Instacart Shares Sag After IPO But Kearney Expert Sees Recipe for Growth
Growth might be challenging for post-IPO Instacart, but that doesn’t mean expansion is impossible for the 11-year-old last-mile delivery company.
One strategy and transformation expert believes that simply going public is key to Instacart’s future growth, despite the company’s shares trading lower Wednesday, at $28.71, than the original $30-per-share price set on Sept. 18. That gives it a market cap of $7.9 billion, a far cry from 2021’s $39 billion valuation.
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“They need capital to grow because a lot of their business is not really scalable. If it wants to move into a new market, it’ll need trucks and labor,” said Michael Jenkins, partner and CEO Advisory practice leader at global strategy and management consulting firm Kearney.
He sees proof that Instacart has been building a strong foundation over the past three years. “They’re down to single-digit growth, but the durability of their platform by the sophistication of the services and data they have are all much higher,” he said.
According to Jenkins, Instacart has been smart about diversifying. “They took a page out of the Amazon playbook and a lot of their revenue comes from advertising,” he said, adding that last-mile delivery companies don’t have a “a ton of economics” in terms of becoming profitable.
Instacart’s data-driven focus is a clear advantage in Jenkins’ opinion. “As soon as it becomes a flywheel, it feeds itself. They’re not there yet, but they could be and they’re certainly well positioned to be the winner of the race,” he said. “They have brand recognition and they have good partner relationships.”
With “enormous headroom for growth,” Instacart could grow six-fold and “still wouldn’t cap out the market,” he continued. With only about 10 million users, Instacart now must be careful about strategy to fully unlock the opportunity ahead.
And that starts with discipline. “They’re not going to thrive if they’re just a logistics company because anyone can do that,” he said. “If you look at florists and pizzerias, those are very mature last mile companies. They’re profitable when density and service economics are high. It’s profitable to deliver a pizza in Manhattan at dinnertime, but less so in Dubuque [Iowa] in the middle of the afternoon.”
But if Instacart can be choosy on where it operates and the categories it serves, it would have a recipe for profitable growth, Jenkins said.
At the moment, Instacart is operating in a sector dealing with rising labor costs. Amazon, for one, is spending an additional $440 million on higher pay for drivers who work for Amazon’s delivery service partners (DSPs). Created in 2018 to cut its reliance on FedEx and UPS, Amazon pays DSPs each month for fixed costs as well as employee costs and benefits. Many DPSs reportedly already pay drivers above the hourly $20.50 average.
“One of the things I’ve seen in competitors like Instacart is that they were paying wages higher and higher, and they were getting worse and worse quality folks,” Jenkins said. “I don’t think we’re quite in that froth of the market where you’re truly getting non-qualified labor, but [when] people perceive they have options, you have to pay up in order to get attention.”
According to Instacart’s prospectus, last year it earned $428 million, better than the $73 million loss it recorded in 2021. Total 2022 revenues reached $2.5 billion, with online advertising adding 30 percent of that sum. Business seems to be slowing down, however. Instacart said 2022 orders were 18 percent above 2021. But orders were flat for the first six months of this year versus a year ago, it said.
