Where Will Instacart Go After The IPO? Grocery Experts Weigh In

Instacart’s IPO filing last week signaled many things – a bit of upward momentum in the overall IPO market, inklings of the potential direction e-grocery is heading and an unexpected, developing relationship with PepsiCo. But questions still remain about the future direction of the grocery-tech giant’s growth.

The San Francisco-based company has expanded beyond third-party grocery delivery in recent years and, in addition to fulfillment, the business sells a suite of omnichannel-supporting software for retailers. Instacart has also ramped up its advertising arm, which currently accounts for 30% of revenue. According to the filing, the company became profitable in 2022 and has maintained that bottom line for the past five consecutive quarters.

But there are some questions: “Supermarket Guru” Phil Lempert noted that $358 million of that $428 million profit came from a “tax benefit” leading to more questions about the company’s long term revenue plans. Meanwhile, other analysts wonder if the company can continue to grow its core business.

While that business appears to be in decent shape, experts are anticipating a slew of changes to operations following Instacart’s public market debut, and many believe as the company evolves, the impacts will reverberate across the grocery market.

Michael Sansolo, president of Sansolo Solutions and former SVP at The Food Marketing Institute, explained that Instacart’s growth relied on its model serving as a “win-win” situation for both the tech grocer and its retail partners. If that dynamic shifts down the road, and retail partners begin to feel like Instacart is notching more gains, “the company is not going to succeed… it’s going to be a very interesting, possibly tricky transition.”

“Instacart in two years from now will probably be very different than it is today,” noted Lempert. “Today’s Instacart is very different than it was two years ago.”

Click-And-Collect Has Captured The Current Landscape

The prospectus showed that Instacart’s grocery orders continued to steadily climb even as the pandemic waned, increasing 18% in 2022, but remained flat in the first half of 2023. Currently, the business’ growth is primarily driven by advertising dollars.

When the pandemic hit, Instacart provided a ready-made solution for retailers needing to implement grocery delivery services, but trend reports over the past year have indicated the format didn’t hold the majority of consumer or retailer interest very long due to the extra fees on the consumer side, and increased labor demands for retailers. Within the broader e-grocery landscape, hybrid models like click-and-collect have become the preferred choice of retailers and their customers alike, said Lempert, Sansolo and Brittain Ladd, a retail analyst and micro-fulfillment center expert.

“When we think about how a store basically works – the shopper comes in, picks their own products and then takes them home – the [customers] were doing a lot of labor for free,” explained Sansolo. “Now in this new [delivery] model, which obviously COVID-19 forced to explode overnight, suddenly the store was being asked to pick the order, do all that work, and then bring it to the house.”

While Instacart provided an easy solution for that new, heightened grocery delivery demand, the model relies on consumers’ continued willingness to participate and a steady stream of gig workers. The current labor shortage, continued wage challenges in the gig economy and consumer perception that grocery inflation remains elevated, certainly does not help matters. So where does that leave Instacart?

Pick One: Tech Titan or Grocery Guru

Experts agree that Instacart’s business model will change following its IPO, but remain mixed on whether executives will be able to evolve the current strategy or steer it in entirely new directions.

Lempert imagines a future of hybrid grocery where dry center store goods are housed in a back-of-house, micro-fulfillment center that is fully automated – likely with Instacart software solutions. Within that setup, consumers would still come into the store and hand-pick their perishables, while the remainder of their order is filled and received at checkout. This would allow retailers to reduce store sizes, and likely labor costs, and consumers would benefit from more efficient shopping experiences, without added fees.

“A lot of people complain about their produce being picked properly,” Lempert noted. “People want to have that experience, to go into the store and pick produce and pick meats – [but] nobody’s excited about picking a can of Campbell’s soup on the shelf.”

As for the future of Instacart’s third-party delivery service, the forecast doesn’t look too rosy. Earlier this month, Giant Foods announced it would cease its home grocery delivery service, eliminating nearly 400 jobs; Lempert emphasized that delivery services even beyond grocery have taken a hit. He noted Domino’s delivery business dropped 5% and QSR chain Chipotle reported an 18% decline in delivery.

According to Sansolo and Ladd, Instacart will need to establish a new type of relationship with its retail partners. Ladd believes retailers are soon going to push back and claim Instacart is “siphoning away” their ad dollars.

Sansolo thinks Instacart can maintain its retail relationships as long as the company continues to evolve in a way that’s mutually beneficial with its partners. He imagines that wholesalers will also begin adding themselves to Instacart’s software customer mix, allowing them to continue to compete in the market and help small retailers with economies of scale. He believes the fact the software was built by Instacart will become “secondary,” and drew comparisons to Amazon’s web services.

“We don’t know where we are on this evolutionary path,” said Sansolo. “We don’t know if maybe Instacart has actually perfected what has to be done and is going to simply be trimming things around the edges… or maybe the model is just in its infancy.”

“The question will be, now that Instacart is its own company, will it change the financial arrangements? Will it change who’s got the power in the relationship [between retailers and Instacart]? Obviously, one of the big elements of the relationship is data… and I don’t think there is a hard and fast answer to [who owns it] – it’s probably the question that every retail partner has in their heads right now,” Sansolo continued.

Where Does This Leave CPG?

Instacart’s move to the public market won’t likely change much for food and beverage brands, except for one. PepsiCo is set to purchase $175 million worth of shares in a private sale and experts are unclear on the food and beverage giant’s motivations.

Ladd, Sansolo and Lempert speculate that Instacart could begin distributing PepsiCo products direct-to-consumer through a new fulfillment model. PepsiCo already has expansive distribution and logistics expertise with its own network, but a partnership with the third-party platform would eliminate the need for grocery retailers altogether, potentially opening up a new, higher margin sales channel.

Instacart’s internal sales and consumer data could also be of significant interest to PepsiCo, including insight on emerging, high-performing product types. This data pool would essentially give PepsiCo yet another platform for brand incubation and product innovation.

“Pepsi may be one of the most complex ones to think about [in this situation],” said Sansolo. “We don’t really know how they envision [this relationship], but they are a very smart company and clearly see there may be an avenue here to have connection to the consumer in a way that can be more profitable, less friction than what they are doing right now.”

Both Ladd and Lempert believe there’s a potential that Instacart could open its own stores, which, depending on how its relationship with PepsiCo progresses, could offer new channel opportunities to food and beverage entrepreneurs. Ladd argues that regardless of what happens, Instacart needs to change its business model to rely less on fulfillment and begin opening stores, claiming the move would increase revenue and profits, “triple” the grocery-tech giant’s valuation and disrupt the entire grocery industry.

“Certainly with the merger between Kroger and Albertsons… where they’re going to have to divest hundreds and hundreds of stores, there’s a possibility that Instacart may open up some of their own stores as well,” said Lempert. “But as far as the [third-party] delivery service goes, I don’t think that Instacart will be in the delivery business in five years.”