On Monday, the Wall Street Journal published a compelling comparison of two popular grocery delivery companies, one from the 90s, Webvan, and one from today, Instacart. In Webvan’s heyday, the company was making $239 million in revenue with almost $441 million of venture capital invested. Today, Instacart makes $100 million in revenue and just recently raised $220 million in a round of funding for a total venture capital investment of $275 million.
The most notable difference between Webvan and Instacart, however, wasn’t the different in revenue; it was the basic business model. Instacart uses the existing inventory of its retail partners while Webvan invested in refrigerated warehouses that cost nearly $40 million each. Because of the difference in infrastructure investment, Instacart is able to service 15 metro areas today, while Webvan only had a maximum of 10 metro markets. Internet connections are faster today, consumers are more accustomed to ordering online, and mobile phones are everywhere. The environment seems ripe for success.
Rebuilding History’s Biggest Dot-Com Bust
By Greg Bensinger, WSJ
George Shaheen built one of the most glorious flops of the dot-com bust. Fifteen years later he is a believer again.
Mr. Shaheen is the former chief executive of Webvan Group Inc., the online grocery company that in less than three years burned through more than $800 million in cash, went public, filed for bankruptcy and then ceased operations.
Today, a new crop of companies are battling once again to drop off eggs, cold cuts and milk at customer doorsteps.
“This is a service that somebody will figure out,” said Mr. Shaheen, now retired. “No one really wants to go get in their car, drive to the store and go grocery shopping; this could save real time for people.”
Many investors are betting on Instacart Inc., a San Francisco company that calls to mind Webvan if only for its soaring sales and surging valuation.
Two-year-old Instacart is expected to announce on Tuesday it raised $220 million in fresh funding from venture capitalists. The round values Instacart at roughly $2 billion, up from $400 million last June, according to people familiar with the matter. The company says it expected $100 million in sales in 2014, about 10 times greater than a year earlier, but it is also unprofitable.
Webvan grew at a faster clip, generating $178.5 million in sales in 2000, its second year in operation. Shortly after its IPO in November 1999, it was valued at $8 billion.
Still, much is different about these two companies. And in that way, Instacart stands as a metaphor for how the online business has evolved over the course of a generation, driven by the rise of the smartphone. In particular, Instacart, like many online businesses today, vigorously pushes out costs and risks to others.
Webvan racked up a $453.3 million loss in 2000, largely for erecting and operating massive refrigerated warehouses with high-tech conveyor belts that shuttled groceries to big trucks. Each warehouse cost Webvan $30 million to $40 million to build, Mr. Shaheen said, who has no connection to Instacart.
Instacart has a far different approach, taking advantage of existing grocery stores by dispatching couriers to Whole Foods or Safeway and delivering goods within an hour. The drivers are independent contractors, meaning Instacart doesn’t have to provide them with salaries or costly benefits.
Venture capitalist Michael Moritz, whose firm Sequoia Capital invested in both companies, says this system lets Instacart avoid Webvan’s “devastating cost structure.”
Instacart charges $3.99 to $5.99 per delivery and makes money by marking up many items and pocketing the difference—a gallon of Safeway brand organic milk costs $7.39 through Instacart, compared with $5.99 in store. The company generally pays the couriers a minimum $10 per delivery as well as additional fees based on order size and speed. Couriers say they also accept tips, which can bring their earnings up.
Instacart also doesn’t operate its own trucks—the drivers, contracted employees, use their own cars and buy their own gas. Nor does Instacart have to pay upfront to stock shelves, as Webvan and brick-and-mortar grocers do.
Even so, Instacart isn’t yet profitable, say people familiar the matter, and not all orders eke out even a small profit.
For example, an order of 15 common items like frozen peas, milk, cereal and fresh fruit costing about $68 from a San Francisco Safeway store would yield Instacart a roughly $1.50 profit, according to a Wall Street Journal analysis. If the order were smaller by one 28-ouce jar of peanut butter, Instacart breaks even, and a smaller order could push it into the red.
The grocery business is plagued by notoriously slim margins. The trade group Food Marketing Institute estimates the supermarket industry as a whole turned in a 1.3% net profit after taxes in 2013 on $620 billion in sales.
Those numbers haven’t stopped venture capitalists like Mr. Mortiz from taking a chance again. “After our experiences with Webvan and the electroshock therapy we needed, none of us thought we’d venture ever again into the grocery business,” said Mr. Moritz, who sits on Instacart’s board. “The one thing we were very right about is that if there is an easy and reliable way to order groceries from home, the demand will be insatiable.”
Instacart isn’t alone. Amazon.com Inc., Fresh Direct LLC and Good Eggs Inc. are all hoping to win with grocery delivery, not to mention traditional retailers like Wal-Mart Stores Inc. and Safeway Inc. Google Inc. ’s current arrangement to deliver some groceries from a Bay Area Whole Foods makes it Instacart’s nearest competitor. In San Francisco alone, there are at least six different companies doing this kind of work.
Even Louis Borders, a Webvan co-founder, is exploring a delivery service for groceries and other goods, using existing stores, according to a description on his startup incubator’s website.
Mr. Shaheen says one of Webvan’s biggest problems was the speed of Internet connections at the time, which were slower than the modern broadband link. Today, customers can order from anywhere using Instacart’s app, while couriers can call to make on-the-fly changes as well as scan items and use GPS for faster routing to peoples’ homes. That makes the process more appealing than during Webvan’s heyday, he says.
And because Instacart is partnering with grocers, which view it as a means to bringing in new customers, it doesn’t have to worry about the day-to-day operational risks such as spoiled tomatoes.
That dependency on grocers, however, is also a big risk for the company. Instacart co-founder and Chief Executive Apoorva Mehta, 28 years old, said the secret sauce of the company is in its dispatching software and the exclusive agreements it reaches with grocers to integrate into their register systems, helping them monitor inventory and speed up checkout.
Fairway Group Holdings Corp. , which operates a chain of grocery stores in the New York City area, said it has added new customers as a result of its eight-month-old partnership with Instacart.
“Our goal was to increase same-store sales by enabling customers who didn’t necessarily have convenient access to a store to still shop with us,” said Jackie Donovan, Fairway’s marketing vice president. “Instacart told us we could see a 50% increase in incremental business, per store, and that’s what we’ve seen.”
Not all are so sanguine about Instacart. When the company tried to expand to Chicago in 2013 by using Trader Joe’s stores, the grocer blocked the effort until a formal agreement could be reached. Instacart is still not delivering goods from Trader Joe’s.
A Trader Joe’s spokeswoman didn’t return a call seeking comment.
Today, Instacart operates in about 15 U.S. metropolitan areas, more than double Webvan’s total when it folded.
Instacart is also experimenting with embedding workers in stores, such as 28-year-old Erica Jazayeri who winds her way through a San Francisco Whole Foods six hours a day.
On a recent afternoon, Ms. Jazayeri plucked three pounds of dry spaghetti, a jar of olives and a box of aluminum foil, among other items for a customer, and scanned each bar code on her phone. Then she checked out the roughly $80 haul at a dedicated Instacart register, bagged it and stowed it on a shelf for a driver to collect and deliver.
Ms. Jazayeri, who has worked at Instacart for about four months, says she is expected to pick and scan one item every 1.6 minutes.
Mr. Mehta, a former Amazon logistics software engineer, said customers who use the service ultimately increase their order sizes by an average of two-and-a-half times, while also shopping more frequently.
“The service is perfect for people who simply need more time—working mothers, young professionals,” said Mr. Mehta. “They’re willing to pay a little extra to get that time back that they would otherwise use to go to the grocery store.”
Like Webvan did, Instacart has broader ambitions beyond groceries. In the coming months, Mr. Mehta said he expects to add new categories of goods to its one-hour delivery guarantee. That would put it more in competition with general one-hour delivery services like startups Postmates Inc. and WunWun Inc.
Still, that business is hardly a sure thing. EBay Inc. has scaled back the goals of its Now service, which dispatches couriers to stores, acknowledging the financial difficulties of one-hour delivery.
Mr. Mehta says that’s no deterrent. “Groceries are more than sufficient for us, but why stop there?” he said.