• First cracks appearing in Instacart’s model
• Move to reclassify majority of its workers to employees dramatically increases Instacart costs - while it continues to search for profitability
• Instacart retailers announce they are launching their own branded online shopping services
Are we beginning to see the first cracks in Instacart’s castle walls? Two recent events support speculation.
The first ‘crack’ appeared back in June, in an announcement that I think was missed by many in the industry. Instacart announced that it was reclassifying a large number of its 10,000 workers from independent contractors to employees. This move, in part, driven by government scrutiny of Uber and other on-demand services taking advantage of independent contractors. Now, as any business person knows, there are huge implications in this move in terms of cost and overhead. Classifying workers as independent contractors lets Instacart avoid paying employment taxes and related benefits like unemployment, Social Security, Medicare, and worker’s compensation. By reclassifying many of its workers to employees, Instacart is significantly increasing its overhead. This at a time it is continuing to evolve and shift its business model in search of sustainable profitability.
The second ‘crack’ appeared just yesterday in two smaller announcements. Both Gelson’s, a small retailer in the Los Angeles market, and Fairway Foods, the established New York metro retailer, announced that they have entered into agreement with a third-party eCommerce solution provider that will power up online shopping for each retailer under the retailer’s own branding. Both Gelson’s and Fairway Foods have had a relationship with Instacart in the past. While they may continue to let Instacart continue providing service to their shoppers, it would appear that both retailers, having gotten a taste of the online opportunity, are now ready to increase their bet by bringing their own branded online shopping capability to their shoppers.
Instacart has been the high-flying darling of Silicon Valley’s focus on the on-demand economy, along with Uber. Instacart has raised over $275 million, has a valuation of an estimated $2 billion, and has signed significant retailers like Whole Foods on a national level and many key retailers in markets across the U.S.
There has been speculation in the industry about Instacart’s model, with much of the commentary focused on Instacart, as a third-party, disintermediating the retailer from their customers. Shoppers go to the Instacart app or website, select the retailer, and then begin their order. Some industry pundits, myself included, don’t believe this approach is in the best interest of the retailer. There has been speculation that even Whole Foods entered into the Instacart relationship to dip its toe into the online waters while developing its own solution. The announcement by Gelson’s and Fairway Foods appear to reinforce the notion that Instacart could be vulnerable to this charge of retailer disintermediation - and that retailers are not going to let it happen.