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Instacart: Why Investors and Shoppers Are Warming Up to Food Tech Start-ups


Shopping cartUnderscoring an ongoing enthusiasm for investor-funded technology start-ups that intersect with the food space, the news that Instacart recently closed on $220 million in venture capital funding was perhaps not too surprising given the overall scope of investment in food technology start-ups: Brita Rosenheim, of Rosenheim Advisors (which tracks investment in food technology), reported in December 2014 that "venture capital funding is pouring into the space. More than $1.6 billion was invested last year into food-related tech companies, up 33 percent from $1.2 billion in 2012." 

The enthusiasm for Instacart is interesting from many different angles, not the least of which is the in-depth comparison made by a January 2015 Wall Street Journal article of Instacart to Webvan, the now infamous online grocery dot-com of the late 1990s, which, according to the article, "in less than three years burned through more than $800 million in cash, went public, filed for bankruptcy and then ceased operations." 

Gingerly sidestepping the checkered history of "big" online grocery, both investors and Instacart executives appear convinced that Instacart can succeed because the company, as described by the Journal, "stands as a metaphor for how the online business has evolved over the course of a generation, driven by the rise of the smartphone. In particular, Instacart, like many online businesses today, vigorously pushes out costs and risks to others." 

Many details about Instacart are emerging that are fascinating from both an industry and a shopper perspective. According to the Journal: digital food life

  • Instacart takes advantage of existing grocery stores by dispatching couriers to Costco, Whole Foods or Safeway and delivering goods within an hour. The drivers are independent contractors, meaning Instacart doesn’t have to provide them with salaries or costly benefits.
  • Instacart doesn’t operate its own trucks — the drivers, contracted individuals, use their own cars and buy their own gas. Nor does Instacart have to pay up front to stock shelves, as Webvan did and brick-and-mortar grocers do. 
  • Instacart isn’t yet profitable, say people familiar with the matter, and not all orders eke out even a small profit. 
  • Fairway Group Holdings Corp., which operates a chain of grocery stores in the New York City area, said it has added new customers as a result of its eight-month-old partnership with Instacart. 
  • Instacart is experimenting with embedding workers in stores, such as 28-year-old Erica Jazayeri, who winds her way through a San Francisco Whole Foods six hours a day. 
  • Instacart has broader ambitions beyond groceries. In the coming months, the company's CEO said he expects to add new categories of goods to its one-hour delivery guarantee. That would put it more in competition with general one-hour delivery services like start-ups Postmates Inc. and WunWun Inc. 

However much Instacart succeeds, our Digital Food Life 2014 report explores consumer receptivity to online grocery services and finds that 32 percent of smartphone users are moderately or "definitely" interested in trying such a service: Regression analysis reveals that problem solving is the dominant driver of interest in online grocery. Ethnographic observation suggests that newcomers to online grocery expect a time savings, while loyalists believe that such services enable them to use their time better — all of which suggest receptivity to Instacart, since the offering of delivery within two hours is currently a major competitive advantage over other online services. 

A confluence of cultural conditions — busy, urban lifestyles, site awareness and technology integration — along with situational triggers (often unexpected changes in circumstances) propels the trial of online grocery shopping. Future growth of the online grocery channel will be driven by two key factors: 1) breaking well-entrenched habits (both emotional and physical) associated with in-store shopping and 2) being ready to help customers find and navigate the online grocery channel when situational triggers arise. 

Related articles on technology and food culture from the Hartbeat database: 

Digital Food Life 2014 

Demand for Online Food Retailing: What’s the Future for Digital Food Procurement? 

The Online Grocery Shopper 

Farmigo Interview 

Relay Foods Interview: Growth of Online (Local) Grocery


Categories

Consumer Package Goods Retail/Shopper Insights Technology/Social Media


FOOD SHOPPING IN AMERICA 2017

As leaders in the study of American food culture, The Hartman Group has been tracking how Americans shop for food since the 1990s. From one-stop shopping to multichannel shopping to online markets and click-and-collect, we continue to track consumers’ evolving perceptions, needs, habits and relationships with food retailers. New to the 2017 report is a special section on the expansion of the discount grocery channel, the emerging fresh-format channel and smaller-footprint retail formats.

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