Will Instacart Succeed as an Advertising Company After Going Public?

Instacart is getting ready to change things up as they go public, according to The New York Times. After the new CEO, Fidji Simo, took the reins in 2021, “The board of directors asked her to find new ways for the company to earn money.”

Before starting in her role, Simo proposed to Instacart's board a closer collaboration with grocery retailers. She recommended acquiring startups like Caper, a firm behind an electronic shopping cart that enhances customer and retailer experiences. Acting on her suggestion, Instacart purchased Caper in October 2021 for $350 million. While grocers initially feared competition from Instacart, Simo reassured them of the company's intention to be partners, not competitors.

Beginning in 2019, Instacart allowed “food brands to pay for better placement in the company’s app. Brands had questioned whether the ads were helping, so Ms. Simo commissioned studies demonstrating their efficacy, two people familiar with the company said.”

Simo also devised a strategy to offer software tools to grocery firms to enhance shopping experiences. Subsequently, she engaged with these companies by visiting them and hosting their executives at her Carmel, California, residence.

Last year, Simo expressed her vision of leading Instacart's "third act," emphasizing software tools for retailers and aiming to rival Amazon's grocery delivery and aid grocery digital transitions.

According to the NYT article, “Nearly a third of Instacart’s $2.5 billion in revenue last year came from its ‘highly profitable’ ads and software division, according to its prospectus. In the first half of this year, Instacart’s $406 million in revenue from ads and software helped propel it to $242 million in profit.”

Instacart is demonstrating how a traditionally unprofitable gig-oriented business can approach public markets by diversifying into more profitable sectors and distancing from its gig-economy origins. The journey wasn't easy for the company, marked by financial losses and the 2021 departure of its co-founder, Apoorva Mehta, due to board disagreements.

Meanwhile, Uber, Lyft, and DoorDash are some of the most widely used and recognized companies in the digital app realm, but even those companies “have never turned an annual profit.”

Instacart’s co-founder, Mehta, wanted to change that. By using collected data from customer purchases, the app would be able to promote products to its users in the same way Amazon had been doing with its data.

Now, four years after Instacart began selling ads on its platform, their studies concluded that any negative impact on their customers was minimal, so they decided to increase the amount of ads provided.

This may provide some hope for success in advertising, but Instacart still grapples with various challenges. Its dependence on major retailers such as Kroger and Costco poses a risk if they decide to opt for competitors. While last year saw an 18% rise in grocery orders, this year's first half showed no growth compared to the previous year. This stagnation might impact its advertising business if there aren't sufficient delivery customers to target with ads.

According to U.S. News & World Report, Jeremy Bohne, the founder of Paceline Wealth Management in Boston, believes Instacart is a major force in grocery technology, collaborating with stores that represent 85% of the U.S. grocery sector. The company is diversifying its model and reducing reliance on delivery by pivoting toward online advertising, which constituted 30% of its revenue last year.

However, Bohne suggests that Instacart's real competition might be in-store sales, especially during economic downturns.

As Wharton management professor David Hsu told Barron's, "The ad business is just starting to ramp up and it remains to [be] seen how well it does." Ultimately, Instacart has made "an ambitious play with a lot of uncertainty."