Answered: 2. Explain how Instacart’s business…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

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2. Explain how Instacart’s business model works. How does the company generate revenue?

Transcribed Image Text:INTERACTIVE SESSION: ORGANIZATIONS Can Instacart Deliver? The online grocery store Webvan was perhaps the most well-known flop of the dot-com boom. Its Instacart's app provides a detailed map of each local establishment including store aisle contents. 2001 failure led many pundits and investors to con- clude that the online grocery business model was untenable. The customer's grocery list, compiled using exten- sive drop-down menus either on the website or in the app, is organized by merchant and aisle to provide maximum order fulfillment efficiency. Inventory is tracked for all of Instacart-affiliated merchants. As a personal shopper skims an aisle, bedecked in a bright green T-shirt flaunting the Insta- cart logo, items can be selected for different orders placed at different times. The software can also plan delivery routes and predict future customer orders. iPhone users can connect to the Instacart app However, Webvan's downfall was due mainly to pursuing a first-mover advantage strategy. It paid more than $1 billion to build huge distribution ware- houses, bought fleets of delivery trucks, and invested heavily in marketing. Then it offered free deliveries on any size order, at virtually any hour, at prices that trumped its brick-and-mortar competitors. This was not a formula for generating profits. In recent years other companies are testing the waters again for online grocery sales. FreshDirect in New York City has succeeded by combining fresh local produce, organic and kosher items, and custom- prepared meals with standard grocery store fare. Established brick-and-mortar firms including Albert- son's, Safeway and Peapod.com (the online entity for both Stop & Shop and Giant) took over as pure play online firms perished. The newest entrant, Instacart bypasses the expenses of warehousing and transportation alto- gether by using a legion of independent contractors and local food retailers. These personal shoppers receive orders via the Instacart smartphone app, from Yummly, the largest recipe search engine in the world, and have the ingredients delivered in time for dinner. Visitors to Food Network websites, with more than half a million recipes, can browse recipes online and then click a button to add ingredients they need to their Instacart shopping cart. The Instacart app is integrated with Google Now cards so that Android users can place orders for either delivery or pickup using a token generated within the app. Instacart's core competencies thus dictate its tar- get market: the price-insensitive, convenience shop- per. At first, item prices were marked up (20 percent in one sampling) and a $3.99 delivery fee charged. An Amazon Prime-like service called Instacart Express requires a certain volume of business and a $99 yearly fee in exchange for free delivery. One of Webvan's big mistakes was pursuing a mass-market strategy. It was never going to be able to turn a profit by providing quality and selection at rock-bottom prices-with free delivery to boot. Instacart is instead catering to shoppers who are willing to pay a pre- mium to have both quality and selection. By mid-2015 Instacart had 200 employees and 4,000 personal shoppers in New York, Los Angeles, San Francisco, San Jose, Washington, DC, Chicago, Boston, Austin, der, Denver, Houston, and Portland, Oregon. It con- tinues to grow. Grocery purveyors, from large chains such as Costco, BJ's Wholesale Club, Safeway, Kroger, Super Fresh, Trader Joe's, and Whole Foods to local specialty shops such as Erewhon Organic Grocer & Café in LA, Marczyk Fine Foods in Denver, and Green Zebra in Portland are now welcoming Insta- fill them from grocery store aisles, and use their own vehicles to deliver them to customers' doors. Like fellow "sharing economy" firm Uber, Instacart minimizes labor costs by requiring its personal shoppers to pay for their own auto and health insur- ance and Social Security contributions. Purport- edly paid between $15 and $20 an hour, depending on how quickly they can fill and deliver an order, most Instacart shoppers work part-time on flexible schedules. Instacart co-founder and CEO Apoorva Mehta believes Instacart's competitive advantage is tw fold. First, customers are not limited to a single vendor and can combine items from multiple stores on one order, so product selection is truly custom- ized. (Instacart uses special software that can track inventory across multiple supermarkets.) And since personal shoppers are on call around the clock, cus- tomers have to neither order many hours in advance of delivery nor wait for a delivery window. In fact, customers can have their grocery list filled and deliv- ttle, Philadelphia, Atlanta, Boul- cart as a way to expand their customer bases ahead of the full national rollout of Amazon subsidiary ered in less than an hour! Amazon Fresh.

432 Part Three Key System Applications for the Digital Age
While many analysts predict that matching the
bargain basement prices of Amazon and Walmart
is unavoidable, Instacart is instead modifying its
business model. Partnerships with Petco and Tom-
linson's Pet Supplies in Austin, Texas, hint of addi-
tional product areas on the horizon, while Mehta
speculates that expansion into general logistics is
layering labor on top of the existing grocery infra-
structure is still unproven. According to a Wall Street
Journal analysis, an order of 15 common items such
as frozen peas, milk, cereal, and fresh fruit costing
about $68 from a San Francisco Safeway store would
produce a profit of only $1.50 for Instacart. If the
order were smaller by one 28- ounce jar of peanut
butter, Instacart would break even, and a smaller
order could push it into the red. Without price con-
conceivable.
Many of Instacart's grocery store partners now
set their own prices, paying Instacart a cut of each
cessions from participating merchants, can Insta-
cart attract enough customers? And maintain a pay
scale that ensures the topnotch customer service
demanded by its target market? And still make a
profit? And can retailers' sales gains from Instacart
be sustained? Instacart may be a great idea, but it's a
order. This has freed Instacart of the burden of mark-
ups, protected it from the vagaries of variable food
prices, and provided a more stable profit structure.
Retailers have been willing to pay Instacart in the
hope of gaining more business because Instacart
enables a single store to serve people across a larger
geographic area. Affiliated retailers are reporting
gains, although the numbers are small. Nilam Ganen-
thiran, head of Business Development and Strategy,
maintains that different types of agreements have
been reached, declining to specify whether partners
are outsourcing their e-commerce to Instacart for a
monthly fee or are charged per item purchased, per
order placed, or per customer serviced.
With national chains achieving just 1 to 2 percent
very big bet.
Sources: Sarah Perez, "Instacart Becomes the Default Ingredients-
Buying App for Food Network's Websites," TechCrunch.com, June
2, 2016; Megan Rose Dickey, "Instacart Cutting Wages for Shoppers
Starting March 14," TechCrunch.com, March 11, 2016; Brad Stone,
"Instacart Rings Up $220 Million More for its Grocery Delivery Ser-
vice," Bloomberg Business, January 13, 2015; Carmel DeAmicis, "On
the Way to $220M in Funding, Instacart Quietly Changed Its Busi-
ness Model,"gigaom.com, January 14, 2015; Farhad Manjoo, “Insta-
cart's Bet on Online Grocery Shopping, New York Times, April 29,
2015 and "Grocery Deliveries in the Sharing Economy," New York
Times, May 21, 2014.
margins on grocery delivery, the Instacart model of
CASE STUDY QUESTIONS
1. Analyze Instacart using the value chain and com-
petitive forces models. What competitive forces
does the company have to deal with? What is its
value proposition?
3. What is the role of information technology in
Instacart's business model?
4. Is Instacart's model for selling online groceries
viable? Why or why not?
2. Explain how Instacart's business model works.
How does the company generate revenue?

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