Markups are out, fees are in

On the way to $220M in funding, Instacart quietly changed its business model

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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.”

5 Responses to “On the way to $220M in funding, Instacart quietly changed its business model”

  1. Why whole foods and others would allow Instacart to pooch their customers and build instacarts tarnished brand off their backs is beyond me.

    Whole Foods allows their customers to jump over to instacarts website, place an order thru Instacart, get the delivery in instacarts bags and receive an Instacart receipt in lieu of the whole foods one and at 20-30% higher price?

    The “fee”is not replacing their markup In the end whole foods becomes the supplier and Instacart is the grocer to the former whole foods customer. That’s a bad idea esp over the long term. Whole Foods and Instacart will get their brands intertwined over the years. Great for Instacart no so much for whole foods.

  2. Instacart just doesn’t want to be upfront in its dealings. They have to be non committal and muddy the waters because the interweb is full of disparaging comments about their price markups without transparency.

    How can they say that “fees” are now they’re “primary model” ?! The WSJ piece is dated Jan.13 2015, last week and the 20-30% markup is still on the items they compared pricing to.

    Here’s instacarts dirty little secret: they are not just an app or a service co. They are a grocery store. They actually have to buy the groceries from the grocery stores and resell them to create the illusion of revenue. So, they can say “hey vc look at this huge revenue growth! Here’s my routing number” if they had to get Investor money showing only the “fees” they collect from their now “primary model” they would not get $220m, or $2.20 for that matter.

  3. This article, like many others that report on the new service industry apps, shows us where the real profits are being made. ( suck in the greedy stupid investors ) Does any reasonably intelligent person think that you can profit on grocery store deliveries? As GR pointed out.

  4. So you’re thinking by passing on the markup to the grocery store they’re going to make MORE margin? Previously they were charging 10-30% markup to the consumer (WSJ). Groceries have incredibly thin profit margins. Seems really doubtful that they will absorb a 10-30% hit in those margins.. at least not without raising prices generally.

    I feel this writeup is just a tad hand-wavy about the math here. Whether you call it a markup or a fee, Instacart is a high-cost amenity operating in a razor-thin margin space. It doesn’t come for free just but shuffling around who’s end it comes out of.

    • Nope, you’re misunderstanding. According to this article, the grocery stores aren’t absorbing a “10-30% hit in those margins.” By allowing the “partners to price their own goods on Instacart”, they have the ability to increase margins on any given product. And as the article states, “In return, the grocers pay Instacart a fee.” If your a grocery store, imagine a loaf of bread priced at $4 in-store, and you say, “ok, I’m willing to sell this bread through instacart for $5 (or 25% more than in-store). And in exchange I’m ok giving IC a % fee.” So if that fee % is less than the markup, the grocery store margin on that product doesn’t contract, it expands.