Past few years have seen rise of On-Demand economy ( also called as Sharing Economy or Collaborative Economy or Gig economy) in all segments of life due to increased availability of sources of communication and very low transaction cost associated with On-demand economy. On-Demand economy tries to bring consumers and providers of goods and services to same platform and use highly scalable technologies and platforms to fulfil consumer’s demand by immediate provisioning of goods and services. These companies have achieved massive success by providing information at the finger tip of the consumer and providing instant gratification for the consumer’s need.
On Demand economy has found its presence in each and every part of human’s life ranging from Transportation (Uber, Lyft, Sidecar, Blablacar, Hailo), Housing (Airbnb, Homeaway, Wimdu), Clothing (Vinted, Tradesy, Twice), Parking, Home Goods and Food. I have discussed in my previous blog working of On Demand Economy in transportation with Uber as an example in my previous blog Uber in tough business of Car Aggregation. A graphic design of these on demand services along with finding in these companies can be seen in the chart below:
Instacart is one of these On-Demand economy based service that has achieved massive success by disrupting the way people purchase groceries. Instacart is an On-Demand same day grocery delivery service that delivers groceries in as little time as 1 hour or 2 hour. Instacart utilises technology to meet consumer demand by immediate provisioning of goods and services. Instacart connects consumers from personnel shoppers in consumer’s area who pick up and deliver groceries from users favorite stores saving consumers time.
This article explores business model of Instacart and tries to find out the reasons for immense success that Instacart has achieved in a very short span of time. Instacart was funded by Y Combinator in 2012 and has also received 220 million Series C funding valuing company at $ 2 billion. Instacart is located in San Francisco, and well-funded by some of the greatest investors in the world, like Sequoia Capital, Khosla Ventures, Andreesen Horowitz, SV Angel, and Y Combinator.
Problem being solved by Instacart
Instcart provides solution to people around the world to shop for their groceries. Instacart solves same day on-demand grocery delivery problem wherein it fulfils a customer’s order in one or two hours after he places an order. A user can order his groceries and have these delivered to his door step in one or two hours using his phone or web.
Instacart has partnered with various local stores like Whole Foods, PetcoNow, Kroger, Costco, Breads Bakery, Mollie Stone, Gelson’s, Smart & Final, Super King, Fresh & Easy and Ralphs!, H Mart, Natural Grocer. A user can choose and mix items from variety of these local stores into one order. Currently Instacart delivers in SF Bay Area, San Jose, NYC, Brooklyn, Washington DC, Philly, Boston, Chicago, Austin, Seattle and Los Angeles.
Instacart solves above Order Fulfilment problem (fulfilling orders from local stores) by solving complex optimization problem like vehicle routing algorithm. Further, Instacart uses machine learning to map individual stores, track how long a shopper will take to pick from an item from a store and drive and predict delivery time taking into account weather, traffic pattern, location and other factors like sporting events. This creates an experience for its customers that is nothing short of magical leading to increased user acquisition and user retention for Instacart.
Market and Competition
US grocery market size is $1 trillion consisting of $700 Billion grocery business and $300 Billion convenience spending market. Further, US grocery industry is very fragmented and it has many players operating in it with very few barriers to entry. Margin in the industry is very low leading to fierce competition between the players and firms try to increase market share and revenue by offering lower and lower prices. Further, e-commerce has also emerged as an important shopping channel along with other channels like Hypermarkets (like Walmart,Kroger, Safeway, Supervalu), Supermarkets (Aldi, Stater Bros and Superior Grocers), Discount Stores and Convenience Stores etc.
Instacart is working to bring this fragmented market together by providing consumer an opportunity to order their grocery from some of these stores. It faces competition from other online one day delivery players like Amazon, ebay, taskRabbit, Google Express. It is currently present in 17 cities and contracts around 4000 personnel shopper.
Instacart follows sharing economy based model like the model followed by Uber. Earlier, Instacart used to earn revenue through delivery fees and product markup. Instacart charges $3.99 per delivery for three hour delivery and $14.99 per delivery for one hour delivery. Instacart also earns some money by marking up the prices of grocery items (by one estimate 20%) wherein it charges customers more for individual groceries than their in-store price. Further, shoppers can also earn between $15 and $30 an hour depending on how quickly they deliver the food (using their own cars).
Recently, Instacart has made one shift in its revenue model, wherein it allows some grocery store partners to price their own goods on Instacart. In return, these grocery stores pay Instacart a fee to service their locations. It explains why for some grocers the products cost the same on Instacart as they do in store, but for others the price is more or some times less.
Instacart follows “managed crowdsourcing” model wherein a user orders something on Instacart through an app and Instacart crowdsources labor to serve user’s order in one hour or three hours after an order is made. Instacart is also working to expand its delivery schedules to for later today, for the next day etc. The crowdsourced labor consists of trained shoppers equipped with an Instacart shopper app. This app is extremely intelligent with information like location of shoppers in the store, exact knowledge of the location of items in different shops and other information like department, isle and shelf location of these items. Based on these information, shoppers are routed in the store as well as outside. Further, these app provides minutest update on any order to the consumers. This leads to very large efficiency in overall fulfilment of orders.
Instacart is a very lean organisation and this brings efficiency in its operational model. Instacart does not hold any inventory and it does not own any warehouse or fleet of trucks for its operation. This shields Instacart from the risk of variable grocery prices as the it does not keep inventory with itself. It partners with grocery stores and charge grocery stores a fee instead of charging consumers by charging markups on product price. This makes grocery stores more amenable to improving Instacart’s efficiency like offering Instacart company’s its own personal checkout line.
Instacart is also looking to outsourcing its deliveries to third parties providers like postmates, Lyft, Sidecar but at the same time it is not planning to completely outsource its delivery process but keep the last mile portion of delivery business with itself. In this mechanism, Instacart will maintain control of the end-to-end consumer experience through apps developed for shoppers and delivery people. All delivery directions will still be provided through the app, whether delivery will happen through in-house delivery person or someone contracted through a third-party.