What's Next For Instacart?

| About: Instacart (ICART)

Summary

Instacart had a great year in 2015.

Foreign expansion in the works.

Refining its metrics.

Expanding its demographic base.

IPO anytime soon?

Instacart (Private:ICART), the grocery, pet supply, wine and fresh baked goods delivery startup founded in 2012, now has $275 million in venture capital funding and a $2 billion valuation. So what's in store for the coming year? Lots of things. The stage for the next 12-24 months was methodically constructed in 2015.

The company tripled in size and currently has around 300 employees and partners with over 100 retailers in 18 U.S. cities. It hired its first CFO, Ravi Gupta, in September 2015, and Jeremy Stanley as its new VP of Data Science. Instacart may have laid off 12 in-house recruiters in December 2015. But, as evidenced by its current job listings in Linkedin, it continues to aggressively recruit software and data engineers, research scientists and designers.

The young company also tweaked its business model. Instead of simply marking up each item purchased and delivered by one of its contract shoppers, the company is now letting its partners set their own prices in exchange for a fee paid directly to Instacart.

Instacart dramatically expanded its goods delivery services. It has gone beyond early partners such as Costco (NASDAQ:COST) - grocery delivery with no membership required - and Whole Foods Markets (NASDAQ:WFM). It now offers delivery for more than 13,000 Petco (Pending:PETC) products in 16 U.S. cities. Target (NYSE:TGT) also has joined with Instacart for delivery of its grocery and personal care products. And in late 2015, the company began moving very seriously into wine delivery, partnering with Total Wine and More. Starting out in Miami, Instacart will eventually deliver fine wine, beer and spirits to Total Wine's 128 superstores in 18 states. Spec's, the Texas wine and deli warehouse, also began partnering with Instacart in late 2015. Instacart will deliver Specs wine and deli offerings in Austin and Houston.

In mid 2015, Instacart began offering its in-store shoppers the option to convert to part-time employees. This decision had as much to do with being able to ensure proper training for these workers as it did for providing more benefits.

Looking more closely at its bottom line and future expansions, Instacart upped its delivery prices in December 2015: for most cities, delivery now starts at $5.99. Instacart Express will be $149/year beginning January 4th, 2016. The starting delivery price had been $3.99 for the past three and a half years.

In summer 2015, Instacart acquired Wedding Party, a mobile app start-up that allows wedding guests and friends to contribute their own photos and videos to a shared, digital album. This acquisition was most likely as much about gaining access to the Wedding Party app's talented engineers as it was buying the small company.

Foreign expansion in the works: There are a multitude of options for expansion. One of the most obvious was clarified recently by Nilam Ganenthiran, Instacart's Toronto-based VP for Business Development and Strategy. In the September 15, 2015, issue of Canadian Business, Ganenthiran pointed out that the Canadian grocery shopper now looks much like the American consumer did when Instacart debuted in 2012, that is, "increasingly comfortable with online ordering, and willing to trust people hired to fulfil a grocery order." Ganenthiran says, "Instacart is poised to launch in Canada later this year or in early 2016."

"I really think Canada's at a tipping point, because the consumer need is no less prevalent," Ganenthiran added. "In fact, it's potentially greater, especially in winter months. We are extremely bullish on Canada."

Whole Foods Market, one of Instacart's busiest partners, has 10 stores in Canada. It would be an obvious launch partner for Instacart's entry into the Canadian delivery market. And with nine stores in the United Kingdom, Whole Foods Market also could serve as an obvious launch partner for Instacart if it chooses to cross the Atlantic.

Refining its metrics: One aspect that sets Instacart apart from many other delivery services is its sophisticated tracking and analysis systems and their ongoing refinements.

Fareed Mosavat, Senior Growth Product Manager at Instacart, in December 2015 in an interview in December 2015 with Diana Smith on Segment.com, talked about their data collection scenarios and what they are working on.

Today you cannot enter the Instacart site without signing up for an account/leaving your email. According to Mosavat, Instacart is "currently working towards removing signup from the onboarding flow and making it part of checkout." And at the same time "be able to watch an anonymous user from beginning to end and see their conversion." In addition the focus is how to better define those metrics specific to Instacart, including refinements defining Instacart site visitors and their use and return to the site."

Expanding demographic base: Instacart's CEO Apoorva Mehta has often repeated the comment that he decided to start the company because, as a busy millennial, he never had time to grocery shop or even had the inclination to do so. That was 2012.

Yes, it was the millennial segment that got things off to a good start. But Nilam Ganenthiran notes that while the condo-dwelling millennials gave the company its start, today it's the "young dual-income families with Johnny in soccer and Suzy in ballet (that) comprise about one-third of its customers." Ganenthiran adds that these families tend to order baskets three to four times the size of the average Instacart order."

So what's next? The forgotten constituency - the elderly. "It's a really unique group because nobody talks about them in relation to e-commerce, but they're huge and growing," Ganenthiran says.

Hmm . . . What might millennials give their grandparents for birthdays or holidays. How about an annual Instacart Gift Subscription?

IPO anytime soon? An IPO is unlikely in 2016. Depending on the U.S. economy and the markets, 2017 would be more advantageous. Instacart has a lot of venture capital and expansion is not as costly as with the traditional bricks and mortar model. As its founder and CEO Apoorva Mehta likes to point out "We don't hold any inventory, we don't have any warehouses, we don't have any trucks."

In a recent Tech Crunch interview, CFO Ravi Gupta hinted that more bite-size acquisitions, such as Wedding Party, "may be in the cards." When asked about an IPO, Gupta would not elaborate, saying only that the company is not "being specific about that next phase. It's just about having more partner retailers, more markets, more customers, and continuing to grow. Whether we do that in the private or public market isn't something we're talking about right now."

Instacart and its expansion last year into a large segment of the retail landscape says a lot about it being able to go forward, but uncertainty still hangs in the air. Today there is an air of pessimism about many unicorns that continue to burn through their venture capital cushions at explosive rates. Layoff announcements at many of these appear weekly. Instacart appears to be in a much better position, but details of finances remain sketchy. An article in the Economist recently mentioned that Instacart is rumored to lose around $10 on each order it fulfils.

2016 will be an interesting year for Instacart. Stay tuned.

Disclosure: I am/we are long WFM, COST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.