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”

Bloomberg Businessweek (Europe) - - NEWS - Edited by Jeff Muskus The bot­tom line To off­set the cost of de­liv­ery, In­stacart is seek­ing a sales com­mis­sion from part­ner re­tail­ers. −Ellen Huet

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.

Ama­ lures re­peat cus­tomers to its $99-a-year Prime mem­ber­ship with fast, free de­liv­ery. Its up­start ri­val,, 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.

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