Instacart and their Unsustainable Model

November 10, 2019

Personally, I believe that Instacart is attempting to operate on a fundamentally flawed business model, and is doomed to fail unless the underlying model is changed. It is being kept afloat by external money, but will never be economically viable in a socially responsible way. If they can’t make enough margins to actually pay their employees, it’s not a viable business.

Note that I have 0 background or knowledge in this specific sector. These are my opinions and thoughts from some basic research. Many things in here are likely not 100% correct.

Depending on Competitors

Instacart’s main business is in doing grocery delivery, typically from pre-existing, well known grocery stores. Part of this is the dependency on well known and trusted in-house brands of existing retailers. This leaves Instacart heavily dependent on the existing grocery chains. In effect, they have build a business which is dependent on their potential competitors. They pay their “runners” to physically go into stores, purchase orders, and deliver the products. This means they they either:

  1. Cannot centralize operations in an automated warehouse fashion, or
  2. Require competitor cooperation in order to centralize known brands for easier access

In order to compensate for this, Instacart has gone down the route of using sleezy pricing practice. In my opinion, sleezy, unclear pricing is a clear sign of an unsustainable model. If you need to hide your pricing in order to get a customer, your product is not worth the price.

There is a cross section of people who will want a single delivery of items from multiple stores, and will be willing to pay a premium for it. I do not believe this is a big enough section to warrant their current extreme valuation.

“Disrupting” the wrong thing

The entire “gig economy”, Instacart included, is taking “disruption” in the wrong direction. The original “disrupt the industry” in Silicon Valley focused on targeting old-school, inefficient, rent-seeking industries, with the end goal of making them more efficient and profiting on the difference. Uber attempted to disrupt taxi cartels, and WeWork attempted to disrupt forcing companies into long-term leases. The spoken goal was to make things better for the “every day personal”.

Unfortunately for the entire country, we seem to have come out the other end. These companies are all now focusing on how they can disrupt minimum wage laws. It should go without saying: Any company that, as a requirement for it to remain in business, is dependent on their workers living in poverty, does not deserve to exist.

Instacart, like many other “gig economy” “employers” are taking advantage of the lack of financial understanding, and/or desperation, of their worker force. The current IRS milage deduction is 53.5 cents per mile drive. These types of wear-and-tear costs, and hidden expenses of these “jobs” are just another hit on the income from these positions. Minimum wage exists for a reason.

The fake classification of these individuals as “self employed” is a large cop-out to avoid social responsibility. True self employment implies freedom, and more to the point, a pathway to financial independence. Ie, in true self employment, it is possible to build a business which can grow beyond one person. This is not possible as an Instacart runner. There is no way for you to subcontract your Instacart delivery job.

One thing that I often hear as a benefit of all of these “companies” is the number of jobs they provide. Instacart claims to have “over 70,000 dedicated shoppers” and Uber claiming “3 million Uber drivers in 2018”.

Food Delivery

A comparison can be drawn here to food delivery companies, such as Doordash, who has also participated in predatory and sleezy pricing/payment practices. Unfortunately for Instacart, Doordash has the advantage of having the power over their “competitors”. Doordash is a large company in comparison to the average small, local restaurant that they “partner” with. It is very unlikely for the local Thai restaurant to develop a competitive delivery platform. Not only would it not make economic sense, but the small restaurant will not have the brand recognition needed. If your typical consumer wants Thai food, they often don’t particularly care if it comes from Mai Thai, Thai Kruefka, or Little Thai Food. In fact, they likely googled “local thai food” in order to find a place. Compare this to your local grocery store. You know what stores are in your area. You already know where to find them.

While it likely does not make sense for Little Thai Food to set up their own delivery service, it most definitely does for Whole Foods.

How Can this Work?

I can 100% see a successful business model in a delivery-first (or only) grocery store, with an extreme focus on the customer experience. Ie, a grocery store with no physical location, with hyper-optimized warehouses and automation for packing and scheduling orders. With the name brand that Instacart has, they could be in a prime position to pursue this. Unfortunately, I believe that the reputation hit they are taking to their brand from their current actions will destroy any trust that could be used to pivot towards an economically stable business.

A business that can efficiently solve food distribution in a sustainable fashion could have a drastic impact on the entire country. Instacart has the potential to be a drastic social good, however the underlying business model must change in order to avoid being a net-negative on society.

I believe Instacart will be a failed business model. They cannot possibly compete with individual stores/brands for in-house products, which they will always have to be able to get if they are “delivering from the store”. If they can’t make enough margins to actually pay people to do it, it’s not a viable business. Forcing “tips” to try to make up the difference is just cheating.