Instacart IPO: 5 things to know about the app that aims to drive a “massive digital transformation” in grocery shopping

By Bill Peters

Instacart is competing in a crowded market and could go public at a time when grocery budgets remain under pressure

Grocery delivery app Instacart hopes to benefit from what its chief executive calls a “massive digital transformation” in the way people shop in supermarkets, but faces stiff competition and an uncertain demand environment.

The company filed for an initial public offering late last month, and its debut could gain traction in markets even as customers still grapple with higher grocery prices. Meanwhile, major rivals such as Walmart Inc. (WMT), Amazon.com Inc. (AMZN), Uber Technologies Inc. (UBER) and DoorDash Inc. (DASH) are competing more aggressively for a larger share of the online grocery shopping market, whether for large weekly purchases or smaller runs for a handful of items.

Instacart, which would operate under the ticker symbol CART, already controls about 22% of the $132 billion online grocery delivery market, according to Evercore analysts. The company is betting on a larger online future for shopping for household items, which over the decades could include more mobile checkouts, electronic shelf labels and what Instacart describes as “AI-powered smart shopping carts.”

A stock market debut for Instacart, founded in 2012, was expected to come after the company last year reportedly put its plans for an initial public offering on hold after decades of high inflation, recession fears and a post-pandemic tech industry slump whetted investor appetite IPOs had dampened. Last year, Instacart cut its value several times, but this year the company increased it to around $12 billion, according to the information.

Some investors said the delay may be a good thing.

“I think they’re coming to the public markets as a more mature company that has done the cost cutting and business model transformation behind closed doors rather than doing it on quarterly conference calls,” said Don Short, head of venture equity at InvestX, whose portfolio includes Instacart.

The company plans to offer 22 million shares priced at $28 to $30 each, after raising that price range on Friday in the wake of chip company Arm Holdings PLC’s successful initial public offering on Thursday. Arm closed its first day of trading up 25%. Instacart would raise $660 million at the high end of that range.

With 276.5 million shares expected to be outstanding upon completion of the transaction, Instacart would be valued at $8.3 billion.

Here are five things to know about Instacart’s planned IPO.

1. It has sales growth and some profit…

In the first six months of this year, Instacart generated $1.475 billion in revenue, up 31% from the first half of last year. The company finished last year with revenue of $2.55 billion. The company closed last year with a profit of $428 million, which included a significant tax benefit, and posted a net profit of $242 million in the first half of this year.

Bernstein analysts said in a recent note that the company is “more profitable than expected,” citing steady gross margin expansion in recent years. This expansion has been supported by the momentum of Instacart’s advertising business, which allows brands to run sponsored ads and other promotions on Instacart. Margins also benefited from retailer and customer order fulfillment fees, which amounted to $16 per order in 2022.

Instacart said that in 2022, the average value of a grocery order will be $110, Bernstein analysts noted. This year, Instacart averaged around $7 in gross profit per order.

“Overall, cohort engagement appears difficult post-Covid,” the analysts said. However, they questioned how big the company could become, noting that 7.7 million monthly customers is “not a lot” and could represent either a “growth opportunity or developing an audience.”

2. … but higher food prices have weighed on orders

In the first six months of this year, total customer orders on Instacart were 132.9 million, up only slightly from the 132.3 million orders in the first half of last year. Instacart noted in the filing that higher grocery prices have weighed on demand. UBS analysts noted that customers ordered cheaper tariffs.

Short said the slower growth was not surprising given the gains made during the pandemic. And Instacart also pointed to seasonal factors that can impact demand, saying fewer customers order on the platform in the spring and summer, with trends picking up again as the back-to-school and holiday seasons advance.

UBS analysts said they viewed these trends as “cautious indications” about the food delivery ambitions of Uber (UBER) and DoorDash (DASH).

3. The company wants to make more money from ads, but advertisers are wary

Like DoorDash and retailers like Amazon.com and Walmart, Instacart hopes to use more of its digital space to give brands the opportunity to advertise. This business, for which advertisers pay fees, is growing. Instacart’s “advertising and other revenue” reached $406 million in the first half of this year – a 24% increase from a year ago. And elsewhere, digital ads have led to higher margins, which could help offset the costs of running a delivery network.

However, Instacart noted the impact of more restrained advertising spending amid economic concerns, saying: “Our advertising performance was impacted by changes in spending by certain brand partners due to macroeconomic uncertainty and changes in the business and performance of our brand partners.”

4. Its customers include large grocery chains – but its three largest customers account for a large portion of its sales

Instacart has partnerships with more than 1,400 retailers, including chains like Costco Wholesale Corp. (COST) and Kroger Inc. (KR), which are looking to merge with Albertsons Cos (ACI). Instacart, citing data from Euromonitor, found that the top 20 grocers account for more than two-thirds of the U.S. grocery market. And the grocery platform receives around 43% of its gross transaction volume – a measure of the value of products sold – from its three largest retailers.

“If any of these retailers were to suspend, limit or terminate their operations or otherwise terminate their relationships with us, Instacart’s attractiveness to consumers and brands could be materially and adversely affected,” Instacart said in its IPO filing.

5. It is backed by Pepsi

In the filing, Instacart said it has entered into an agreement with PepsiCo Inc. (PEP) under which Pepsi will acquire $175 million of Instacart’s Series A redeemable convertible preferred stock in a private placement. The Series A Preferred Stock will have a conversion price equal to the IPO price and may be converted “under certain circumstances.”

-Bill Peters

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09/15/23 0639ET

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