Instacart gets Pepsi, Doritos to pay shoppers' delivery fees
Delivery startup works with goods makers to cover costs and offer discounts
New York
ONLINE shoppers hate paying delivery fees. So Instacart Inc is getting Pepsi to foot the bill.
The grocery delivery startup is working with General Mills, Nestlé, PepsiCo, Unilever, and other consumer goods makers to cover the cost of delivery or provide other discounts when customers buy their products. In addition to the coupons, the companies pay Instacart to advertise on its website. Since introducing the programme about six months ago, it now accounts for 15 per cent of Instacart's revenue, said Apoorva Mehta, the company's chief executive officer.
Shoppers can find discounts when filling up their carts with brands such as Degree, Doritos, DiGiorno, Häagen-Dazs, Quaker Oats, and Stella Artois. Instacart ads promise free delivery if US$10 is spent on Red Bull, or consumers can get 75 cents off any Dove soap. Mr Mehta compares the ads to those offered on the side of Google search results. "It's like AdWords for groceries," he said.
In its quest to build a profitable business, Instacart is searching for new sources of revenue that won't turn off shoppers. The company, which was valued at US$2 billion by investors last year, had previously made up some of its costs by selling products for more than what the grocery stores charged. Customers complained, and Instacart backtracked. The company said that it costs much more to deliver an order than the US$5.99 it charges shoppers, but customers are unwilling to pay more.
"People resist paying for delivery because in their minds, it's something they previously paid US$0 for when they picked up their own groceries," said Nir Eyal, an author who studies how people form habits around technology and teaches at schools such as Stanford University. "Of course, that's silly because time also has value, but people don't see it that way."
This fact isn't lost on other e-commerce companies. Amazon.com lures repeat customers to its US$99-a-year Prime membership with fast, free delivery. Its upstart rival, Jet.com, encourages shoppers to order in bulk to receive discounts in exchange for reducing the company's delivery expenses.
Postmates, a startup that typically charges as much as US$10 for delivery from restaurants, reduces that cost to US$2.99 or US$3.99 when a restaurant pays the company a commission of 15 per cent to 20 per cent on the order. Since launching the scheme about a year ago, partner restaurants now account for more than 35 per cent of orders, Postmates said.
When Instacart realised shoppers wouldn't cover the bill for delivery, the company started by going after deeper pockets: retailers such as Whole Foods Market, Costco and Target Corp. Once stores partner with Instacart, the formula shifts. Most partners choose to list items for the same price online as in store. To compensate Instacart for the increased sales volume it drives, the stores pay the e-commerce company a commission on every item sold through its site. Instacart declined to say how much or what percentage of revenue those fees account for.
One retail partner has been particularly enamoured with Instacart. Whole Foods plans to invest in the delivery startup and sign a five-year agreement, tech website Re/code reported last month. Instacart declined to comment.
The company now counts at least 100 retailers as partners, up from 30 barely more than a year ago. The "vast majority" of Instacart's sales are through partner stores, said Vishwa Chandra, the company's vice-president of retail accounts.
Instacart said the newer business arrangements are helping it bolster profit margins. Delivery fees paid by customers now make up less than half of the company's total revenue, which grew fivefold in the past year. WP
