Consumers Pay Up for InstaCart’s Expensive Business Model

With all the buzz about the latest InstaCart’s $220 million round of financing, I finally decided to pull the trigger. But not to grace them with my first order, not so fast. Instead, I reached down to the waste basket by my desk and pulled out the receipt from my weekend trip to Costco.

InstaCartReading numerous analyst’s accounts of InstaCart business model, I was almost persuaded to accept that finally a magic formula for riches in the online grocery business was discovered. What’s more, this formula includes an unbeatable consumer proposition of $3.99 delivery fee (or a $99 per year fee waiver option), a “slight” markup on the groceries, and a two hours delivery window. Brilliant! Right?

But it gets better, if you believe the CEO and the analysts, there is also up to $30 per hour earned by InstaCart’s personal shoppers. This company appears to have solved not only the online grocery shopping conundrum but also it has also found an answer to the biggest economic puzzle of our time the stagnation of pay rate. If you can push a cart and you are willing to work 10 hours a day you can bring home some $1500 per week. Not bad at all.

It all makes sense. Consumers want convenience, but no one wants to pay too much for delivery. We are all spoiled by free delivery of our takeout lunches and dinners and by our local grocery stores delivering groceries for free, if it is within a walking distance. Nevertheless, $3.99, $5.99 or a $99 yearly membership fee doesn’t sound that bad (unless you start adding up all the other membership fees like the $99 for Amazon Prime, $110 for Costco Executive Membership to name the most prominent contenders to my retail membership budget).

Shopping for groceries is hard, and the Costco in Brooklyn this past weekend was, as always, a zoo. So I can imagine that for someone to do my shopping at the store and bring it to my house, $30 pay is well deserved. But I have to admit that I did not have the slightest idea how InstaCart can afford paying $30 for my order if they only charge me $3.99 for delivery, and tuck on only a “slight” markup.

This is when I decided to create an order with InstaCart from the receipt I just pulled out from the trash. Far from “slight”, I found that price markup was in fact extraordinarily large. As you can see from the table below, where I added the items on my receipt to my online shopping cart, when its all set and done InstaCart’s order would have cost me 44.5% more than what I paid at the store. $61.78 on an order of $138.96 – I never expected the difference to be so big.

InstaCart Vs Costco

Products InstaCart Costco Store Diff
Kleenex Ultra Soft 3-Ply Facial Tissues 12/ 85 count* $20.49 $13.29 54%
Kirkland Signature 2-Ply Bathroom Tissue 30 ct $19.59 $15.99 23%
Earthbound Farm Organic Spring Mix 1 lb $6.09 $4.89 25%
Kirkland Signature Organic Brown Eggs – USDA Grade AA 24 ct $8.59 $6.99 23%
Blue Hill Bay Herring In Wine Sauce 26 oz $6.09 $4.99 22%
Chosen Foods 100% Pure Avocado Oil 1 L $12.79 $9.99 28%
Bumble Bee Solid White Albacore Tuna In Water 8 – 7 oz $16.99 $13.89 22%
Blackberries  18 oz $6.69 $3.99 68%
Roma Tomatoes on the Vine 2 lb $6.09 $4.99 22%
Joy Ultra Lemon Scent Dishwashing Liquid 90 fl oz $7.39 $5.99 23%
Kirkland Signature 50/70 ct Cooked Shrimp 2 lb $26.89 $19.89 35%
Kirkland Signature 12″ x 10.75″ Foil Sheets 500 ct $12.09 $9.89 22%
Kirkland Signature Dishwasher Pacs 110 ct $11.99 $9.79 22%
Kirkland Signature Drawstring Kitchen Bags 13 Gal 200 ct $17.09 $14.39 19%
Subtotal $178.86 $138.96 $39.90
Delivery $3.99 markup 29%
Tip 10% (second lowest tip suggestion at checkout) $17.89
Total $200.74 $138.96 $61.78
* $16.79, less $3.5 automatic coupon given at the store. markup 44%

 

The Unsuspecting Consumer

If someone offered you to do your Costco shopping for a small fee of $44 for every one hundred dollars ringed at the register, would you think it was a good deal? When a $200 basket ends costing you $288 and a $300 basket a whopping $432, it’s hard not to call this a ripoff.

Why do we all go to Costco in the first place? We pay the $55-$110 annual membership to get access to brand name products at better prices, we go there to save 10-30% on our groceries and other products, compared to the price of standard retailers. So adding another layer to the supply chain, a layer that is no less than 30-40% thick makes absolutely no sense.

Why would consumers agree pay 30-40% more? My answer would be, a combination of retailer deception and consumer ignorance.The ignorance has to do with the fact that grocery shopping is a basket based activity which makes it very difficult for the consumer to gauge the real price of individual items in their 13-30 products shopping cart. The deception part has to do with how brick and mortar retailers take advantage of this difficulty. We are all familiar with the “loss leaders” pricing strategy designed to attract consumer by highlighting the low price of a few items to lure them into the store. Once in the store, the retailer has calculated, the target bottom line is always met.

Price Fog

With gross profit margins of 13% for Costco, 25% for Walmart, 27% for Safeway, and 36% for Whole Foods, it is not surprising that consumers have no idea what grocery products cost. Moreover, prices at the same retailer fluctuate on a weekly, sometimes daily basis. And when you factor in cross retailer pricing, consumers don’t stand a chance to see clearly. The fog surrounding grocery prices is really the only reason why InstaCart can get away with what most consumer would describe as ripoff.

The premise of Internet Commerce was to cut the middleman and to reduce the hands touching and inflating the price of the products at it moves up the supply chain. We are seeing more and more manufacturers selling directly to consumers on their online shops and on Marketplaces like Amazon’s, Sears and Rakuten. With just a few clicks consumers can see and compare prices on pretty much every product or service and chose the best price from the retailer they trust.

Comparison shopping for groceries and basket level shopping engines are not yet developed to serve consumers effectively. There are some players in this space, the start-up company MySupermarkets offers basket level comparison shopping, but only for products it can find online on Amazon, Costco, Walmart etc. While this is a step in the right direction it hardly serves to clear the fog around what we pay for everyday products. And until this online and real world gap is closed, InstaCart can get away with charging whatever they want.

The Argument for Convenience

For those who want to point out the convenience factor, I’d say that while this aspect of the crowd sourced butler services is evident, as a motivation to switch your grocery shopping to InstaCart it may not be sustainable. If you are a weekend shopper as most busy people are, you just added a slew of new inconveniences to your life.

The first is the not so simple task of ordering groceries online, figuring out exactly what you need, how much of it you’d want to buy this weekend, making sure that you are buying the right product.

Unlike Fresh Direct InstaCart has a huge database management challenge. Since they don’t buy or control their product selection (the retailer does), their product descriptions are basic at best. Most of the times product information is limited to the title and image. This elementary product information creates an expectations gap that has to be overcome buy on order notes and SMS communication with your personal shopper…

Which brings us to the second inconvenience of having to stay put for an hour while the personal shopper works your order. Unless you are billing at $250 an hour over the weekend, I’d say to force yourself out of your computer screen and do your own grocery shopping – and try to have some fun in the process.

 

 

2017-01-24T13:18:34+00:00 Categories: News|Tags: , , , , , , , |6 Comments

6 Comments

  1. shane November 21, 2016 at 3:27 am - Reply

    So what happens when NZ company arrives offering :

    Free delivery
    Lower than in store pricing due to more efficient cost structure 40% to 60% on main stream items
    High quality as less handling and direct from producers
    Click and collect in 15 minutes with credit of $2 as it saves delivery cost.
    Safer more reliable staff, with no stock outs as stock is already owned and stored with live web store ERP stock system.
    Order by menu with no additional costs. Setup your home details and order by day or by week, still no delivery charge whether you order daily or weekly.
    Setup JIT with your household pantry – system auto orders when household items running low. Free setup no additional costs.
    .

  2. RoyD May 28, 2016 at 5:08 pm - Reply

    My question is simple – are they making any money? sure hope so with this pricing scheme

  3. Andrew April 27, 2016 at 11:02 pm - Reply

    That is only the Costco experience. I got Petco today, and paid about an extra 5% to Instacart, and a 15% tip to the delivery person. Instacart shoppers are doing more than a wait staff at a restaurant, and should actually be getting a 15-20% tip. Especially for all the gas and wear and tear on their own car to deliver your groceries. Whole Foods and Gelson’s also do not mark up their price. I’d just avoid Costco, and order from the other places. I believe Smart and Final is also the same price as the app. Just don’t get mad at the tip. Workers are paid mostly by that for giving you the convenience of taking a major chore off your plate.

    • Editor May 28, 2016 at 5:29 pm - Reply

      I think this is meant to educate consumers not to question how much InstaCart employees should earn. To your point, I don’t think that the markup is high only for Costco orders. There is no way to make money on 5% markup considering what you too pointed out as the costs involved in getting the order to your doorstep. Unless you shop for 20-30 items in any given store and then go online to see what it would cost you on InstaCart, you cannot say that its only 5% or that some retailers don’t markup at all. The retailers are not part of the equation anyway, its just you and InstaCart.

  4. Melissa April 14, 2015 at 4:36 pm - Reply

    WOW! Instacart looks great for someone who’s sick or needs a couple items in a rush but it doesn’t look like it alleviates the stress of grocery shopping for the struggling single mom (like myself) because the costs are freaking outrageous. And I would rather pay a high fee and know that I’m paying a high fee vs pay a low fee and wonder what else I’m paying in up-charges. I still plan on using Instacart when they hit my area. Just not for a full load.

  5. Shelley Butterworth January 30, 2015 at 11:53 am - Reply

    I am wondering if they hike the price by that much for Whole Foods? Or it’s something that they only do for Costco because prices are low to begin with… Otherwise an eye opening article, $90 extra for a $200 Costco order is a dinner for two at a nice restaurant. Think about that next time you feel lazy!!!

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