Instacart Wants to Be an Influencer in Food Delivery

Instacart and restaurant-delivery platforms might seem like similar businesses on the surface, using gig-economy workers to deliver food to consumers. But there are key differences worth noting. While Instacart says the majority of its shoppers are independent contractors, the company also employs full-service shoppers in some stores on a part-time basis. In part because of their larger average basket sizes, groceries as a core business relative to restaurant food also make for very different unit economics. Instacart last year said it did $1.5 billion of revenue but handled “tens of billions” of dollars in gross transaction value. While not a perfect comparison,

DoorDash

generated almost twice the revenue last year, handling roughly $25 billion in gross order value for its largest business.

But that dynamic could change. Alongside its grocery-delivery business, Instacart is growing an advertising business, which it believes can one day be on par with some of the largest digital-advertising businesses in the world. The hiring as CEO of Ms. Simo, who led the launch of ads on Facebook’s News Feed and the team in charge of monetizing mobile ads for the platform, points to Instacart’s ambitions to accelerate this business. Over the last two years, Instacart has made three high-profile hires from

Amazon

and Google to lead and manage its advertising business.

Data from both Edison Trends and Bloomberg Second Measure show that Instacart’s market share in grocery pickup and delivery spiked early on in the pandemic. That market share remains elevated from pre-pandemic levels but has come down since then. In April 2020, Instacart had a commanding market-share lead on U.S. consumer sales among select U.S. grocery pickup and delivery companies, according to Bloomberg Second Measure, taking significant share from

Walmart.

But as of May 2021, Walmart was on top once again.

Although Instacart remains private and discloses few financials, its advertising business generated roughly $300 million last year, with sights on growing that business to $1 billion by next year, according to a person familiar with the matter. Those growth prospects will likely be a key focus for prospective investors, as the company prepares for a highly anticipated public offering. In addition to strengthening the value proposition of a platform to its customers, reaching consumers as they are shopping, ads are also a lucrative business with high margins that can compensate, should growth slow in other areas. Thanks to its ad-dominant business model, Facebook showed a gross margin of over 80% last year, for example, compared with DoorDash’s overall gross margin of just over 50%. With last year’s pandemic boost, Instacart says it was able to show profits on the basis of adjusted earnings before interest, tax, depreciation and amortization in 2020—something it hadn’t achieved pre-pandemic in 2019.

Restaurant-delivery platforms themselves have struggled to turn consistent profits, even as revenue has soared. DoorDash at least managed to turn a profit last year for the full year on an adjusted Ebitda basis, but

Uber’s

Eats business didn’t. Regulatory pressures have raised driver compensation in some geographies and capped fees that the platforms can charge restaurants, at least temporarily. New York City is now weighing a permanent cap on fees. Delivery platforms have been able to compensate for lower fees from restaurants by charging higher fees to consumers. But with in-restaurant dining back, consumers may not be willing to keep paying that tab for long.

Ads are one way to close the gap, and food-delivery platforms seem to be somewhat quietly bolstering their ad presence. Uber’s Eats business launched its first advertising format in sponsored listings last August and has said it is targeting a $100 million run-rate for its ad business this year. However Chief Executive Officer

Dara Khosrowshahi

said in May that Eats is tracking well above that. Uber also recently brought on a former director at Amazon focused on ad tech to lead its advertising business. DoorDash says that, while it offers consumer discounts, the company still foots the bill for some of those promotions at this time. A spokesperson for the company says it isn’t ready to discuss progress on ads at this time. DoorDash does, however, have a vice president leading its ads business and is hiring for a director of ad revenue, according to LinkedIn.

As delivery companies eventually shift from focusing on growth to profits, advertising could be the holy grail. Meanwhile, Instacart seems eager to showcase its worth.

Write to Laura Forman at laura.forman@wsj.com

Corrections & Amplifications
In April of 2020, Instacart had a commanding market-share lead on U.S. consumer sales among select U.S. grocery pickup and delivery companies. An earlier version of this article incorrectly implied it was in April of this year. (Corrected on July 14)