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In its early days, grocery store delivery startup Instacart made its money two ways: Through delivery fees and product markups. It charged customers more for individual groceries than their in-store price.
But in the last year, the company shifted its revenue strategy. It is allowing some grocery store partners to price their own goods on Instacart. In return, the grocers pay Instacart a fee to service their locations. It explains why for some grocers the products cost the same on Instacart as they do in store, but for others the price is more (or, confusingly, less).
“We don’t want to be in the pricing game,” Instacart’s head of business Nilam Ganenthiran told me. “There’s exceptions, but that’s generally true. Retailers outsource their e-commerce to us for a fee.”
Although there’s variations in how each partnership is structured, Ganenthiran said the fee, charged to grocery store retailers, is now the company’s “primary model.”
Instacart never made any official announcements about its change in business strategy. I didn’t find out until questioning Ganenthiran about its profit margins. As a result, earlier this week when Instacart received its spate of news coverage over its $220 million funding and reported $2 billion valuation, some outlets misreported Instacart’s business model.
“There has been a perception of the markup model being our primary economic engine due to how we started 2.5 years ago,” Ganenthiran told me. “Our model actually has been evolving.”
Most publications didn’t realize that. The Wall Street Journal went so far as to write an additional story, separate from its funding brief, breaking down a potential Instacart profit on a typical grocery store transaction. The numbers didn’t look good, suggesting Instacart might make as low as $1.40 on an order of 15 basic items.
But since Instacart’s revenue isn’t primarily tied to product markups anymore, that may not be representative of its profit margins.
Instacart wouldn’t tell me whether its grocery store partner fee is calculated per item, per order, per customer, per month, or some other variant. It also wouldn’t disclose how much that fee is. Neither would Whole Foods when I reached out to them for comment, and Safeway didn’t respond. Without knowing what grocery stores are paying Instacart, it’s hard to deduce the company’s potential profit margins on each delivery. “There’s different strategies with different partners,” Ganenthiran explained.
In theory, it’s much smarter for Instacart to charge grocery stores a fee than for it to eke out profits on product markups. That kind of partnership makes grocery stores more amenable to improving Instacart’s efficiency (like offering the company its own personal checkout line). It also shields Instacart from the risk of variable food prices. Ganenthiran said, “Most grocers are past the tipping point where they understand consumers want this service.”