Is Instacart really an ad company that delivers groceries?
Don't call it a come back - ads are here to stay
Did you hear the big news everyone’s talking about? No, not the IPO market awakening from it’s mighty slumber. My podcast! It’s called “Run the Numbers”, and it’s awesome, or might totally suck! IDK, you decide!
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Please listen; I really need this. I recently lost all my money in an elaborate phishing scheme (turns out I do not have a long-lost (RICH) uncle Marvin in Botswana who sadly passed in a jet ski accident).
OK, onto the real news: Instacart filed to go public on Friday.
This is a beacon of hope for the dormant tech IPO market... and, along with Klaviyo, may break the dam for others to follow.
Yes, we had some false starts along the way. First, there was Cava. People were hopeful that a company slingin’ humus and pita would crack the lid and restore 20x forward revenue multiples.
Then there was the news of Liquid Death looking to make a splash in the public markets. While I vehemently disagree that canned water qualifies as a tech company, I do concede that water, which you need to live, may be considered recurring in some people’s eyes. Stay hydrated, my friends.
But this is real - Instacart is a tech enabled marketplace doing billions of dollars in revenue.
“Instacart is a grocery technology company.”
Now, what struck me as fascinating is the amount of revenue derived from advertising. According to the Information, 30% of their 2022 revenue, or $740M, came from advertising.
This revenue line alone is multiples larger than the the total revenue most tech companies that went public in 2020 and 2021 had on the books. For example, if I recall correctly, SentinelOne had just over $100M in ARR when they filed.
And according to the WSJ, the core delivery biz is seeing some recent headwinds, while the ad business, while relatively nascent, is gaining traction:
Instacart said that growth of its core delivery business slowed in the first half of 2023, with gross transaction volume—a measure capturing overall sales across its platform—rising 4% to $14.9 billion.
The company said revenue from its advertising and other businesses, including its technology services, grew 24% to $406 million. Advertising has been a newer focus for the company.
Now, I will concede that for the six months ended June 30th, Transaction Revenue on a Gaap basis (a function of Gross Transaction Volume x Take Rate) did grow 34% y/y, or ten percentage points higher than advertising revenue.
But this squeeze cannot go on forever.
My takeaways:
The slowing GTV (Gross Transaction Volume) growth may indicate that Instacart’s core delivery business is approaching it’s natural TAM ceiling, at which point the take rate will have to continue to climb to keep revenue growth up. This trend is corroborated by the flat order volume y/y.
The marginal cost of serving an ad is a lot better than paying a guy on a bike to deliver a 17 pound watermelon and a 24 pack of water. And it shows in terms of contribution margin to the company’s bottom line.
But don’t users hate ads?
Now of course, you have to make sure that ads are not degrading the user experience. If you F’up your core marketplace, you have nothing; ads are only a possibility because people are showing up to buy groceries. This means you can’t push Hunt’s ketchup on them AGGRESSIVELY when they really want Heinz (plus, that would be a crime).
In fact, Instacart firmly believes ads are a net positive experience:
We believe Instacart Ads delivers a superior shopping experience and pricing for customers by giving them access to thousands of deals and discounts, which in turn drives larger average order values for our retail partners.
And this positive trend materializes in cart sizes:
We estimate that on average, our ads deliver more than a 15% incremental sales lift, and in some cases twice that for our brand partners.
Marketplaces layering on ad revenue
Instacart isn’t the only one making cake off ads. There’s a real playbook when it comes to layering on ad revenue to a marketplace model.
Etsy is putting numbers on the board as well, with more than 25% coming from ads rather than crocheted aprons. And Amazon is a not-so-sly ads juggernaut - the Great and Powerful
originally opened my eyes to this - $31.6B in Ad revenue is nothing to shake a stick at:
Where does this go?
So bold prediction here - I think that Instacart’s ad revenue will become larger than their grocery revenue within the next three years.
And this will be good for the business because they’ll be able to lower their take rate on deliveries (which is something between 5% to 8% on orders), decreasing total costs for end users, which will bring even more people to the platform, and allow them to serve even more ads. It’s a virtuous cycle.
Only time will tell. But in the meantime, don’t call it a come back… While SaaS is sexy, ad revenue is here to stay.
Speaking of ads - this post is sponsored by MY PODCAST MUHAHAHAH
Check out Run the Numbers today:
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Quote I’ve Been Pondering:
“I read somewhere that a photo of Nikita Khruschev’s historic shoe-pounding incident at the UN revealed that he was still wearing both shoes. A third “for pounding-only” shoe? That’s calculation”
-What They Don’t Teach You At Harvard Business School, by Mark H. Mccormack
Enjoyed the bits of humor and comparison metrics. I am an occasional Instacart user as well. Who isn’t?
I really enjoyed this today :) For whatever reason I was smiling the whole way through AND learning something :D