart’s revenue model and price architecture have evolved.
- In 2013, Instacart claimed to offer lower prices compared to in-store prices, but withheld from disclosing their grocery sources.
- In 2014, Instacart was found to have significantly higher prices compared to other online grocery services.
- In early 2015, Instacart partnered with various grocers, charging them a partner fee in exchange for allowing grocers to price their own goods. To highlight these partnerships, Instacart would later announce that it would display the price difference, if any, on products on Instacart and in-store.
Among the company’s revenue streams are:
- Delivery fees
- Instacart Express membership fee
- Markup on retailers’ store prices
- Partner fees charged to vendors
With the latest fee increases, Instacart partners, competitors, and industry observers are likely questioning how its price positioning might be evolving.
How much does Instacart mark up in-store prices?
According to Instacart’s website, Instacart charges the same in-store prices for some retail partners (e.g., Whole Foods) but a “15%+” markup for others (e.g., Costco). Instacart explains that “the average price of items on Instacart is 15% higher or more compared to the average price of that retailer in your local area.” The “15%+” markup is also used as one of Instacart’s mechanisms to highlight their grocer partners from non-partnered grocers.
To better understand Instacart’s markup versus in-store prices and regional variability, in September 2015, Profitero collected 60 products’ in-store prices at Costco stores across 10 zip codes in 5 metropolitan areas: New York, Atlanta, Chicago, Los Angeles and Seattle.
Note: for each product, the lowest Instacart price across all monitored zip codes was compared to each zip code’s in-store price. While this calculation method does not reflect the actual markup percentage per zip code, it reflects the lowest per-region markup percentage calculation that might be considered reliable.
On average, Instacart charged a 23% markup over store prices on the same items, 8 percentage points higher than the 15% quoted.
Instacart markups across various metropolitan areas differed slightly:
- Los Angeles had the highest markup (26%)
- Atlanta also had a relatively high markup (25%)
- Seattle and New York had the lowest markup (21%)
In contrast to regional differences, Instacart markups across categories differed more significantly:
- Processed food had a higher markup (42%) compared raw food categories, such as Produce (18%) and Frozen (12%)
- Cleaning Supplies and House Supplies, which are also popular on grocery shopping lists, also had fairly high markups, at 27% and 26%, respectively
- Snacks and Breakfast were on the lowest end of the markup, at 22% and 21%, respectively
There may be several factors that determine Instacart’s markups. A post from The Wall Street Journal claims that Instacart marks up items differently based on demand for each item, and it is speculated that each Instacart partner retailer has influence over mark-ups by category and overall, depending on the overall service package they agree to with Instacart.
More dynamic pricing models also often consider factors like demand elasticity and cross-elasticity, remaining stock levels, but Instacart is unlikely to have visibility into local stores’ perpetual inventories.
The recent price changes and relatively high markups are strong indicators that Instacart does not aim to be a price leader in the online grocery industry. Instead, Instacart may focus on delivering value through convenience and a focus on customer experience.
Implications for Instacart and the Online Grocery Market
As its business scales, competition evolves, and demand for online grocery continues to become more mainstream, Instacart could consider several possible options to further improve customer satisfaction:
- Maintain or improve service level as the company expands
Shoppers choose Instacart due to the convenience it provides. Instacart needs to convince shoppers that the service level they provide is worth the money that shoppers pay.
Instacart claims to have partnered with more than 100 retailers and to operate in more than 18 cities. As Instacart continues to scale, can they still keep up with such precise delivery windows and high service levels?
According to re/code, Instacart CEO Apoorva Mehta confirmed that the company is experimenting with outsourcing some deliveries to third-party companies. We are looking forward to see what Instacart has to offer.
- Expand selection by supporting additional grocers
Online grocery shopping is convenient in part because it saves shoppers the time to physically travel possibly long distances to get to their preferred grocers. Instacart can further deliver value by further expanding its selection of grocers.
- Further promote price transparency
While Instacart might not aim to be a price leader, providing price transparency can add to customer satisfaction. In 2014, an analysis was published regarding Instacart’s potential deceptiveness in its pricing markups, and an article from the New York Times accused Instacart of its hiding of extra costs. There are even several 1-2 star reviews on Yelp that remark about Instacart’s hidden price premiums.
Instacart could further increase its customer satisfaction by focusing more on price transparency, so that shoppers may have added confidence in using the service.
- Synchronize online with in-store stock availability
According to the current fulfillment model, when a product is out of stock, Instacart personal shoppers will substitute a similar item or provide a refund when no substitutions are found.
However, this may discourage users when the similar item is an unsatisfactory substitute or the personal shopper fails to locate an item. Minimizing stock availability complications, perhaps by synchronizing the displayed online stock availability with the actual in-store stock availability, could strongly differentiate Instacart from other online grocery shopping platforms.
Implications for Retailers
Given Instacart’s rapid market expansion, it is important for retailers to understand how Instacart is recalibrating online grocery pricing at a local level – especially for non-partner grocers. Grocers may want to consider several implications of Instacart’s steady expansion:
- Monitor competitors’ prices
Grocers can better understand their competitive landscape by monitoring competitor prices through Instacart. As Instacart continues partnering with more and more retailers, local pricing for some retailers is now transparent (or semi-transparent) for the first time.
- Monitor potential overpricing
Non-partner grocers do not have direct pricing control on Instacart, and Instacart indicates that they charge an average of 15% markup for non-partner grocers. Since these markups vary widely among a range of factors, non-partner grocers should watch for overpricing incidents which may damage the grocers’ reputations.
- Assess losses from un-reaped membership fees
Some retailers’ financial models depend heavily on membership fees (e.g., Costco). But Instacart helps some shoppers circumvent the membership fees, since shoppers do not need to be members to shop there.
Grocers can better understand how much they may be losing in potential membership fees by monitoring Instacart’s markups.
- Assess maturity of local online grocery market
Grocers can assess the maturity of the local online grocery market by assessing the local coverage of Instacart partnerships, especially since Instacart highlights its non-partnered grocers via the “15%+” markups. Grocers can also use coverage data when considering partnering with Instacart and other online grocery platforms.
Implications for Suppliers
Suppliers are also affected by Instacart’s growth, but have less of a direct relationship with the company compared to grocers. Here are several implications for suppliers:
- Monitor product content
While not the focus of this post (but certainly something that Profitero will analyze in the future,) product content on Instacart is not necessarily sourced from brands. Suppliers can protect their brand equity by monitoring product content on Instacart and other online grocer platforms and engaging their retailers and Instacart to provide more complete and compelling product content.
- Reconsider promotional strategies
Suppliers sometimes fund promotions that are planned and coordinated by brick-and-mortar grocers, but these promotions may not be executed by Instacart. Suppliers may want to reconsider promotional strategies as Instacart grows, and as the online grocery market matures.
- Assess forecasting and replenishment plans
Brands may not have full visibility into total online and in-store demand when sold through Instacart, so forecasting and replenishment may become more challenging.
On the other hand, there may be an opportunity for mutual partnerships between brands and online grocery platforms, considering that Instacart’s struggles with out-of-stock items occasionally irritate customers.
- Strive to connect Instacart with commercial and brand teams
Suppliers struggle to allocate the resources and funds to support Instacart’s relatively new, unconventional model. However, Instacart accounts for meaningful growth and mindshare, and suppliers may want their commercial and brands teams to give Instacart serious consideration.
Like the broader online grocery market, Instacart continues to evolve. Visit Profitero’s Knowledge Center for further analysis of Instacart and other emerging players such as Jet.com or sign up to our weekly newsletter.