A growing shopping list
Grocery delivery service Instacart expanding fast
Grocery delivery service Instacart is surging forward with a war chest of hundreds of millions of dollars, aggressive expansion plans and new partnerships with stores like Sur La Table as it seeks to squeeze a profit from a notoriously tough business.
Now in 40 markets, Instacart plans to double its presence to 80 U.S. cities by year end. This week, it’s adding Detroit; Las Vegas; Brownsville, Texas; and Columbus, Ohio. It’s also enlarging existing markets, spreading to more suburbs in Chicago and Indianapolis, for example.
“Our goal is to cover 70 percent of U.S. households by the end of 2018,” said Max Mullen, who co-founded the San Francisco company in 2012 and now leads
its consumer products. “We’re offering delivery services in not just tight urban areas but also the outer rings of where people live.”
The payout could be immense. Groceries are a $675 billion a year market in the U.S., yet only 2 to 4 percent of shoppers currently buy online. That could change as a mobile, tech-savvy generation no longer feels the need to personally sniff melons and eyeball beef tenderloins. Online grocery sales could hit $100 billion by 2025, according to a study from the Food Marketing Institute.
Instacart faces competition from Amazon, Google and Postmates, as well as smaller startups like San Francisco’s Good Eggs. But the biggest threat to Instacart’s ambitious plans could be growing discontent among the people who pick out groceries at the store and deliver them to customers. Instacart depends on those workers to fulfill its vision of making groceries “magically appear.”
Instacart changed its app about a year ago, making the tipping feature more obscure, workers say. It also reduced what it pays independent contractors, who get about 40 cents per item and a few dollars per delivery. Those amounts vary by city and other circumstances.
“The way they compensate is a bit screwy,” said Phil Lempert, the food trends editor for NBC’s “Today” show who’s known as the Supermarket Guru. “The independent contractors are up in arms.”
Instacart started off using contractors to do the grocery shopping and delivering, and still does about four-fifths of its business that way.
A couple of years ago, it began hiring people as employees to pick items from store shelves, go through the checkout line and fill grocery bags labeled with customers’ names and addresses. Instacart said those in-store shoppers make “above a living wage” plus bonuses. Some workers said employee shoppers in San Francisco make $15 an hour, above the current minimum wage of $13 an hour.
Independent contractors then pick up those bags from stores like Whole Foods and deliver them to customers, often for less than $4 per order, according to many workers. Instacart says only that the rate is “competitive by market.”
“Sometimes they cluster them together, but sometimes they send you just a single order; you have to drive out of your way to deliver it and cross your fingers that you will get a tip,” said Linda Jordan, referring to the delivery-only orders. She’s been working for the company for about a year in San Jose.
Jordan prefers “full-service shopping” where she both picks out and delivers items. Even then, some weeks she makes as little as $13.50 an hour. “A good week is $20 to $30 an hour, but that’s been extremely hard to get in recent months,” she said. “The commission per item went down, the delivery fees went down. Even pennies in this job, you feel it.”
Her laments were echoed by about two dozen Instacart workers nationwide who responded to a reporter’s posts on Facebook. Many said their pay had fallen dramatically from the company’s changes — some characterized Instacart as “stealing our tips” — and said they were disheartened and fearful.
Andrea Vernetti of Alameda has been an Instacart worker for a few months. “I started after the dust-up about service fees, so I didn’t feel the impact as much as long-standing workers,” she said. She makes about $20 to $22 an hour working part time when her job as a pastry chef is slow.
Some workers filed a classaction lawsuit against Instacart over tips and related issues. In March, Instacart agreed to settle the case for $4.6 million and change how it describes fees to customers so they don’t mistakenly think tips are included. That settlement is pending court approval.
“We have tens of thousands of shoppers and have a lot who really like us,” said Instacart spokeswoman Rebecca Silliman. “We’ve had some tough times, but we’re in a place now where we feel really good about the shopper experience.”
Instacart may be squeezing margins as it aims for profitability. It said last year that on average, it earned more per delivery than it cost to deliver the order, a milestone known as gross margin profitability. That isn’t the same as true profitability — generating enough to cover corporate overhead, marketing costs, engineering, customer service and other expenses. “We are working on that,” Mullen said.
Venture capitalists are convinced that Instacart is on a path to profitability, so much so that in March they put in $400 million. That brings the company’s backing to $674.8 million, according to Crunchbase, and sends its valuation to $3.4 billion.
Instacart makes money in three ways:
Shoppers pay a service fee — either about $6 per delivery, or via a membership called Instacart Express, similar to Amazon Prime, that gives free delivery on orders over $35 for $150 a year, or $15 a month. To lure new customers in Texas and the Midwest, Instacart is offering a free year of Express deliveries.
Stores, which include Whole Foods, Publix, Schnucks and Supervalu, as well as Costco’s grocery departments, pay Instacart an undisclosed commission on orders it delivers.
And Instacart showcases advertising from 160 makers of packaged goods. “When someone searches on cereal on Instacart, Cheerios can appear first,” Mullen said. “We can show (the company) how many consumers click and buy. It can sponsor coupons.” San Francisco’s Bi-Rite Markets has used Instacart for almost three years for several hundred deliveries a week, some of which are new customers, said Liz Martinez, director of product management for the two markets in the Mission and Western Addition. People who order online tend to spend more. “The basket average is nearly three times what it is in the store,” she said.
Sur La Table is Instacart’s first nonfood partner, but the delivery company sees a clear link with kitchen supplies, as shoppers might realize they need a garlic press or Microplane grater-zester to whip out dinner. For now that partnership is starting in the Bay Area, Portland, Ore., and Chicago, with the goal to roll out in other markets this year.
“We see Instacart as helping create the future of grocery shopping,” Mullen said.
But Lempert said a big rival may be the very stores Instacart is courting.
“More and more grocery retailers now are doing ‘click and collect,’ where people can order groceries and then pick them up rather than get deliveries,” he said. “It’s easier for customers than scheduling a window when they’ll be home and doesn’t cost them anything.”
And there’s Amazon, which is pursuing groceries with typical all-out aggression. It offers AmazonFresh deliveries, AmazonFresh Pickup (a clickand-collect store it’s piloting in Seattle) and its new Amazon Go convenience markets.
Five years ago when Mullen co-founded Instacart, most people wanted to know how it differed from Webvan, one of the most spectacular flameouts of the dot-com era.
Webvan had warehouses, trucks and huge inventories of groceries. Instacart shops and delivers from existing grocery stores.
“In retrospect, how silly to build a parallel supply chain in the grocery industry,” Mullen said. Stores, he said, already have “a perfectly good” one; they just need to get the groceries from here to there.