Instacart faces big challenges as IPO advances

Instacart’s announcement Friday that it finally intends to go public after a year of speculation could be a boon for other large technology companies hoping to declare their own IPOs, but the San Francisco-based last-mile delivery company faces strong headwinds in a rapidly changing market. 

Instacart, which operates under parent company Maplebear Inc., was founded in 2012 by former Amazon engineer and entrepreneur Apoorva Mehta and grew rapidly, particularly during the COVID-19 pandemic, resulting in an internal valuation of $40 billion by early 2022, according to news reports.  

The announcement that Instacart intends to begin trading on Nasdaq under the ticker symbol CART could be the beginning of a wave of tech-related IPOs, but it’s far from a certain bet that the company will remain profitable over the next few years, industry experts said.  

Grocery orders remain flat

It’s been a wild ride for Instacart over the last year and a half, with its valuation reportedly dropping precipitously in 2022 to an estimated $10 billion. That put the brakes on Instacart’s plans to go public last year, with CEO Fidji Simo announcing in October that the market was not IPO-friendly.

Instacart faces greater competition from services like DoorDash and Uber Eats, along with the threat of the slow retreat of its retail partners like Heinen’s and Aldi, which are now directing customers to their own mobile apps for delivery.  

Related:Instacart files its long-awaited IPO plans, with PepsiCo as big backer

Instacart reported in its IPO filing that its total revenue jumped from $1.83 billion in 2021 to $2.55 billion in 2022, an increase of 39%. That trend continued for the first six months of 2023, with total revenue increasing 31% to $1.47 billion, compared to the same period the previous year. 

But one potential problem for Instacart is that while its revenue has grown, its grocery orders have stayed flat for the first half of 2023. The company reported in its prospectus that it fulfilled 132.3 million orders for the first six months of 2022, compared to 132.9 million for the first six months of 2023.  

Similarly, the company's gross transaction value for 2023 remained relatively flat, increasing just 4% to $14.9 billion from the previous year, despite still-high food prices.  

Ad sales growth could pose a problem

Much of Instacart's revenue gain has come from ad sales through its online and mobile platforms, the company reported in its filing with the Securities and Exchange Commission. Instacart’s total ad revenue jumped 24% to $406 million in the first half of 2023, making up 28% of the company’s total revenue.  

Related:Heinen’s to ditch Instacart, direct shoppers to its own platform

That could eventually become a problem for Instacart, according to David Bishop, a partner with data analytics firm Brick Meets Click. Bishop said in an interview Monday with Winsight Grocery Business that Instacart's strong ad growth is the result of the development of its ad platform for its consumer-packaged goods (CPG) advertising channel. 

“But what's really important is … what enables that revenue growth for advertisers — it comes to eyeballs, and eyeballs relate to traffic, and you can look at traffic based on their numbers on orders, and their order volume is essentially flat,” Bishop said. “It's slightly up, but it's flat. So one, it's going to be hard for them to monetize advertising a lot further, you know, if they aren't growing orders.” 

Instacart’s use of advertising on its platform is different from what a customer would experience on a first-party site run by a grocer, Bishop said, in that it will push products to shoppers because its partners have paid for that advertising space.

Searches for items on Instacart are more likely to return results for other branded items that have paid for sponsored ads on the delivery company’s platform, for example, which will “degrade the user experience,” Bishop noted .  

Related:Instacart Hits Revenue Record as IPO Looms, Report Says

Brittain Ladd, a logistics and supply chain specialist who has worked as a consultant to Instacart, told WGB that the ad business Instacart has captured from CPG companies will eventually dry up. “It is only a matter of time," he said. "I mean, I literally believe it's only going to be a matter of a few months before most grocery retailers are going to say to Instacart, 'Enough of the ads, because you're essentially taking our ad dollars.’”

Ladd believes that’s why Instacart forged a partnership with PepsiCo, which has committed to purchase $175 million in Series A preferred stock from the company once it goes public. “Instacart had an unwritten rule that they had to follow," he said. "They had to be loyal to the grocery retailers that they serve until now, and I believe what's happened is that Instacart has looked at their business and said, 'Our core fulfillment business is flat. We can't get it to grow anymore, but our ad business is doing great. And so why would we continue being loyal to grocery retailers, when we can find a way to help the CPG company take back their power from retailers, why would we do that?’” 

He speculated that the PepsiCo partnership is a sign that Instacart is choosing CPG companies over retailers and will ultimately use their distribution facilities and network to begin fulfilling orders, ultimately competing with grocers.  

Both Ladd and Bishop said Instacart’s reliance on about four retailers for close to 50% of its revenue is also a potential problem. As of 2020, four grocers made up 75% of the company’s combined revenue, according to the prospectus. The prospectus did not identify the companies, but one of them made up 34% of Instacart’s revenue that year, while another represented 15% and two each were at 13%. 

Those percentages have declined over the last three years. That total dropped to 71% from four companies in 2021 to 53% in 2022. Unaudited numbers for the first half of 2023 revealed that only three companies now make up more than 10% each, now totaling 38% of Instacart's total revenue.

A changing grocery industry 

With major industry shakeups in the works, such as the pending merger of Kroger and Albertsons, having so much of revenue coming from so few sources is risky for Instacart, according to Ladd, who noted that large grocery chains are embracing development of their own micro-fulfillment centers.  

Costco, for example, is currently planning its largest store ever. Located in Fresno, California, the 241,342-square-foot facility will include about 47,000 square feet to be used as a micro-fulfillment center.

Those kinds of micro-fulfillment centers will ultimately cut into Instacart’s bottom line, according to Ladd. Instacart acknowledged in its prospectus that the consolidation of its customers could disrupt its business relationships, specifically noting the potential impact of the pending merger of Kroger and Albertsons.  

“Consolidation amongst major retail partners, such as the pending merger between Albertsons and Kroger, could impact contractual negotiations with such retail partners, result in lower utilization of our products, or lead ultimately to termination of existing retailer engagements,” the company said. “In addition, our competitors may also establish or strengthen cooperative relationships with current or future retailers, brands, and other parties with whom we have relationships, which could limit our ability to promote our offerings to those retailers and reduce our number of customers.”