Instacart IPO Isn’t Offering Empty Calories
Grocery-delivery provider already makes appetizing profit, though competition is picking up
By Dan Gallagher
Heard on the Street
Wall Street Journal
Aug. 28, 2023 6:00 am ET
Instacart still has a strong edge among grocery shoppers looking to stock up.` / PHOTO: MICHAEL LOCCISANO/GETTY IMAGES
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Have investors really shifted their focus from growth to profits? Instacart might prove the truest test of that theory.
The online provider of grocery-delivery services filed papers Friday for an initial public offering. That filing showed a surprisingly decent bottom line—and not one pulled in the nick of time ahead of the listing. Maplebear, which does business as Instacart, first generated an operating profit based on generally accepted accounting principles in the fourth quarter of 2020. It has also shown a profit under those standards for the last five consecutive quarters, leading to an operating margin of 14% for the trailing 12-month period ended in June.
That stands out especially against other so-called gig-economy players. Uber, Lyft and DoorDash are still all losing money annually on that basis, though Uber did just manage its first quarter of GAAP operating profits in the June period. Advertising has likely been a major factor helping Instacart’s bottom line, as national brands pay for prime placement in the company’s virtual grocery aisles. One of those national brands— PepsiCo —is even buying $175 million of Instacart’s shares in a private placement deal ahead of the offering. Advertising now accounts for more than a quarter of Instacart’s annual revenue.
Establishing a strong bottom line has been a wise move for Instacart. Compared with the market’s attitude when its aforementioned peers went public, investors now have become far less forgiving of companies that torch profits and cash to chase market share. That has helped keep a lid on major new issues. Only five other venture-backed IPOs priced at over $1 billion have taken place so far this year, compared with 10 last year and 60 in 2021, according to data from PitchBook. Arm Holdings also filed IPO papers last week, and the British chip designer showed GAAP operating profits for its last three fiscal years.
But Instacart’s filing also shows some less appetizing trends. Gross transaction volume, which represents the total value of orders over the company’s service, has slowed remarkably, rising only 4% in the first six months of this year compared with the same period last year. By comparison, the first half of 2022 saw GTV volume grow 15% year over year. Orders also seem to have flatlined, remaining just above 66 million in each of the past three quarters.
Many factors are likely at work there. Instacart notes in its filing that inflation has pushed up order values but also driven customers to purchase fewer items per order. And competition is coming from all sides. Walmart, the world’s largest grocer, accounted for 62% of U.S. online grocery sales for delivery or pickup during the month of July compared with 54% in the same month last year, according to YipitData. Instacart’s share fell by 5 percentage points in that time.
Grocery giant Kroger, which uses Instacart for rapid delivery options but also offers its own delivery service, accounted for 10% of the U.S. market in July, according to YipitData. And Uber and DoorDash are also now both going after the grocery market, and claiming big growth numbers. DoorDash said in its third-quarter report last year that its third-party grocery business grew its gross order value “by well over 100%” year over year, though that is coming off a very low base. Both Uber and DoorDash currently have less than 1% of the U.S. online grocery market, according to YipitData.
Instacart still has a strong edge among grocery shoppers looking to stock up; its average order value is twice that of Uber and DoorDash, according to YipitData. And like Amazon, it has shown that an e-commerce business with a strong position in its core market can also be a powerful advertising platform.
The rub is that Instacart might be too reliant on ads. In a note to clients before Friday’s filing, Bernstein analyst Nikhil Devnani estimated that advertising likely accounts for all of Instacart’s profits. And that business isn’t fully divorced from trends in the core grocery delivery operations. Advertising-industry analyst Brian Wieser
Write to Dan Gallagher at dan.gallagher@wsj.com
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