Instacart (also known as Maplebear Inc.) completed its IPO on Tuesday, September 19, 2023. The grocery delivery company’s shares were priced at $30 prior to the public offering, and surged to $42.95 in the first few minutes of trading on the stock exchange.
Instacart’s shares are listed under the ticker symbol “CART.”
What can we learn from how Instacart went public? What’s the projected outlook for the grocery juggernaut?
In this post, I’ll take a deep dive into the company’s products, the overall grocery market, the scale and stakeholders of Instacart’s IPO, and the company’s financials and metrics. I’ll also explore how the COVID-19 pandemic affected Instacart’s trajectory.
Instacart’s products
Instacart bills itself as a grocery technology company. Most people probably know Instacart for its core grocery delivery marketplace offering, but that is only one of its three biggest products.
Let’s take a look at each of these products in turn.
1. Instacart Marketplace
Instacart’s core product is an online grocery marketplace that is the largest in America. This marketplace has cumulatively done over $100 billion in gross transaction volume and fulfilled over 900 million orders.
2. Instacart Enterprise Platform
Instacart Enterprise Platform is an end-to-end technology solution that powers retailers across all aspects of their business, on their owned and operated storefronts. Instacart launched the platform in 2022 and it offers e-commerce, fulfillment and other capabilities to grocers on their storefronts.
Customers include Publix, Sprouts and The Fresh Market.
3. Instacart Ads
The Instacart Ads product is targeted at consumer packaged goods (CPG) brands that want to reach Instacart’s users at the point of purchase (i.e., as they are about to place an order on Instacart’s marketplace) through brand or direct response ads. In some ways, the ads offering is another monetization lever for the marketplace business. We’ll talk about this in more detail below.
The American grocery market
Instacart operates in the U.S. grocery market, which is the largest retail segment in the country.
The size of the grocery market in the U.S. is $1.1 trillion, but only 12% of that is online today, representing approximately $132 billion in online volume.
Online grocery penetration took 10 years to triple from 1% of total grocery sales in 2009 to 3% in 2019, and just three years to quadruple to 12% in 2022, largely thanks to the COVID-19 pandemic.
Grocery has one of the lowest online penetrations among categories, with only 12% of grocery sales happening online. In contrast, 66% of consumer electronics sales take place online, along with 38% of apparel, 23% of consumer food service and 20% of home goods.
While the aggregate grocery market will likely only grow with inflation, the size of the online pie may grow faster. Instacart believes that the online share may even double over time.
Image source: SEC filing
To make matters more complicated, the online share of grocery is divided between digital platforms (Instacart, Doordash, GoPuff, etc.) and grocers’ own stores and channels — and the split varies widely between pickup and delivery. The bottom line is that only about 30% of the total online volume happens on digital platforms such as Instacart.
Image source: SEC filing
Scale and stakeholders
Instacart’s core grocery marketplace is three-sided, and includes retailers/grocers, customers/users and “shoppers.” But there’s also a fourth stakeholder that’s important to Instacart: the CPG brands whose products Instacart is indirectly selling.
Let’s go through the rough scale Instacart operates at and the value they provide to each of these stakeholders.
Retailers
Image source: SEC filing
- Value prop: Grocers can use Instacart to reach new customers and make online pickup and delivery available to their existing customers. Instacart’s recently launched enterprise platform also aims to give smaller grocers the same technology bigger customers have, including an owned and operated e-commerce platform, fulfillment, etc.
- Scale: Instacart has tremendous scale. Over 1,400 retail banners/chains partner with the company, and Instacart supports delivery and pickup from 80,000 stores. This represents partnerships with 85% of the grocery market by volume (excluding alcohol). Retail partners include Aldi, Costco, Kroger and Publix, as well as Best Buy, Walgreens and Sephora for specific use cases. Instacart powers about 5% of total sales for their top 20 retail partners.
Consumers
- Value prop: Instacart provides consumers with an easy-to-use online grocery shopping experience with optimal selection, convenience and value.
- Scale: Instacart has 7.7 million monthly active orderers who spend an average of $317 a month on Instacart. Over 900 million total orders have been placed, and Instacart has brought in $100 billion of gross transaction volume since its inception.
Shoppers
- Value prop: Shoppers are the individuals who pick and deliver the items to customers. Instacart offers them an immediate, flexible earnings opportunity. Relative to other delivery jobs, over half the time is spent in stores and work can be done throughout the day.
- Scale: Instacart currently has approximately 600,000 shoppers, and has paid them over $15 billion since the launch of the company. Freelance shoppers are about two-thirds female, about half of them are parents and they work on average about 9 hours per week — nearly half of which is spent shopping, not driving. On average, shoppers make about 8-9% of an order’s value, corresponding to approximately $10 per order (+100% of tips).
Brands
- Value prop: Instacart indirectly drives purchasing for brands through grocery and retail stores. In addition, through their brand-focused advertising products, Instacart provides a way for customers to discover brands at the point of purchase.
- Scale: Over 5,500 CPG brands use Instacart Ads to reach more customers. This includes household brands such as Campbell’s, Nestlé and Pepsi and emerging brands such as Banza, Chloe’s Fruit Pops and Whisps. Instacart estimates that on average their ads deliver a 15% incremental sales lift for their brand partners. In 2022, brand partners spent over $700 million on Instacart Ads.
Business Model and Financials
Let’s now discuss Instacart’s business model and financials.
Business model
In terms of the business model, Instacart has two main sources of revenue:
- Net transaction revenue: Instacart generates transaction revenue on every order through fees paid by both retail partners and customers, which is then netted out against shopper earnings and coupons. Retailers are charged a fee per order completed, and buyers are charged a delivery fee and a service fee. In 2022, the overall gross fees were roughly 14.9% of gross transaction volume (GTV). Shopper’s earnings are netted out against transaction revenue. Shopper earnings, which were approximately 8.2% of GTV, are the fees paid out to the shoppers who do the buying and delivery. After we remove shopper earnings and coupons/refunds, the net transaction revenue is 6.3% of GTV.
- Ads and other revenue: Instacart also generates ad revenue through fees paid by brands for additional promotion of their products. Instacart generates these fees on a per-click or on an impression or fixed fee basis. We can also think of these fees as a “take rate” on the gross transaction volume. As of 2022, the fees were roughly 2.6% of GTV.
This implies a total take rate of 8.9%.
Given a typical order size of $110, the unit economics look something like this: Instacart pays out $9 to shoppers and keeps $10 as revenue. The cost of goods sold (COGS) is $3.
You can see the economic breakdown of Instacart orders in the chart below.
Image source: SEC filing
Key drivers and financials
The key drivers of Instacart’s top line are the number of orders in a given time period, the average value of the orders, and its net take rate from those orders. We can multiply these together to calculate the company’s revenue. Then, COGS and operating costs determine its overall margins.
Instacart naturally saw a huge jump in orders (and correspondingly, gross transaction volume) in 2020 because of COVID-19. They did sustain some of those gains post-COVID, but growth has slowed. It’s worth digging into each of the metrics to try to determine where there may be opportunities for future growth.
Image source: SEC filing
Number of orders: In 2022, Instacart brought in 262 million orders, growing 18% year over year. However, in Q2 of 2023, orders only grew about 3% year over year. Flatlining order growth may be the biggest risk to Instacart.
Image source: SEC filing
Average order volume: Order values increased slightly during COVID but then came back down into the $110 range. While some growth is possible for this metric, it likely won’t be a major driver of future growth.
Gross Transaction Volume: Gross Transaction Volume at Instacart was approximately $30 billion in 2022, an increase of 16% year over year. However, given the fact that order growth is slowing, GTV growth in 2023 is also now in the 3-5% range, year over year.
Net take rate: Instacart has done a good job growing its net take rate, up from 4.2% in 2019 to 8.8% in 2022. In 2023, they’ve managed to grow it further, seeing take rates of 9.6-10.2%, with transaction rate rates around 7.5% and ads around 2.8-3%.
Revenue: Instacart made $2.5 billion in revenue in 2022, growing 39% year over year. In the first half of 2023, despite slowing order and GTV growth, they made $1.48 billion, representing 30% growth. This has largely been driven by improving take rates and to a small extent by order and GTV growth.
Gross margins: Instacart has done a great job improving their profitability over the years as they’ve scaled, with gross profit going from 0% of GTV to 7%. On a revenue basis, gross margins have increased to 72%, up from 60% in 2020 and 0% in 2019.
Image source: SEC filing
Operating income: As Instacart has continued to scale, the leadership team has also reduced operating costs as a percent of revenue. Overall, operating expenses as a percent of revenue have gone down from over 200% pre-COVID and even 65% during COVID-19 to about 57%. In 2022, Instacart made an operating profit of $62 million (4% margin) and in the first half of 2023, their operating margins were 18%. This led to a profit of $269 million. As they continue to scale and optimize post-IPO, it wouldn’t be outside of the realm of possibility to see a 30% margin business in the base case in the medium term.
Membership and ads
It’s worth discussing Instacart’s Membership and Ads products, which are a core part of their business model.
Membership
Doordash and Uber Eats have long discussed their subscription products, noting that subscribers order frequently more than non-subscribers. In Instacart’s case, that’s even more pronounced, as we see with their membership program, Instacart+.
- What it is: Instacart+ offers expanded customer benefits including unlimited free delivery on orders over a certain size, a reduced service fee, credit back on eligible pickup orders and exclusive benefits.
- Scale: Instacart has grown to 5.1 million members by the middle of 2023 with a member count that is growing at 11% per year. At an annual price of about $100 a year, that’s over $500 million in annual membership fees.
- Impact: Instacart members order more frequently and spend more on Instacart compared to other members. On average, an Instacart+ member spends an aggregate of $461 over 4 orders per month, compared to an aggregate of $223 spent over 2 orders by a non-member. That’s more than double. Amazingly, over 57% of GTV was driven by Instacart+ members in the first half of 2023, highlighting the importance of the program.
Ads
We’ve touched on Instacart’s ads business earlier, but it's worth discussing in a bit more depth.
Image source: SEC filing
- What it is: Instacart’s advertising product allows CPG brands to drive discovery very close to the point of purchase via prominent shelf placement. Think of it as the virtual version of the slotting fees brands pay grocers.
Image source: SEC filing
- Scale: Over 5,700 Brands use Instacart Ads, and advertising and other revenue generated over $740 million in 2022, growing over 30%. This is up from less than 1% of GTV to almost 2.6% of GTV, and provides additional extremely high-margin revenue to Instacart. Instacart represents one of the largest and fastest growing e-commerce channels for CPG brands and customers include Campbell’s, Nestlé and Pepsi.
- Impact: Ads represent almost 30% of Instacart’s revenue, much higher than Uber and Doordash. This year, Instacart will likely bring in $800 million in ad revenue, and its operating income will likely be in the $600 million range. Therefore, one way of thinking about Instacart is that the core business will break even, and all the profit will come from the ads business!
The impact of COVID-19 on Instacart
In some ways, COVID is what propelled Instacart from a great to an amazing business (or good to great, depending on how high your bar is).
Top-line metrics grew 4x in 2020, more than triple that of prior years. In addition, the larger scale helped bring costs under control.
Image source: SEC filing
Looking at the GTV by cohort graph below, it's clear that the existing customer base massively expanded during 2020 and beyond. Similarly, the number of customers and the order volumes of new cohorts were much higher than in the past.
Image source: SEC filing
But what is promising for Instacart is that usage among cohorts has stayed roughly the same or declined only slightly from COVID-19 levels, and they’ve continued to build on their pandemic growth.
At this point, orders influenced by COVID-19 have more or less died down, but Instacart still has the users who joined during the lockdown and have continued to buy from the platform. Granted, order growth has flatlined, but it’s still significant that Instacart was able to hang on to so many of its COVID-era customers.
Image source: SEC filing
COVID-19 helped pull forward online grocery from 3% of grocery sales to 12% in 3 years, and Instacart was the biggest beneficiary of that shift.
Can Instacart sustain top-line growth, post-IPO?
Instacart brought in $660 million from its initial public offering by selling 22 million shares at $30 each. This IPO pricing positioned Instacart with a market valuation of roughly $10 billion, a notable decrease from its $39 billion valuation after a 2021 funding round.
At the time, I thought $39 billion was a stretch, but the $10 billion valuation during the public offering was still lower than I anticipated (my projection was $16-20 billion).
Instacart has certainly built an impressive and category-defining business — they’re the leader in online grocery in the U.S., with $2.5 billion in annual revenue, growing 30% year over year. The company also has 18% operating margins.
The competition is heating up, though. Uber Eats and DoorDash — which both began offering grocery delivery in 2020 — are hot on Instacart’s heels.
And with orders and GTV growth slowing to 3-5% and revenue growth now primarily being driven by higher fees, just how much runway is there for top-line growth?
Today, given their $30 billion in GTV and an online grocery market size in the U.S. of $132 billion, they already have 22% of the market. But if you dig deeper into the market size, we see that 46% is delivery and 54% is pickup. Of those, 95% of the pickup and 48% of the delivery happens on grocer-owned and operated channels. This means the digital platform market size is only $35-40 billion, and Instacart has already captured the majority of that market.
Image source: SEC filing
This is why market growth will be critical for Instacart to continue growing GTV and orders. Their growth strategy will need to include things like:
- Expanding into the 70% of shopping that happens on owned and operated channels via Instacart’s Enterprise Platform.
- Other ventures into alcohol or prescription delivery.
- International opportunities.
Instacart's journey from inception to IPO is nothing short of remarkable. The company has leveraged its innovative product offerings to tap into the vast potential of the $1.1 trillion U.S. grocery market. Although the COVID-19 pandemic accelerated its growth, they have retained many of their newest users, but as growth starts to plateau, they’ll need to explore new verticals and markets to stay competitive.
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