Instacart Survived Covid Chaos — But Can It Keep Delivering After The Pandemic?
The pandemic transformed Apoorva Mehta’s grocery delivery service into an essential—and booming—business. Now the 34-year-old billionaire is under pressure to outdo Jeff Bezos—all while dodging an avalanche of new competitors, rebellious workers and restless partners.
Apoorva Mehta pauses for a moment to consider the past ten months of chaos. A year ago, he was running Instacart as a popular app that was gaining momentum. Then last spring came a massive Covid-fueled boost. Things quickly morphed into a nightmare: striking shoppers, inventory shortages and the challenge of meeting the kind of blistering demand Mehta wasn’t expecting until at least the next presidential election.
As it turns out, the tribulations of March were just the beginning. As the country’s leading grocery delivery app, Instacart is now besieged by a growing number of well-funded competitors. Mehta himself is under pressure to justify a valuation that more than doubled during those 10 months to $18 billion, a highly anticipated public offering and a strategy aimed at proving Amazon—when it comes to supermarkets, at least—has it all wrong. Understated and wonky, Mehta deftly sidesteps any hint of urgency.
“I’m playing a 20-year game,” he says, sporting a T-shirt in his sun-filled home office north of San Francisco, when asked about Instacart’s IPO and the CFO he hired away from a 20-year stint at Goldman Sachs to help with it. He happily shifts the conversation to the long term. “Grocery is the largest retail category in the world, and yet it’s still not digitized. We’re excited by what the future looks like.”
That future is one in which traditionally tech-averse supermarkets are transformed into digital fulfillment outfits that stock, promote and package groceries for pickup or delivery. For customers who order $35 or more, Instacart charges as much as $9 per delivery—or free delivery with an annual $99 subscription. The grocers pay too, forking over an average 10% per order, a painful proposition in an industry where net margins have historically averaged 2% or less. Mehta says the high fees are necessary to cover the hundreds of Instacart engineers, designers and technicians toiling to turn a purely physical transaction into an almost entirely virtual one. So far he has signed on 600 retailers including Costco, Wegmans and Eataly.
They can use the help. Years of decreasing profits have fueled a spate of mergers, bankruptcies and consolidation. The sector’s wafer-thin margins don’t easily support Instacart’s fees, forcing many grocers to inflate their prices on the app. At the same time, though, no one can ignore the sudden shift feeding Instacart’s rise: Online grocery purchases have jumped to 10% of the $1 trillion industry, more than triple what they were at the end of 2019. Of course, that hypergrowth underscores one of the biggest risks of all: that significant chunks of Instacart’s customers will return to picking out their own produce once the pandemic passes.
“We saw five years of growth in a matter of five weeks,” says Mehta, a former supply-chain engineer for Amazon and member of the 2015 Forbes 30 Under 30 class. “And the growth has continued. We grew over 300% year-on-year.”
He can blame—and thank—the coronavirus for that. During the first two months of pandemic panic buying, Instacart was delivering more food than Walmart, America’s largest grocer, according to data firm Second Measure. At the time, it was second only to Amazon. The number of chains Mehta serves increased by 60%. There are now 500,000 Instacart shoppers cruising more than 45,000 stores across the U.S. and Canada; revenue has hit $1.5 billion.
Each purchase is becoming more valuable, too. According to an investor presentation obtained by Forbes, Instacart was grossing more than $3 per order by mid-2020, up from a loss of more than $2 per order at the start of 2019. Since the pandemic started, Mehta has delivered three consecutive quarters of positive cash flow as measured by earnings before interest, taxes, depreciation and amortization. That’s a first for the company, which was losing a whopping $15 per order as recently as 2015.
Of course, turning a profit is easier when you’ve outsourced the sizable real estate footprint normally required to operate a food business. Instacart has no warehouses, no stores, no freezers, no delivery trucks—pretty much no physical assets at all. What it does have is the intellectual property that powers its app and the people who maintain it. All that existing (and expensive) brick-and-mortar infrastructure is paid for by supermarkets, while Instacart’s hourly delivery people are contract workers who pay for their own transportation and their own health care. This setup has helped Mehta raise $2.5 billion in eight years from blue-chip investors that include Andreessen Horowitz, Sequoia and Khosla Ventures. Mehta holds an estimated 10% stake in the firm, making him a billionaire.
On The Rise
Shopping for groceries is a $1 trillion business in the U.S. most Americans still do it with a trip to the supermarket, But online grocery shopping is finally starting to pick up, driven in part by the pandemic.
“Apoorva has cracked the code on one of the most operationally complex industries to ever come online,” says billionaire Marc Andreessen, whose VC firm first bet on him as part of a $44 million investment round in 2014. “Where others have failed, he has created a sustainable, successful same-day delivery model that allows customers to shop from the same local grocers that they’ve loved for generations.”
That hasn’t gone unnoticed. Amazon, which stole Instacart’s most valuable partner three years ago when it paid $13.7 billion for Whole Foods, now delivers groceries in 18 cities. In July 2020, Uber spent $2.7 billion to acquire Postmates, the restaurant delivery firm that during the pandemic started curbside pickup of bottles of wine and bags of groceries. Postmates’ competitor DoorDash started delivering some groceries for Walmart in 2018 and is now coming hard at Instacart, flush with cash and valued at $61 billion following a blockbuster December IPO. It all has Mehta defending his early edge with a new effort to build and operate grocer websites and run ads for food products, digging deeper into their digital business.
“They have let the fox into the henhouse,” says Joel Warady, a former Mondelez brand executive. “The more [grocers] partner with Instacart, the more vulnerable they might become. If I was a retailer, this would really scare me.”
That Mehta might strike fear into the hearts of American retailers is surprising, given his beginnings. Twenty days after he was born in 1986, his parents moved from India to Libya, where his father was a general manager for an electric transmission line company under the Muammar Qaddafi regime. It wasn’t until they moved to Canada in 2000 when Mehta was 14 that he first saw a Western grocery store. Walking into one in Ontario, he was agape. “I had never seen so many Kit-Kats in my entire life,” Mehta recalls, shaking his head.
“That was just a massive culture shock,” he adds.
“I would be lying if I were to say that starting Instacart wasn’t a direct consequence of that.”
After graduating from the University of Waterloo, he spent four months at BlackBerry before joining Amazon in 2008, where he worked in Seattle as a supply-chain engineer managing warehouse inventory and merging shipments to cut costs.
But he dreamed of having his own company, and spent his evenings reading business books and brainstorming. He quit and moved to San Francisco in 2010, determined to become a successful entrepreneur. The result was mania. Over a two-year-period Mehta launched 20 startups, including a Groupon for food, a rating app for restaurants and a social network for lawyers. They all flopped.
“Reed Hastings had this enterprise company before Netflix. Elon Musk had a classified company before PayPal,” Mehta says. “To expect that my first company was going to be successful out of the gate was not an expectation that I had. The failure was expected.”
He landed on Instacart one day when he opened his fridge in San Francisco and noticed it was empty except for a single bottle of Sriracha. Within months, he had built a prototype app. His first break came when he collected $150,000 after being accepted to Y Combinator’s 2012 class—he missed the application deadline but got in after sending the head of the business-accelerator program a six-pack of beer via his app. Through Y Combinator, Mehta met two entrepreneurs whom he brought on as Instacart cofounders. Both are still at the company and hold less than 5% stakes in it: Brandon Leonardo leads an engineering team dedicated to customer growth; Max Mullen supports employee experience and culture.
Looking to capture the feel of being inside a well-stocked supermarket, Mehta posted photos of available items on the app for customers to peruse. In the early days, he did most of the shopping himself, making deliveries via Uber. What he didn’t do was build warehouses. Or overhire. Using contract workers as shoppers, he solved the payroll problem that had plagued dot-com-era grocery bust Webvan.
Instead, Mehta faced a different problem: He was shunned by the industry. “Most retailers in the very early days didn’t want anything to do with us,” he says. “It took us many years of just showing up. It is entirely about trust.”
His persistence led to a deal in 2014 with Whole Foods, which quickly became the biggest piece of Instacart’s business. Three years later, Mehta was scrambling again after Amazon announced it was buying the chain—and kicking Instacart out.
“Instacart without Whole Foods was like Pizza Hut without pizza. It was that big,” Mehta says. “But look, frankly, this was not going to be a 21st startup for me. There was absolutely no chance I was gonna allow that.”
The good news: Whole Foods agreed to wind down the partnership over two years. Mehta used that time to hit the road and visit every major grocer. It turned out that the Amazon deal spooked many of them as much as it rattled Instacart. “Everyone had read the same books, the story of what happens when Amazon enters an industry,” says Mehta, who at the time seemed like the far lesser threat. By the time Whole Foods left, he had added Kroger, Costco, Albertsons, Wegmans and Publix.
“This was incredibly difficult but definitely made us stronger,” he says. “Now, as a company, we have the scar tissue that allows us to take on very hard challenges.”
If ever there were a time to appreciate that scar tissue, it’s now. Instacart’s woes with workers involve both contract shoppers, who sign up to shop for and deliver specific orders, and in-store shoppers, who are stationed in certain supermarkets. At the peak of the early pandemic chaos, contract shoppers publicly rebelled over the lack of safety precautions or extra compensation for the risk of exposure to the coronavirus. Workers walked out in the spring, demanding more protective gear and $5-per-order hazard pay. Instacart, which began distributing safety kits in April, relented somewhat by June with expanded paid sick leave and free telemedicine visits for exposed workers. But Mehta didn’t roll over.
Ten part-time in-store workers at a Kroger in suburban Illinois joined one of the nation’s biggest unions right before the pandemic. In January, Instacart announced that about 2,000 of its roughly 10,000 in-store shoppers would be terminated by March, which the union called “outrageous.” Instacart insists the move is part of a long-planned transition away from having workers stationed in stores, and that grocers prefer to have their own employees fulfill those orders, adding that the cuts total far less than 1% of Instacart’s total shopping workforce.
A second skirmish concerns Cornershop, a startup of which Uber bought majority control in 2019 for $459 million. Instacart says the company stole thousands of its copyrighted food photos, while Cornershop says it used a third-party vendor and did not knowingly infringe on Instacart’s copyrights. In September the startup agreed not to scrape any more data or use images, and the fight is now headed for a public trial.
Mehta’s biggest battle, though, is for trust, especially as more grocers grow leery of the control Instacart is gaining over their customers. After all, relationships are his most valuable asset. Stew Leonard Jr., who runs his family’s popular six-store Northeast grocery chain, says that while Instacart helped grow his business, it also holds leverage over the chain through its ownership of the data from the orders it fills. “With our website, I learn about who you are,” says Leonard, who wants to use that information to send more targeted promotions and ads. “There’s a lot of competitors now, and we’re talking to two of them that will offer everything Instacart offers, and you own 100% of the data.” Instacart says that Stew Leonard’s and all its partners already have access to plenty of data—if customers agree to share it—and that it is launching a new portal this spring that will allow retailers to access even deeper analytics.
Erewhon, a celebrity-beloved organic grocer in Southern California, has taken an even tougher stance. “We used to literally have Instacart on our homepage. I don’t do that anymore,” says Tony Antoci, Erewhon’s owner, who has six locations in and around Los Angeles. “We’d rather own our customer, because once they go to that Instacart platform, they’re an Instacart customer.”
Antoci, who credits Instacart with creating a “tremendous” amount of business for the chain, launched his own delivery service a month into the pandemic after six years of feeling like he was competing with Instacart. To do so, he turned to ECRS, the North Carolina company that provided his cash register software. A 31-year industry presence, ECRS jumped into the e-commerce game four years ago and signed up 355 grocery chains in 2020.
“We’re not trying to take away their customers,” Mehta insists, adding that Instacart has no plans ever to sell groceries directly—unlike DoorDash, which has its own warehouses. It’s also actively hiring dedicated Instacart analysts who will be embedded in retail partners’ headquarters to support them. It says it already has data analysts in place at three of North America’s 10 largest chains.
“One of the main reasons why retailers work with us and not with Amazon is because Amazon has not treated retailers as well,” Mehta says. “That is not lost on us at all.”
Instacart raised $625 million last year, in part to support a strategy that would make it the ideal tool for grocers who want to build their own e-commerce offering—and make it harder for them to justify walking away. Instacart, Mehta argues, understands the minutiae of the highly complex industry better than the competition because that has been its focus from the start. More than 175 retailers, including Wegmans, Food Lion, Costco Canada and The Fresh Market, pay Instacart to power these websites.
“Focus is a competitive advantage,” Mehta says.
And a matter of survival. One former manager says holding that advantage also means holding onto the chains with the strongest customer loyalty. “They’re terrified of losing Wegmans and Publix,” the manager says.
Looking forward, Mehta is building an advertising platform that he says makes Instacart as much of an alternative to Facebook as it is to Amazon. It was born after countless hours at a whiteboard with his former CFO Ravi Gupta. Gupta, who left in 2019 for Sequoia, the VC shop that invested in both Instacart and DoorDash, recalls the thinking: “We don’t want customers to be charged more, but we want to earn more revenue. We don’t want retailers to be charged more, and we want to earn more revenue. How does that happen?”
Early adopters of the platform, including big companies like Hormel and fast-growing startups like Utah-based JoJo’s Chocolate, are seeing big returns. “Instacart has become a really important source for us to allocate marketing spend, because it’s just incredibly effective at connecting that dollar to that sale,” says Eat Just founder and CEO Josh Tetrick, whose sales of vegan eggs on Instacart grew sixfold in 2020. “We’re always cranking it up on Instacart.”
Mehta is loving it, too: By the end of 2020, Instacart users were clicking on more ads every single day than they did during all of 2019 (though he’s mum on specific figures). He now needs to keep grocers convinced that his ads aren’t just another way to cut into their margins. Food companies have only so many dollars to spend on advertising, and some of that cash ends up in grocers’ pockets to pay for in-store promotions and shelf placement. A portion of that $225 billion annual spending is now being diverted to Instacart.
If some grocers are wary of Mehta, others offer full-throated support. Among them is Danny Wegman, the third-generation family owner and CEO of Wegmans, a chain of more than 100 supermarkets in the east.
“As a founder of a fast-growing technology company, his openness to evolve and seek input and industry knowledge is a true testament to the partner he is,” Wegman says. “After a 500% increase in his business this year, he is still asking how to get better. That is a key reason for his success.”
True to form, Mehta is looking past present challenges and reaching for more, including an expansion beyond supermarkets and deals with Sephora, Best Buy and 7-Eleven. He says, “I’m on the phone with a retail CEO almost every day.” He adds, “The trajectory of the company has forever changed.”