Customers hate delivery fees, so Instacart went to retail partners to help defray the cost

The startup wants to boost revenue but not prices “Time also has value, but people don’t see it that way”

Online shoppers hate paying delivery fees. So Instacart, which brings groceries to your door the same day you order them, is getting manufacturers to foot the bill. The company is working with General Mills, Nestlé, PepsiCo, Unilever, and other consumergoods makers to help cover the cost

of delivery or provide other discounts when customers buy their products. In addition to giving out coupons, the companies pay to advertise on Instacart’s website. Those payments account for 15 percent of Instacart’s revenue, according to Apoorva Mehta, the company’s chief executive officer.

Shoppers can find discounts when filling their carts with brands such as Degree, Doritos, DiGiorno, Quaker Oats, and HäagenDazs. Sample Instacart ads offer $1 off Dove soap or free delivery if you spend $10 on Red Bull. Mehta likens the ads to those that appear alongside Google search results. “It’s like AdWords for groceries,” he says.

Instacart says the cost of delivering an order is much higher than the $5.99 it charges shoppers, but customers are unwilling to pay more. The company tried to make up some of the difference by selling products for more than what the grocery stores charged. Customers complained, and Instacart stopped charging higher prices on most products. The company recently cut pay for some workers, according to reports on websites Quartz and Re/code. Instacart says it “reduced variability” in pay for its shoppers. “People resist paying for delivery, because in their minds, it’s something they previously paid $0 for when they picked up their own groceries,” says Nir Eyal, an author who studies how people form habits around technology. “Of course, that’s silly because time also has value, but people don’t see it that way.”

Other e-commerce companies have their own approaches to the problem.

Amazon.com lures repeat customers to its $99-a-year Prime membership with fast, free delivery. Its upstart rival, Jet.com, offers discounts to shoppers who order in bulk, which reduces delivery expenses.

Postmates, a startup that typically charges as much as $10 for delivery from restaurants, reduces that to $2.99 or $3.99 when a restaurant pays the company a commission of 15 percent to 20 percent on the order. More than 35 percent of orders

come through partner restaurants, Postmates says.

To help cover delivery costs, Instacart looked to retailers such as Whole Foods Market, Costco, and Target. Once stores partner with Instacart, the formula shifts. Most partners choose to list items for the same price online as in stores. To compensate Instacart for the increased sales volume the site drives to them, the stores pay the e-commerce company a commission on every item sold through its site. Instacart declined to say how much or what percentage of revenue those fees account for.

The company counts at least 100 retailers as partners, up from 30 a year ago. The “vast majority” of Instacart’s sales are through partner stores, says Vishwa Chandra, vice president for retail accounts. One partner has been particularly eager to do business with Instacart: Whole Foods plans to invest in the delivery startup and sign a five-year agreement, Re/code reported last month. Instacart declined to comment on the deal.

The company says the newer business arrangements are helping it bolster profit margins. Delivery fees paid by customers now make up less than half of total revenue, which grew fivefold in the past year. Instacart says it’s “profitable” in four cities, including its two biggest, San Francisco and Chicago, and that 40 percent of its volume is profitable— meaning most orders lose money. It also says it will be profitable overall by summer. That comes with a major caveat: Its calculation for profitability doesn’t include the cost of office space, executive salaries, and some additional staff expenses.

Instacart has raised $275 million from investors since its debut in 2012 and was valued at $2 billion by investors at the time of its most recent fundraising late last year. The company is confident it can grow into a sustainable business—so much so that CEO Mehta says he doesn’t plan to raise venture capital again.

The bottom line To offset the cost of delivery, Instacart is seeking a sales commission from partner retailers.