In the technology community, we take the inevitability of all major commerce categories coming online as a given — starting over two decades ago with books and electronics; today, extending to cosmetics and mattresses. All a retail category needs is a defining company to unlock consumer demand and provide the right experience to clear the hurdles of digital purchasing inhibition and push consumer behavior to change. And as more categories are unlocked, consumer expectations rise wholesale to expect an intuitive selection experience, low-friction payment, convenience, and a high standard of quality: goods show up on my doorstep quickly, cheaply, and with the quality I expect from the image on my device. Easily done with standardized, easy-to-understand, easy-to-ship items like books and electronics.
However, grocery — one of the largest consumer retail categories — has been slower to move online and remains a significant laggard. In the United States online grocery has historically been associated more with massive failure than dramatic success. Complexity of supply chain, large capital expenditures, and significant logistical challenges have led many online, full-stack entrants to languish and struggle to achieve scale. Given sensitivity to food quality and cost, consumers themselves have been slow to embrace, despite the parallel rise of online delivery of restaurant meals in both urban and suburban geographies. The equation of trust in quality, price, convenience, and distribution had not yet been balanced by a defining experience.
In March, the world changed when the coronavirus pandemic thrust the grocery industry into a digital acceleration that has, in our estimation, pulled forward the penetration curve for online grocery by about five years and set it on a trajectory to drive high growth for the coming decade. As states domino’ed in succession with stay-at-home orders and uncertainty of the future increased, many turned to online ordering looking not just for convenience but safety, and in the case of those populations at high risk, necessity. In a span of a month, demand for online ordering rose dramatically at the same time the overall addressable market for grocery spiked (we estimate an increase of ~30% for the month of March). To put that into perspective, this represents about $20 billion of incremental grocery volume in just a single month. As stock outs of essentials and lines down the block became the norm for the brick and mortar experience as consumers sought to stock up on essentials, we estimate overall online ordering volume grew more than 2.5x from February to April.
We believe that this event will lead to a wholesale, sustained shift in consumer behavior. Given the relative ease of habit formation from a mobile device and high grocery order frequency, we believe this short period of time was enough to bring about a new habit for a large number of new users. The company is already beginning to see many new users who came for the necessity and are staying for convenience. Just as the SARS epidemic in Asia in 2002–2003 spurred a dramatic shift to online purchasing in the early days of eCommerce, pushing Alibaba and JD.com on their way to becoming two of the largest global technology businesses, we believe this pandemic crisis will have the same impact on essential companies like Instacart. Combined with continued improvement in service quality, a new baseline has been established for the overall market, significantly above where it was previously, bestowing scale benefits to those who were able to capture the demand.
“Disruption” in Silicon Valley generally happens when functions of our day-to-day lives get completely reconstituted, compressed into a single device or service, or, in some cases, entire behaviors are shifted by the sheer force of entrepreneurial will and personality. Consumers have digitized their behaviors with so many other categories, why did it take so long in grocery?
The “full stack” disruptive grocery startup has not appeared. Today, consumers expect a frictionless digital experience that rivals the best apps on our device, convenience and recognition that matches the corner store, and quality that trumps the local farmers market. The execution of all of that combined with securing the necessary capital to make it happen is biting off far more than any one company can chew. Even Amazon, the most well-positioned company in the world with best-in-class logistics, top-tier engineering talent, and a balance sheet that rivals a small country, needed to acquire into the market and begin their grocery service by delivering from retail locations.
Instacart has taken a smart, measured path to growth by partnering and aligning its success with their core customers, the retailers. Why spend billions of dollars in capital trying to compete with a supply chain spanning from farm to shelf that developed over several generations, optimized to reduce cost every step of the way? This alternative approach received quite a bit of criticism early on. In a market where consumers literally clip coupons to save a few dollars, how can you reach price parity for the consumer when sending people into existing retail locations to pick off shelves and deliver to homes? However, that criticism misses the broader story. Instacart not only serves the retailer but a complex broader ecosystem as well.
As technology companies like Instacart grow, they tend to unlock new opportunities; or second, third, and even fourth acts. Instacart maintains an enviable position in the grocery ecosystem as they shuttle the customer through point of interest, point of decision, and point of sale. Those looking to build a stronger relationship with the consumer, now have a means to reach them when it matters most. Lacking great digital advertising options, consumer packaged goods companies like Procter and Gamble and Johnson & Johnson have needed to resort to their old tricks: heavy television advertising combined with dominant in-store shelf positioning and availability. While digital ordering disrupts this comfortable status quo replacing scarce shelf space with infinite scroll, it also provides enhanced capabilities to find their best customers and be available when they are making decisions in a way never before possible. In addition, it helps Instacart and the retailer bear the cost to make the service affordable to more and more consumers. As Instacart continues to scale, this will only bring greater benefits to the consumers.
Finally, there is no stronger signal of operational excellence than the ability of a company to quickly respond to a sudden and drastic shift in the market. Instacart’s flexible, rapidly scalable model showed its advantages in recent months: the company doubled the size of its shopper community to more than 500,000 people, providing safe, flexible earnings opportunities to many of those furloughed or laid off during the economic crisis. That rapid response galvanized the company to meet the demand to deliver to millions of people including those in higher-risk health categories and those who needed to stay home to care for loved ones. The societal value and impact became clear quickly: while others struggled to meet demand, Instacart rose to the occasion and was in a large portion of the country the only option to receive necessities via delivery or pickup.
Our Investment in Instacart
At GC, we work with companies across every stage that have the fundamental elements for building businesses that endure. In our investment process, we look for attributes like adaptable strategies, scalable leadership, society-first principles, a generational view of the horizon. We believe Instacart is one such company.
We are incredibly proud to make Instacart one of the first investments from the General Catalyst Endurance fund, an investment vehicle we operate to support late-stage private technology companies that we believe have the ability to endure and grow for a generation or more. Partnering with leaders like Apoorva, Nilam, Sagar, as well as the rest of the Instacart team that has stepped up to meet the challenge these past few months give us confidence that Instacart is one of those companies.
— Kyle Doherty and Team GC