Instacart and the Growth Challenge Post-COVID 19

This paper will identify, describe, and evaluate Instacart current strategy, Firstly by identifying Instacart customers, value proposition, company source of revenue, and going through the business model elements. Secondly, by analysing the firm competitive position in the grocery delivery market using Porter Five Forces model. Finally, a competitive growth recommendation strategy for the short and long term.

1. Introduction

Instacart logo (Instacart, 2020)

Instacart is an on-demand fresh groceries and everyday essentials delivery and pickup services across the US and Canada. As a result of the consequences of the COVID-19 pandemic, Instacart became one of the most promising and growing companies in the US.

Instacart was launched in 2012 by a former Amazon employee with 2.1 billion USD total funding received until June 2020. Instacart service reaches up to 5,500 cities in North America by partnering with more than 400 regional and local retailers as Albertsons, Costco, and Loblaw, touching more than 30,000 stores as pick up locations for customers (Anon., 2020). Instacart is considered a Unicorn startup and valuated to be 7.6 Billion USD in June 2020 (cbinsights, 2020).

1.1. How does it work?

The business model is centred around busy families that unburden the household from a load of grocery shopping. A customer can easily log into Instacart and start picking from thousands of items available to them through the local retailers close by. Once an order is placed, through the sharing economy model, Instacart part-time employees can accept, takeover the order over the platform, shop customers’ items, and deliver them to customers doorstep in as fast as one hour in some areas (CNBC, 2020).

Instacart created a platform ecosystem with a virtual grocery store without needing a physical store or holding of inventory as in figure 2.

Figure 2: Instacart Ecosystem Platform

2. Grocery Industry and COVID-19

E-commerce has changed our behaviour in the last two decades, moving us from brick and mortar to omnichannel. Until recently, the grocery sector has remained sheltered from the forces of e-commerce. Until the COVID-19 pandemic, 3% to 4% of US grocery sales was spent online and forecasted to reach 20% in 2025 (Repko, 2020). The pandemic has transformed the way we live and altered our shopping experience. In March 2020, 31% of American consumers used online grocery delivery services, doubling the amount from August 2019. 26% of consumers used the service for the first time (Brown, 2020). Even after the COVID-19, it is expected to stay high as per Statista (Figure 3) (Banker, 2019).

Figure 3: Online Grocery Sales (2015–2022) Source: Statista, IGD (Banker, 2019)

2.1. Business Case: The challenge of growth

Instacart is among those benefiting from this historical demand, yet its performance will significantly determine its growth rate after the pandemic abates. Instacart has a unique business model and has proven to be successful, raising from 4% market share in 2017 to above 20% in 2020 during the pandemic as in figure 4 (CNBC, 2020).

Figure 4: Most Used online grocery services (CNBC, 2020)

Instacart is a strong competitor for Amazon and Walmart. Will Instacart survive the competition and sustain the growth that it is having right now? Will the platform strategy be sufficient for long term growth?

3. Instacart Business model

In this section, the light will be shed on how Instacart work, understand its core business model, customers and stakeholders; by going through the main categories of the business model canvas.

3.1. Instacart customers:

Customers: Busy customers who avoid shopping or carrying groceries. Elderly and disabled people who want their grocery to be delivered to their doorstep.

In-store shoppers and delivery partners: Partners searching for part-time jobs, have a mobile, vehicle, and experience in shopping.

Retailers: Store owners who are looking to reach more customers and to increase sales.

3.2. Instacart Value Proposition:

Instacart value proposition offered for mainly three customer types as below:

Customers: customers will have access to a wide variety of products, different stores to order from one app, and a one-hour delivery service.

In-store shoppers and delivery partners: partners who are looking to earn extra income, flexible working hours, and the right amount of tips from customers which represent 50% to 60% of total income (CNBC, 2020).

Retailers: gain access to more customers through the digital channel, increase sales accordingly, and outsource their own e-commerce grocery channel.

3.3. Instacart Revenue Stream:

Instacart has multiple ways of generating revenue that centres around the below:

Delivery Charges: Instacart charges customers per order. Charges are different based on the delivery time window and the size of the order. Delivery fees start at 3.99 USD (Instacart Fees, 2020).

Service fee: for non-Instacart express members there is a 5% (or minimum $2) per total order value.

Membership Fees: Express membership for loyal customers, offering zero delivery fees for orders above 35 USD and zero service fees as showing in Table 1 (Instacart Fees, 2020).

Table 1: Standard vs Instacart Express. Source: Instacart

Placement fees: Instacart charges brands upon promoting their products on the app.

Retailers Partner Payments: Instacart charges grocery retailers around 3% of total sales revenue.

3.4. Instacart business model Canvas:

Below is the full business model canvas of Instacart:

Figure 5: Instacart Full Business model canvas

4. Instacart Competitive position

Porter five forces methodology was used to understand Instacart competitive position in the market, current and future challenges that face the company and the grocery delivery industry.

4.1. Threats of new entrants:

Cost of entry: grocery delivery market will require significant capital, resource investment, and high technology to run the model efficiently. Instacart provides a national service across the US and Canada, which raise the bar to compete or match the current offering. The threat seems to be low, yet, as a result of digital transformation; The digital-sharing economy firms have grown into global companies with a few years only (PWC, 2015). the threat will be Moderate.

Access to suppliers: its challenging to have a partnership with local retailers and have access to their inventory. Instacart has access to more than 30,000 stores across 5,500 cities in the US and Canada (Redman, 2020). To sustain a relationship with suppliers it needs proper planning, high technology, and competent service level; it is critical to the model's success. The threat is Low.

Barriers to entry: currently, there are no governmental barriers to entry in the US and Canada. The threat is High.

Market growth and attractiveness: since consumer products are essential, grocery delivery is experiencing a transformation and high growth, now it is accelerated with the COVID-19 pandemic. Thus, the industry will attract companies to enter. Managing this business needs experience, technology, and planning. The threat is Moderate.

4.2. Bargaining power of customers

Number of customers: dense customer base increases customer bargaining power against Instacart and other suppliers. (High).

Switching cost: customers can easily switch between service providers without any extra cost. (High).

Price sensitivity: immense market knowledge and routine purchasing process affect customer expectation for service fees since grocery delivery is a frequent service which could occur four times a month. According to a recent study, 23% from who had groceries delivered during the pandemic of COVID-19 reported high service fees issue (Locke, 2020). (High)

Service providers: grocery delivery service providers are increasing, the formidable providers are now competing for e-grocery dominance with a very competitive offering (Steven Begley, 2020); making it tempting for the customers to shift between service providers. (High).

4.3. Threat from substitution services

Substitute performance: if a new substitute product or service offers the same or enhanced value, customers will switch. Competing service fulfilment (up to 1-hour delivery), the next phase focuses on cost, perfect order fulfilment, and innovative services. Achieving this will raise the threat to high, but currently, it is Low.

4.4. Bargaining power of suppliers

Number of suppliers: as mentioned earlier, Instacart has a relationship with more than 400 National, Regional and Local retailers to provide delivery over 30,000 stores. A good number of suppliers could reduce the threat impact to Low. Yet, retailers are the source of items offered on the platform; any complexities in the relationship will cause Instacart to lose some of its customer base. The threat is Moderate.

The uniqueness of Products: groceries have high similarities which is lowering the impact of products differentiation to low. A study on niche consumption trends from 2004 to 2016 found that consumers prefer niche items because it leverages them to find products that match their unique taste (STROPOLI, 2019).

As a result of this, Instacart has to carefully manage and increase supplier variety to extend its product offerings and reduce the impact of customer switching due to the unavailability of a specific product. The threat is Moderate.

Shoppers and Delivery partners: Instacart core business model for delivery service is based on the sharing economy of those partners. Instacart should make sure that they have a stable supply to meet the growing demand of consumers. Failing to fulfil this will cause service disruption and an unpleasant customer journey causing them to shift to another competitor. The threat is Moderate.

4.5. Competitive Rivalry

Based on the analysis of Porter’s Five Forces model with the effects of firms on each other, the grocery delivery market experiences a strong force of competitive rivalry between service providers as in figure 6. The external factors that contribute to this strong force of competition are as follows:

· High competition between firms (strong)

· High price sensitivity (strong)

· Service providers (strong)

· Low switching costs (strong)

· Cost of entry (Moderate)

· Good possibility of new entrants as a result of COVID -19 (Moderate)

As a consequence of highly competitive rivalry, service providers aggressively compete on service quality, speed, price, and distribution network. A summary offering of the main competitors is in figure 10 in the appendix.

Figure 6:Porter five forces of Grocery delivery market

5. Recommendation

In the digital world, disruption happens instantaneously; companies can be easily replaced by new technology or model once it proves that it adds value to the consumer or reduce cost on the value chain. Below recommendation focuses on how Instacart can survive competition in the short run, sustain and increase growth in the long run. Ansoff Matrix was used as a strategy to explain each step of the journey as in figure 9.

5.1. Market Penetration:

The objective of this step is to sustain growth with current existing services and create new barriers to entry by:

Improve Service level and customer service: having an excellent service is essential for the business to grow, and not allowing competitors or new entrants to take over especially when switching cost is low between competitors.

Improving efficiency and reduce cost: Instacart model is based on labour cost, which is a real concern through the growth period. Currently, as customer orders grow, labour costs rise as well. Instacart should focus on improving the efficiency of instore-shoppers, utilise shoppers as maximum as possible, and invest in the solutions to accomplish more in less time and cost.

Instore-shoppers and delivery partners (Supply): Instacart is a light asset model running on the sharing economy, Instacart should maintain the growth of those partners along with the business growth, any disruption in the supply will impact the service continuity immediately. Instacart already hired 12,000 in-store shoppers before the COVID-19 crisis and looking to add 250,000 new full-service shoppers to overcome the surge in demand during COVID-19 crisis (Redman, 2020). Hiring full-service shoppers have a competitive advantage to have a stable supply to meet the surge in demand and reduce the threat of a shortage of on-demand part-timers partners.

5.2. Market Development:

Increasing serviceable areas will obtain new customers and increase growth within the same services provided by:

Number and locations of partners: Instacart’s delivery service is available to 85% of US and 70% of Canadian households. To expand geographically, Instacart should increase the number of partners in the untouched markets as the first step for expansion within or outside the region. Instacart has the leverage of the light asset model, making expansions much easier.

5.3. Product Development:

The objective here is to introduce new services and products that differentiate Instacart across competitors, reduce competition pressure, and sustain growth.

Green service: 48% of US consumers would change their consumption habits to reduce their impact on the environment. Sustainable products share in sales in 2014 was 19.7% reaching 22.3% in 2017 and forecasted to be 25% in 2021 (Nielsen, 2018). Instacart should seize the opportunity from those customers by adding new services as marking green products, highlighting the carbon footprint of all products at checkout, and introducing green delivery option through electric vehicles.

Figure 7: Sustainable Product Sales in the US (Nielsen, 2018)

Private label products: Instacart has exposure to consumer data of most purchased items, prices, and ordering frequency. Such valuable information can be utilised to introduce new private label products (created by one company to be sold and branded by Instacart). Famous examples are Walmart’s Great Value brand and Amazon Essentials.

Private labels will increase Instacart revenue and profit margin; partnership with retailers is important at this stage. Walmart Private label brand sales revenue is 128.6 billion USD in the US in 2018 (scrapehero, 2019).

5.4. Vertical Diversification

Instacart will be able to offer grocery delivery at a lower cost than independents and smaller retail chains due to the economy of scale in purchasing power. On the long run, customers will ignore the retailers listed on the platform and go over to Instacart directly once they have full confidence in the product and service provided.

The firm has an opportunity to capture new sources of revenue through vertical growth by entering the grocery business. Instacart should gradually step into the grocery market to tackle the risks of vertical growth.

Alliance with Retailers: The cost of establishing a new retail firm, running it, and the inventory cost on a large scale will be enormous. Therefore, the alliance will be a reasonable step in penetrating the business; without interrupting the relationship with current retail partners and minimum investment. Furthermore; Instacart can lead the formation of multiple and geographical diversity of local retailers across the country, similar to what happens in the airline industry “Airline alliance”. The importance of alliances of relatively small firms against rivals is the scale economies in its market, increasing the bargaining power of each firm, cost reduction by sharing resources, and enhancing all firms' technological capabilities (Gomes-Casseres,1997).

Each firm in the alliance will have its own set of tangible and intangible capabilities that enable the alliance to develop and add value services they provide to the network. Instacart could provide a delivery network along with high technology to the alliance; partners will provide supply and stores. Alliance does not prevent adverse effects on the service, even the opposite. If the alliance and the synergy were not managed well between firms, it will reduce their overall advantage (Gomes-Casseres,1997).

Amazon already realises the retailers’ importance for the service by the acquisition of Whole Foods Market in 2017 (Banker, 2019). This was a hard blow for Instacart; the Whole Foods partnership once accounted for at least 10 per cent of Instacart revenues.

Automated Micro-fulfilment Center (Dark stores): one of the new future concepts for grocery delivery is dark stores; non-traditional stores founded to serve as fulfilment centres for delivery and pickup orders only by automating wherever possible (Morgan, 2020). Instacart can identify shopping preferences and identify metropolitan areas that are dense enough to make it feasible for establishing its dark stores’ alliance. (Figure 8).

Figure 8: Drivers path to customers from Stores. Source: Instacart Tech Team (Xiao, 2018)

Keeping the cost-controlled is one of the objectives of the dark stores, and it will be a necessity for Instacart to survive the grocery market in the future. Amazon is currently investing in streamlining online order picking (Stevens, 2020).

Figure 9: Ansoff Matrix, Instacart Growth Strategy

6. Summary

Instacart has successfully changed the way US citizens do grocery. With the rise ofe-commerce and COVID-19 pandemic, business growth will be accelerated. Keeping up with the rapid growth will be a challenge for Instacart. Instacart started as a platform ecosystem, but that doesn’t mean that it should continue growing in the same direction. Data is the new Oil, with massive access to customers, consumption data, orders spatial information, Instacart will have the opportunity to move vertically in the value chain and be a grocery store. Starting with an alliance will be a safe step into the business. Selling their private label products and expanding gradually until there could be a big acquisition at some point in the future.

The rise of Instacart resembles Amazon in taking control of the value chain of its service. For Instacart, this could come with a price; current retailers see Instacart as a distribution channel and alliance partner to compete with Amazon and Whole-food acquisition. Still, some partner could see this as a severe threat.

7. APPENDIX

Many competitors are rapidly expanding their online presence along with their competitive offering; sparking rivalry in the grocery delivery market as in figure 10.

Figure 10: Large Grocery players Competitive offering. Source: (Steven Begley, 2020)

8. References

· Anon., 2020. CrunchBase. [Online]
Available at: https://www.crunchbase.com/organization/instacart#section-overview

· Banker, S., 2019. How Amazon Changed Whole Foods. [Online]
Available at: https://www.forbes.com/sites/stevebanker/2019/06/25/how-amazon-changed-whole-foods/#7c8002a978dd

· Brown, G., 2020. HOW IS COVID-19 CHANGING THE GROCERY INDUSTRY?. [Online]
Available at: https://www.cushmanwakefield.com/en/insights/covid-19/egrocery-and-grocery-industry-changes

· cbinsights, 2020. The Global Unicorn Club. [Online]
Available at: https://www.cbinsights.com/research-unicorn-companies

· CNBC, 2020. The Rise Of Instacart And Online Grocery Delivery [Video]. [Online]
Available at: https://www.youtube.com/watch?v=WRc3USp1RAQ

· Gomes- Casseres, B. Alliance Strategies of Small Firms. Small Business Economics 9, 33–44 (1997). https://doi.org/10.1023/A:1007947629435

· Instacart Fees, 2020. Instacart Fees. [Online]
Available at: https://www.instacart.com/help/section/360007902791/360039164252

· Instacart, 2020. Instacart Press. [Online]
Available at: https://aboutinstacart.com/press/

· Locke, T., 2020. 72% of people are still hitting the grocery store, and 83% have had issues with grocery delivery. [Online]
Available at: https://www.cnbc.com/2020/05/14/most-people-shopping-at-grocery-store-versus-using-delivery-bankrate.html

· Morgan, B., 2020. Dark Stores Are The Future Of Post-Pandemic Retail. [Online]
Available at: https://www.forbes.com/sites/blakemorgan/2020/04/25/dark-stores-are-the-future-of-post-pandemic-retail/#57ce19b67826
[Accessed 19 July 2020].

· Nielsen, 2018. WAS 2018 THE YEAR OF THE INFLUENTIAL SUSTAINABLE CONSUMER?. [Online]
Available at: https://www.nielsen.com/us/en/insights/article/2018/was-2018-the-year-of-the-influential-sustainable-consumer/

· PWC, 2015. Sharing or paring? Growth of the sharing economy. [Online]
Available at: https://www.pwc.com/hu/en/kiadvanyok/assets/pdf/sharing-economy-en.pdf

· Redman, R., 2020. Instacart adds Big Lots to retail partner base. [Online]
Available at: https://www.supermarketnews.com/online-retail/instacart-adds-big-lots-retail-partner-base

· Redman, R., 2020. Instacart aims to add 250,000 more personal shoppers. [Online]
Available at: https://www.supermarketnews.com/online-retail/instacart-aims-add-250000-more-personal-shoppers

· Redman, R., 2020. Online grocery sales to grow 40% in 2020. [Online]
Available at: https://www.supermarketnews.com/online-retail/online-grocery-sales-grow-40-2020

· Repko, M., 2020. As coronavirus pandemic pushes more grocery shoppers online, stores struggle to keep up with demand. [Online]
Available at: https://www.cnbc.com/2020/05/01/as-coronavirus-pushes-more-grocery-shoppers-online-stores-struggle-with-demand.html

· scrapehero, 2019. Walmart and the Power of Private Labels. [Online]
Available at: https://www.scrapehero.com/walmart-and-the-power-of-private-labels/

· Steven Begley, E. M. S. M. a. A. R., 2020. Digital disruption at the grocery store. [Online]
Available at: https://www.mckinsey.com/industries/retail/our-insights/digital-disruption-at-the-grocery-store

· Stevens, B., 2020. Amazon’s new grocery stores to feature hidden robotic “microfulfillment” areas for online orders. [Online]
Available at: https://www.chargedretail.co.uk/2020/02/24/amazons-new-grocery-stores-to-feature-hidden-robotic-microfulfillment-areas-for-online-orders/

· STROPOLI, R., 2019. Demand for niche products is growing. [Online]
Available at: https://review.chicagobooth.edu/economics/2019/article/demand-niche-products-growing

· Xiao, J., 2018. It All Depends. [Online]
Available at: https://tech.instacart.com/it-all-depends-4bb7b22e854b

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