Summary List Placement
It seems like the sky’s the limit for what customers can get delivered from Instacart — and for how much capital the company can raise.
The company raised another $265 million from previous backers including Andreessen Horowitz, Sequoia Capital, and D1 Capital Partners, it said Tuesday. The latest round of funding more than doubled its valuation to $39 billion.
“They continue to be brilliant at raising money,” Phil Lempert, a grocery analyst said. And as the company looks to IPO this year, that cash “hides a lot of sins,” he said.
In fact, analysts told Insider that the funding was a bit unexpected as the company was predicted to get its next big cash infusion via an IPO this year. The public offering is still expected to happen, with the latest valuation giving the company a boost ahead of a public offering. The $39 billion figure exceeds the $30 billion goal Reuters said that Instacart was targeting last fall when it hired Goldman Sachs bankers to lead its IPO push.
“They were able to get a much more ideal valuation than what was expected of them on the public side,” said Alex Frederick, senior venture capital analyst at Pitchbook.
A new competitor nipping at InstaCart’s heels
Instacart’s latest funding round comes as one new rival surges into the grocery delivery space: DoorDash.
The delivery competitor has been shoring up its non-restaurant delivery business with an eye on doorstep delivery of groceries and household goods.
Over the last few years, DoorDash has made significant headway in its quest to add more convenience and grocery offerings. In 2018 DoorDash began testing last-mile delivery with Walmart, a strategy that allows retailers to offer delivery through their own digital channels.
DoorDash now delivers from about 1,000 Walmart stores nationwide. The delivery company, whose delivery fulfillment arm is called DoorDash Drive, also makes deliveries from hundreds of PetSmart and CVS stores, as well as department store brands like Macy’s.
Meanwhile, Instacart has stepped up its partnerships with non-grocers.
Depending on the region, the company provides on-demand delivery for Target, Disney Store, Big Lots, Best Buy, The Vitamin Shoppe, Sephora, Rite Aid, Restaurant Depot, BevMo!, Total Wine & More, CVS, and Petco. In December, the company started delivering from more than 150 DICK’S Sporting Goods stores.
While Instacart explores outside of groceries, DoorDash has been creating its own grocery distribution hub: DashMart.
DashMarts sell basic groceries such as ice cream, potato chips, cough medicine, and dog food in 25 cities.
The one-stop shopping platform on the DoorDash app cuts out retailers. DoorDash delivers household goods, and some retail items supplied by restaurants, from mini-warehouses.
Two differing models of grocery delivery
Retail analyst Burt Flickinger III said DoorDash is a new rival in the space, but it is providing a different kind of service for consumers looking for a few goods on-demand, rather than an entire basket of groceries.
“People are typically using DoorDash more for fill-in and convenience shopping,” he said.
Flickinger noted that Instacart’s average orders are much higher than other delivery players as Instacart strategically partners with the “highest volume retailers” in the retail business.
Its growth is underscored by the average order size, which Flickinger’s firm tracks. Three to four years ago, the average Instacart order ranged from $80 to $90. To breakeven for anyone in the grocery delivery business, he said the average order size should hover around $110.
“Now Instacart orders tend to be full shops in the range of $125 to $200 on average, depending on the market,” said Flickinger, managing director at the retail consulting firm Strategic Resource Group in New York.
He projects Instacart to be profitable by the end of the year because they’ve done such a great job partnering with leading retailers, including popular big-box brands like Costco.
Analysts said the latest round of funding will seal Instacart’s dominance in the space as they plan to use the funding to improve its platform, or marketplace app, and by hiring new talent.
Instacart said it plans to increase its corporate headcount by 50% in 2021.
“This [raise] will only cement the company’s status as the destination for grocery retailers to be on, as the funding round will likely allow the company to invest more heavily in customer acquisition costs and further expand its customer base, potentially ultimately eating into Amazon Fresh’s market share even further,” said Nick Shields, senior analyst at Third Bridge Group.
New revenue streams
Instacart has several options for putting its latest windfall to work, said Pitchbook’s Frederick.
One area it may look at: The commissions it charges the retailers, which can be as high as 10%, a cut beyond most grocers’ profit margins. Frederick said Instacart could use some of the funding to lower those charges, a move that could make it easier to sign up new retail partners and keep contracts with existing ones.
“Most of these grocers are using Instacart either just to increase their revenue and have some skin in the game toward online grocery or until they can build out their own e-commerce solutions,” he said.
Some larger grocery chains like Kroger are already building tech solutions and pushing customers toward click-and-collect options that they control and are logistically less challenging than delivery, Lempert said. Click-and-collect and curbside is more profitable for groceries than delivery and allows them access to customer data, he noted.
Grocers competing with Instacart is yet another reason to expand beyond grocery delivery, he said.
Instacart “sees the writing on the wall,” he said. “They see that retailers are trying to push you, as the consumer, to shop with them and not with Instacart.”
Alternatively, Instacart could give retailers more bang for their buck by building its own warehouses or fulfillment technology. Lempert pointed to Instacart’s recent hire: Walmart executive Mark Ibbotson. The exec has been tasked with finding potential partners for automated e-commerce fulfillment centers. Lempert predicts Instacart will create their own “dark stores,” or stores entirely devoted to online orders. This move would be not unlike DoorDash’s DashMart.
Whatever Instacart does next, experts stress the need to find alternatives to its current business with grocery chains.
“Thinking long-term, Instacart needs to find some other revenue generators or ways that they can cut commissions,” Frederick said.