As Amazon has ramped up its Whole Foods grocery delivery service to 48 cities across the U.S., a common narrative has followed: The Seattle e-commerce giant will dominate in the grocery industry as it has done in other categories of online retail.
Instacart’s new $7 billion valuation is a bet on the future of grocery delivery — not a wager against Amazon
The startup has a fresh $600 million in funding to boot.
Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.
But some investors continue to bet that there’s room for at least one other nationwide provider in the fast-growing grocery delivery sector: Instacart, which has raised a new $600 million round of funding that values the startup at $7.6 billion.
The new financing and valuation — led by the hedge fund D1 Capital Partners — comes just six months after Instacart closed a $350 million investment that valued it at just $4.35 billion. Which raises the question: How does a privately held company increase its value on paper by 75 percent in only half a year?
In Instacart’s case, it’s by being the chief ally to brick-and-mortar retailers in a $1 trillion industry where e-commerce sales are growing 29 percent year-over-year, but still account for no more than 5 percent of total sales. It also helps that Amazon’s acquisition of Whole Foods — and its subsequent rapid introduction of same-day delivery from many of its stores — has all grocers questioning their place in the world.
Instacart’s place is as a partner to an increasing collection of 300 grocers — from Aldi and Costco to regional players like Wegmans — to deliver items from their stores to customer doors.
“Grocery is the largest category within U.S. retail and it is also one of the least penetrated online,” is how D1 Capital’s Daniel Sundheim put it in a statement. “The industry is at a tipping point and there will likely be a significant acceleration in the adoption of online ordering for grocery delivery over the next few years.”
Of course, the investors who have now poured $1.6 billion into Instacart over the last six years believe in the company. But they are betting as much on the idea that grocery delivery will become a mainstream shopping habit in North America that can support multiple players as anything — and not that Amazon will necessarily fail in the space.
There are still obstacles that Instacart needs to overcome to build a truly mainstream service. Instacart charges customers both delivery fees and service fees that can make the service feel like a luxury, and around 30 percent of Instacart’s partner grocers also mark up prices on top of those fees. The company is still not profitable.
Instacart has also had a notoriously tumultuous relationship with the network of 50,000 workers who pick out and deliver its groceries — something that its founder and CEO Apoorva Mehta recently vowed it was working hard to fix.
As for how Instacart will deploy the new money, Mehta said the company planned to double the size of its product and engineering staff by the end of 2019, in part to create tools that make its service more efficient and its shoppers’ work easier.
“We also want to make sure that Instacart is a household name,” Mehta said in an interview. “That when people think about grocery shopping online — that they think about Instacart first.”
To that end, Instacart plans to make huge investments in marketing, including in many of its partners’ stores.
Here’s my interview with Mehta at last month’s Code Commerce event in New York City.
This article originally appeared on Recode.net.
