Today’s interview is a return to the founder series, although in this case I am actually not talking to a founder, but rather a new CEO for a still-private company: Fidji Simo at Instacart. Of course Instacart will not be private for long: the company confidentially filed its S-1 earlier this year.
To that end, this isn’t — by necessity — an interview about Instacart finances. However, I was very curious to understand why Simo, the former head of the Facebook App at Meta, wanted to take over Instacart at this stage in the company’s evolution, and gain an understanding of why she thinks this is a generational company. As a reminder, the challenge Stratechery has in covering private companies is the lack of data: my solution is to abandon objective evaluation and instead lean into purely subjective evaluations from the most biased observers possible — the CEO.
Simo is, in my estimation, an effective advocate for Instacart. We cover the company’s announcement last week of its Connected Stores initiative, and its announcement this week of Instacart Health, as well as Simo’s expansive vision of how Instacart can leverage its position as an alternative to Amazon to serve one of the largest commerce categories in the U.S.
To listen to this interview as a podcast, click the link at the top of this email to add Stratechery to your podcast player.
On to the interview:
An Interview With Instacart CEO Fidji Simo About Big Ambitions
This interview is lightly edited for clarity.
The Pragmatic Technologist | The Instacart Vision | Connected Stores | Making Money | Abandoning Aggregation | The Shopper Moat | Advertising | IPO, Health, and Competitors
The Pragmatic Technologist
Fidji Simo, it is good to have you here. Before we get to Instacart, I do have one really stupid question that occurred to me while I was writing up the notes for this interview. Do you ever get Instacart and Instagram mixed up or is that just a me problem?
Fidji Simo: Well, I’m very happy to be here, I’m a big fan, so thanks for having me. I would say I did get Instacart and Instagram mixed up from about the first two months at Instacart and then I got it straight, so don’t worry.
Two months, I can understand, that must’ve been very awkward yet completely understandable, because I swear I have the same problem. There’s a lot of Insta’s out there, I used to be a big fan of Instapaper, the read later app, as well, it was just a total mess. I do have a question — you grew up in France in a fishing village, and so I do have to ask, given your current job, how did you go grocery shopping when you were a girl?
FS: When I grew up, first I had the benefit of eating a lot of fish straight from the sea, as you can imagine from my dad. But in Europe we had a lot more proximity of smaller convenience stores, and it was a little bit different from the US in that Europeans tend to shop at the grocery store many times a week. In the US it’s much more of a weekly habit, you do it once a week. So it was a little different from that perspective. And I would say in Europe we certainly love our farmers market even more than in the US, and so that was also a difference. But I grew up, I would say, with an incredible appreciation for food, and in particular, I have a lot of respect for the people who feed the world and that’s why I got so inspired by Instacart’s mission when I joined the board 18 months ago.
You went to HEC Business School at Paris and then UCLA, so how did you end up in tech? Was it always your goal to end up in Silicon Valley, or did that come later, and then you loved it and got locked into it? How did you end up moving from a fishing village in France to first working at Facebook for a long time running the Facebook app, and now being the CEO of Instacart?
FS: I wasn’t destined to up here, clearly. I was the first of my family to even graduate from high school, let alone college, and so my path wasn’t defined at all. In fact, I ended up at HEC Paris because I saw a documentary on TV and I was like, “Oh, these people seem to be learning about business and making a lot of important decisions. I should go there and learn about that” and worked very hard to get there. Then when I was there, I got really interested in technology mostly because it was so different from the things that I had seen growing up. The fishing industry wasn’t particularly technology enabled and I thought that the things that were happening in the world of tech were incredibly exciting. In fact, my first internship, Ben you’re going to appreciate that, was working with organizations that were helping the fishing industry figure out how to embrace technology, and it was a very novel concept, let’s just say that.
To me, I always say that I’m a technologist at heart, but I’m a very pragmatic technologist and what I mean by that is I like technologies that solves real problems. I saw that growing up, I wanted the technology that helps the industry that I grew up in, which are very practical applications, and so I gravitated towards the companies like eBay and Facebook, where these companies were a technology company, but most importantly they were solving real human problems. Whether that was commerce in the case of eBay, whether that was connecting people in the case of Facebook, and now obviously with Instacart as well.
Yeah, that makes a lot of sense. There’s a story of you becoming a product manager of Facebook after starting in marketing, but I think this bit that makes consumer companies unique in general, which is of course there’s one bit which is creating and inventing the technology, and that’s obviously lots of fun and inspiring for all kinds of reasons, but to actually make that practical in real people’s lives. I love the idea of the pragmatic technologist, that sounds like a newsletter that needs to exist. You see this in AI right now, everyone’s working on the models and everyone wants to be on the engineering side, but where’s the product people? That’s the real opportunity, to make it real to real people.
I just love hearing about this background because it resonates with me, I grew up in a place where no one knew anything or cared anything about tech and I was the weirdo because I was so fascinated by this space, but I feel like in the long run it’s given me a big advantage because there’s just this understanding and appreciation of the way normal people experience technology that you can only really get if you’re surrounded by people who don’t care and don’t know anything about technology at all, yet it impacts their lives.
FS: Yeah, I can totally relate. I mean, even in the current industry I’m in, in grocery delivery, I get asked constantly, “Oh, when are the drones coming to deliver my six-pack in my garden?” and I’m like, “Well, do you really need the drones to deliver your six-pack? Because right now we’re sending people to your home and that’s great because they can leave it right by your door and not break the beer on the way down.” So there are a lot of things like that where the technology certainly is very cool, but I always push my teams to try to understand, “Okay, is that a real application that’s going to solve real problems for people?” I think especially in industries like grocery that are very much industries that have been around for many, many decades, it’s important to solve the problems that are going to matter most to people’s lives.
The Instacart Vision
I’m curious to understand the process internal to you specifically as far as taking over Instacart. You started out by joining the board first, then you became CEO. There’s lots of reasons, I can imagine — there’s the allure of being the CEO, a soon-to-IPO startup. On the other hand, there was a founder there and then he was trying to sell the company, and then you come in and then there’s this pandemic boom where Instacart’s exploding, but it has to come down. Was it about grocery in general? What were your real drivers and motivations to take this position in the first place?
FS: So I had spent ten years at Facebook, I was leading the Facebook app, which was the job of a lifetime. I never imagined that this little girl from a fishing village would ever lead the Facebook app, and I wasn’t expecting to leave Facebook at all. I loved what I was doing, but I joined the board to try to see how my experience could help other industries, and what I discovered when I joined Instacart was an opportunity that was much bigger than just online grocery delivery. What I saw was a massive trillion dollar category of grocery that was going to be disrupted by technology, and the ability to be a company that could become the technology backbone for that entire industry. The mission of the company, which is giving people access to the foods they love and more time to spend together deeply resonated with me as well, because as we’ve talked about, I grew up really having so much respect for people who feed the world and seeing how critical that is. So it was the combination of a mission that was incredibly inspiring with a massive market opportunity was the thing that was really appealing.
Also, there was a lot of question as you said of “Is Instacart just a pandemic darling or is that going to be a long term generational company”? In my mind when I looked at the numbers, it was very clear that the online penetration of the grocery industry had been accelerated by COVID, but was going to continue for a long time. We went from the grocery industry being 3% penetrated online before COVID, to 10% percent post-COVID, but all of the categories of retail are in the 20 to 30% range. So for us, it’s really about getting on that ten-year journey of continuing to deepen that online penetration, which is something that has a lot of room to grow. In addition to that, it doesn’t stop with online, we also have the ability to digitize the store. That’s also a very big opportunity for Instacart and for the entire grocery industry to do this digital transformation, do this technological innovation inside the store and across online and in-store.
I actually want to get to all those points, you’ve done a great way of setting up the next few minutes here. I’m curious about this vision — how much of this vision did you have before you joined the board or before you became the CEO? Did you have this in mind for a long time or did you join the board and you’re like, “Whoa, there’s this massive opportunity here!”? I’m curious on the timing of the vision, if that makes sense.
FS: I definitely didn’t have it before joining the board. I joined the board because I thought it was a cool company, great founder, great board, and I wanted to learn. I would say over the next six months I spent a ton of time with Apoorva [Mehta], the founder, and really understanding the business because it is a very complex business and really unpacking all the layers in that business. The logistics business, the advertising business, the retailer enablement business, and realizing that there was a lot more depths than I had imagined and I started to really connect the dots between all of these different opportunities. Then when Apoorva started approaching me on being CEO, that’s when I really forced myself to sit down and put that vision on paper because I didn’t feel like I could jump into an opportunity like that and leave the one that I loved behind without having a bolder vision, a more ambitious vision that I would be very excited about. I also wanted to make sure that as the board was making me CEO, that they would support that vision because it is a bold, ambitious vision and if you don’t have a board that’s really excited about that, you’re not going to have much fun as a CEO.
Right, for sure.
FS: I wanted to make sure that that vision was clear and that the board would be behind it before I signed up for that.
I want to get into that vision specifically. So there’s almost three views of Instacart. There’s what Instagram was—
FS: (laughing)You just said Instagram.
Oh, no! I was hoping to make it through the whole interview! That’s why I asked you that question up front. It was to cover for myself!
But there’s three parts: first, what Instacart was. So what Instacart was, this predates you. There’s what Instacart is today, this company that you took over a year ago and then there’s what Instacart could be in the future. I’m interested to peel those pieces apart. When you look back and you have the benefit of hindsight and coming in later, what was the key insight that really got Instacart off the ground in the first place?
FS: I think there’s been multiple chapters to the company. I think the first thing was really moving the industry online and realizing that people would want the convenience of having grocery delivered to their door. Step one was getting retailers to come on the Instacart marketplace and start offering the service through the Instacart app. Then we actually realized that everything that we had built for the Instacart app was also something that retailers would want for their own properties and so we started building websites for publix.com, sprouts.com, wegmans.com, Costco in the US, all of these are built by Instacart, so we power the commerce in addition to powering our fulfillment. That was step two in realizing that we could address the entire industry that way, but also and most importantly, give tools to retailers to build their own business not just on the marketplace but also directly on their own properties.
Are these bits where you’re white-labeling these websites or apps, is that bundled with Instacart delivery also, or are there some retailers that you built their website but they don’t necessarily use your logistics network?
FS: The vast majority of retailers want to use both, but we have some exceptions. Some of them just want to use the website itself and rely on other fulfillment methods, but the majority just want both and so we built all of that and this next step is really expanding the set of technologies that we can offer to these grocers, not just online but also in store. Our key insight there is that even if we look five years from now, maybe in five years 30% of the industry is online, that still leaves 70% that’s going to be in-store, and customers are expecting more and more of a seamless experience across online and in-store. In particular, we see that when a grocer has a customer that shops both online and in-store, that customer is more valuable, more retentive than just an online customer or just an in-store customer. If we can help all of our retailers turn their in-store customer into both in-store and online or an online customer into both in-store and online, that’s actually going to benefit everyone in the industry.
Is that where Instacart is going? You announced just last week this Connected Stores initiative. It’s complete with the new shopping cart, there’s updateable tags in the aisles, there’s an app component to this, and one of the things you talked about in the announcement was the idea of your shopping list. It clicked with me right there where you can use the same shopping list, whether you’re in the store yourself or if the picker is in the store, and the idea of it being the same thing, that does make a lot of sense. If you go through all the trouble and hassle of picking out your favorite things once, why would you ever want to do it again?
FS: Exactly. We’ve seen that from many people that we talk to, they are telling us when I build my shopping list on Instacart, the next time I end up needing to go to the store, I want that list readily available. Now with technology, literally with just a scan of a QR code, that list ends up appearing on a smart cart, and as you drop items inside the cart, you see the items on your list being checked off automatically through AI and computer vision, which is really seamless. Then you check out from that cart, you don’t have to go through the regular checkout and vice-versa is also true — we had so many people tell us that they still go to physical stores to get inspired to discover more items because browsing the aisle allows you to discover more new things and then now they can buy these items either through smart carts or through our new technological scan-and-pay, while you can just scan items from your mobile phone and pay on your mobile phone directly and immediately that list that you’ve created by shopping in store, you can repurchase it on Instacart or on any retailer website that we power.
To what extent does this work in a store? You mentioned the scanning with the app if they don’t go all in, they don’t get the shopping carts, they don’t get the smart tags. Is this something that is going to scale gracefully up and down?
FS: Yeah, we’ve built all of our technologies to be very modular. You have some grocers that want the full package and it’s great because the full package works incredibly well, it’s all connected seamlessly and it prevents grocers from having to integrate with twelve different vendors. Right now if you think about all of the things that grocers need, they would need an e-commerce vendor, a fulfillment vendor, a smart cart vendor, an ESL [Electronic Shelf Label] vendor and they have to do a ton of integration work to integrate all of these vendors. We do that for them, we do all of that integration for them on one platform but if they have some of these pieces already who are also modular, meaning that they can take one or two of the modules and complement what they already have and we integrate with all of these technology solutions. So we have the best of both worlds.
Who’s paying for all this stuff? Grocery store margins are famously very small. You could start with the Connected Store stuff — if they get all these smart carts, those can’t be cheap, is the grocery store willing to make that investment? Does Instacart subsidize it? Just broadly in general, even if you’re doing the white labels or you’re doing the Instacart app, how do you make this into being a win-win where the grocery store still gets the margins that they need, but Instacart also can make money? I mean you want to IPO, that’s an important part of the equation.
FS: It’s quite important. We basically have several models depending on what groceries want. In the case of in-store, they are ready to invest in some of these technologies because, one, this is the impact on the consumer experience. If you look at smart carts for example, in all of the pilots that we’re running, people end up purchasing more with the smart cards, having larger basket sizes.
Oh, really? That surprises me because one of the worries I’ve always wondered about is if you have your list and it’s right there, you actually do less browsing and you’re less likely to grab something. Or you grab that thing, you put in your cart and your price goes up like, “Ah, do I actually need that, right?” If you’re at the register and your price is high, then there’s like a, “I can’t back out now. I’m committed.” I’m actually surprised to hear that it actually drives larger basket size.
FS: I think there are two things at play. One is because you’re skipping checkout, you have more time to spend in the store and discover more things, and it’s all similar and right there. We also will have the opportunity in the future to make more recommendations. You have an entire digital screen in front of you on a smart cart, so if you’re dropping an item in your cart, we can recommend a complementary item so that you can make a recipe or make an entire meal. It’s the kind of merchandising that can happen online and right now it doesn’t happen in-store and with smart carts and digital screens you can make that happen, we know that that personalization drives higher basket sizes.
The other thing which is interesting is that we’ve talked to a lot of people that are on a budget and they are telling us that in the grocery store they have to limit themselves massively because they really cannot go above a certain budget and sometimes they buy even less on that budget to avoid that bad surprise.
Right, social awkwardness.
FS: Exactly. Whereas if we are telling them exactly how much they’re spending, their dollars actually go further, because they’re like, “Oh, I can really optimize what I’m spending.” We see that online, in fact. We have been pioneering, moving the food assistance program online and so now you can pay with SNAP dollars online. I spent a lot of time talking to people who are using online grocery delivery around the food assistance program, and they tell us that when they’re on the budget, online is so much easier than in-store because they can much better manage their budget. In fact, we have done studies that show that people end up buying more produce online than in-store, because produce is considered to be more expensive, but when they can look at their budget, they’re able to make produce fit within their budget rather than in-store where they just avoid the more expensive categories.
Right, especially if it’s hard to know how much you spent on fruit or vegetables — you have to weigh it and you have to figure out what the actual cost is.
FS: Exactly. So there’s a lot of advantages to actually knowing how much you’re going to spend. Then the other thing on the retail front is that as you know a very big challenge right now for retailers is labor shortages. What we are seeing is that retailers are willing to invest in some of these technologies because that’s going to free up labor from repetitive tasks, and that’s going to allow them to direct the very precious labor resources towards things that are more customer facing — restocking the shelves, improving the customer experience — rather than things that are checkout or updating prices and things like that. Technology can really help during this moment in time.
That’s a really great point. The pandemic is one thing, it’s hopefully not a frequently repeated event. This is automation in a sense, it’s leveraging the consumer, but to make it so the consumer both feels it’s a better experience and also you get to save labor cost, that is very compelling.
What’s striking about this is you start out with the Instacart app, the classic Aggregation play — people know your app, they go there, the grocery store itself ends up, at least in theory, being a bit of a commodity. But what you’re pitching here is a future where Instacart is much more like a B2B app, a supplier app, you’re doing white labeling, you’re okay to forego the Instacart brand in some respects. Is that just a reality of the market? Grocery stores are so established, they’re everywhere, that’s really the only way to get scale?
FS: Lots to unpack there. When I joined Instacart, the thing that I was the most surprised by is all the data about how loyal consumers are to their particular grocery stores. These grocery stores have spent decades really building that relationship with the customers. You said grocery stores become commoditized — I do not believe in that at all.
(laughing)In theory, yes.
FS: Yeah, in theory. I do not believe in that theory at all. I believe that consumers can tell you exactly that they prefers the cheese at Wegmans because Wegmans has spent years investing in their cheese counter, and they prefer the produce at Sprouts because Sprout does focus so much on organic, and it’s very clear that the differentiations that grocers have spent decades building is resonating with consumers.
The way we think about it is two-fold, one is we are building technology that helps grocers compete with the new entrants that are clearly going to enter the market through the lens of technology, Amazon being an obvious one. But we are building technologies that can also make their differentiation come to life. We do not picture a bland technological landscape where you go through a very commoditized grocery store. We are building technology so that the cheese counter at Wegmans can really shine online and really shine in-store in the best possible way.
And then the other thing is that by addressing the consumers wherever they are, whether it’s on an Instacart marketplace or whether it’s going directly to the retailer, we get to address the entire market, and that makes us much more aligned with our retailers, because if you are a retailer, you are obviously not agnostic as to whether a sale happens on Instacart or whether it happens on publix.com, you obviously prefer that to happen on your own website. The fact that Instacart can come to the table and say that we make the exact same amount of money and economics, whether it’s on our marketplace or on a retailer’s website, that makes us a strategic partner for retailers, because they realize that our incentives are entirely aligned with them. We grow our business when they grow their business and that’s very different from the relationships that we would have if we were just a marketplace. That’s really why this retailer enablement vision is so important as a core of who we are, we enable retailers, we don’t compete with them.
One of the things that I like to go back to on Stratechery when talking about companies is founding myths, where there’s some seminal moment in a company, usually in the first few years that becomes part of the culture and an unquestioned driver of decision-making in the future. Your former employer is one of my favorite examples, where with the News Feed, everyone used the News Feed to organize protests against the News Feed, and it’s a big deal, and there’s this mealy-mouthed apology from Mark Zuckerberg and then they just proceed ahead anyway. It turned out people actually loved the News Feed and it was a transformational event for the company.
It feels like to me, and I’m curious your perspective on this, you weren’t there, but looking back, that that moment for Instacart was the Amazon acquisition of Whole Foods. Whole Foods was the biggest customer for Instacart by far, and it seemed like a terrible outcome, but then Instacart had this massive wave of grocers coming to them saying, “Oh my God, please help us”, and completely changed their market and approach to away from being this aggregation player where the Instacart app was most important, to actually there’s a massively dispersed market out here and we can get Amazon-type scale by working for all of them and across all of them and that drives a lot of the stuff you’re talking about today. Is that a good read of that story? Was that as impactful as it seems from the outside?
FS: I think that’s a very good read. I think it was a big realization that the grocery industry was a trillion dollar category. It’s a category that Amazon hadn’t cracked, and it was very clear that they had decided to crack it, and we have seen over the last few years, despite the ups-and-downs that they’ve had in that category, when Amazon is determined to crack a category, they will continue to push forward. Amazon does not have what all retailers have, they do not have decades of experience in grocery, but what they do have is technology, and the way in which they’ve tried to enter and disrupt the grocery market is through technology.
Just Walk Out is a good example of a technology that they’ve pushed both in Whole Food store and Amazon Fresh stores in order to try to change the experience for consumers. Most of our grocers cannot afford the technologies that Amazon is developing. We can afford them because we get to amortize this investment across the 900 retail banners that we represent, which is 80% of the grocery industries that we partner with. They come to us for that technology expertise and the fact that we can make these investments, they also come to us because scale leads to efficiencies — it took us a hundred million orders to turn a profit.
Grocery delivery is very, very hard to do profitably without scale. I hear sometimes people ask me, “Are grocers going to do delivery on their own?” and the reality is that it’s very, very expensive to do that. In fact, Amazon realized that, they started charging for delivery from Whole Foods in addition to the Prime subscription in the last year, and that was a realization that grocery delivery is very expensive if you don’t have scale. We have that scale now, we have managed to get to a level of scale where we can deliver this service profitably and on growth system to us because we can do that in a very efficient manner.
The Shopper Moat
You talk about getting to profitability as far as delivery goes, and what makes Instacart valuable is not necessarily the Instacart brand, but rather the partnership you can have with all these retailers, and you’re fine to have the white label offering and all those sorts of things. What occurs to me is that the picker network, the people that actually go in and buy this stuff for Instacart, remains a super important part of your competitive advantage, and is what gets you in the door at the stores in the first place. That’s the part that’s hard to rebuild and hard to run profitably at that scale. Is that how it fits in your mind? The whole smart cart thing doesn’t necessarily depend on pickers, there’s a payoff perhaps where maybe they use the smart carts also? But I’m curious what your view is about your picker network broadly and how important it is to your strategic position.
FS: The network of shoppers are critical. Just at the very basic level, they are the face of the company to consumers. You open your door and you see an Instacart shopper and so to us, they’re absolutely critical as part of our strategy, but I think it goes further than that. It’s not just the people we’ve been able to convince to do this kind of work, it is also the technologies that we’ve built to make that more efficient. That’s very different from, for example, restaurant delivery. Where in restaurant delivery, the entire strategy is routing someone in the most efficient way to the restaurant, picking up an order and delivering it to the store.
Right, because there’s a time component.
FS: There’s a time component. In our business, more than half of the labor of the pickers is actually spent inside the store, and so all of the ways in which we derive efficiencies are very different: they are about optimizing how fast you can find the items inside the store, it’s about batching different orders so that you can pick multiple orders at once, it also means that we attract a different kind of shopper. 70% of our shoppers are women, more than 50% of them are moms, and when you ask them why they choose this kind of work, it’s because you get to spend more time in the store, less time driving, it’s a more customer-facing type of job, because you are interacting in the chat with the customer and finding the best replacement for that customer. It’s much more communication-based and so we end up having a very different model and therefore competing in a very different part of the market than other app-based companies. So yeah, that entire model is obviously important for us.
That’s really interesting as far as your shopper demographic. Do you really have any competitors for the sort of people that work for Instacart? A Lyft drive is going to be an Uber driver is going to be a DoorDash driver, to your point. I guess if you have a crappier car then you do DoorDash. Does this mean you have exclusive access to this labor market or who else is even in this space?
FS: We do see some people who want to do both and that’s because our hours are very different. Our peak hours are very different than ride-sharing and food delivery. If you think about food delivery, that’s going to be lunch and dinner. Ride-sharing, usually more dinner. Whereas, we peak in the afternoon. So we see some people who really want to complement their income use all of these apps and do several of these jobs and so we do compete for that, but we don’t compete in the same time slots. That’s why that’s also an advantage for us because we just have a very different time of day where we need these people available.
Where does advertising fit in this? Because you were coming from Facebook, and you helped build the Facebook advertising product, that’s the first thought everyone had when you took over Instacart. It’s striking that when I talked to you previously, you were very excited about this being the technology solution for all these companies, it’s almost like an enterprise company, but it does still feel like the advertising piece is a big one. The idea of especially selling the CPG companies, the end caps have been a thing in stores for a long time. What is the app version of an end cap is an interesting question.
How does advertising impact your thinking about long-term money-making and margin? Also, how does that fit in with your alignment that you want to have with stores? I could see there being a little bit more tension there, in part because if your benefit is efficiency, you can probably get more efficiency in advertising as well. How does that play out? Instacart app versus white label apps et cetera. I just threw 47 questions at you, but I’ll let you decide where to start.
FS: I think there’s actually a very interesting virtuous cycle between all of these things. Advertising is obviously a massive opportunity for Instacart. We see ourselves as a platform by which CPG brands can advertise themselves and really have a platform that combines the best of online advertising — the measurability, the precision, and the targetability. We see the ability to move products off the shelves at retail and get them in the hands of consumers and when they see an ad. That’s a pretty incredible advertising product all based on first-party data, which is nice these days. I think it makes for a very good advertising product for brands and so there’s a big opportunity there.
Advertising also benefits consumers in that first they get to discover more products, but also it helps us keep the cost of the service lower for consumers. It also benefits retailers because it helps us keep the cost of the service lower for retailers, and it drives average basket size because when we show ads, people discover more products, they also get deals because a lot of our CPGs also provide savings with the ads and discounts and coupons. That increases the average basket size for retailers, so all retailers gain from that.
The thing that’s really interesting is that we built an entire advertising platform for ourselves on the Instacart Marketplace, but our retailers are starting to tell us that they also wanted to build a retail media network on their own properties, but they didn’t have the technology capabilities or the resources to set up an entire ad platform by themselves to hire a large sales team. They asked us whether we could take the entire ad platform that we had built for ourselves and put that on their own properties, and we just launched that with Sprouts, who are on the process of launching Schnucks, and that’s a way for retailers to overnight start getting advertising dollars from their website that they weren’t getting otherwise with no investment. We’ve done all of the investment for them.
Just a technical question, is the data on Sprouts, is that first-party data for you or is that Sprouts first-party data?
FS: That’s Sprouts’ first-party data, and that’s really important. We want our retailers to show they absolutely earned their customer relationship on these websites, but there are times where if they share some data we can make the experience on their own properties even more valuable and so we can personalize the experience better. That’s something that we explore on a case-by-case basis. Back to the topic of ads, it’s a good example of why I’m also excited about what you call the enterprise vision, but it’s really because it’s about taking everything that we built for ourselves on the consumer side and also putting it in the hands of our retailers, very similar to what Amazon has done with AWS. Ads is no exception, we build it for ourselves, we also build it for our retailers.
So the connected carts are kind of dipping your toes in the water of point-of-sale. Do you see yourselves getting directly into points-of-sale? The reality is these grocery stores are sitting on this astronomical gold mine of data that they’ve mostly just sold off — it gives us some of the sketchier, I think, parts of the ad market. They know exactly what customers buy every week and they could, in theory, generate those shopping lists for every customer tomorrow. Is that something that you’re interested in that you want access to? Or are you further along? Or are there reasons why that’s actually not as achievable as it would seem like to me as sitting on the outside?
FS: In order to power things like scan-and-pay or smart carts, we do need point-of-sale integrations. We don’t need to be building the point of sales ourselves, but we do need this point of sale integrations. As to your question on data, the thing that’s interesting is that retailers get a lot of data at that point of sale, but they’re still trying to map that to a natural human with a full identity. That’s why many of them have launched this loyalty program in big part to actually have a picture of who that customer is instead of a list of one of transactions. The promise of bridging online and offline is giving even more reasons for customers to really tie their identity online and offline so that when they go inside the store, there’s actually a real value proposition for them to sharing that they are Fidji and they are a gluten-free customer who also has a dairy-free kid. If that’s shared, when I enter the grocery store and I connect with my smart cart, that means that my smart cart or my mobile phone, if I’m shopping with my mobile phone, can do a better job at recommending all of the right things for me. It’s good for the consumer, it’s also good for the retailer because they get a much fuller picture of that customer across both channels instead of a series of one of transactions.
IPO, Health, and Competitors
You’ve privately filed your S-1, is it IPO or bust at this point? You’re weighing out as this super compelling vision of this huge market and “We’re not just going to build an app and take a slice of it, we’re actually going for the whole thing”, or the non-Amazon parts of it, I think, is maybe a fairer way to put it. Where can this go wrong? What are the challenges that will prevent you from achieving this vision or even getting to an IPO? Is it just the pandemic slow down? Is it the slump that other e-commerce companies have come to? Is it getting into physical products? That’s the thing that makes me a little nervous with the smart cart thing — actually building physical goods, having to maintain them, keeping your costs in control are a completely different problem than building an app. What are the things that keeps Fidji up at night?
FS: For me, it’s actually quite simple, we are only 10% penetrated online. It’s very clear that this industry should go to 20 to 30%. So the real question is how do we accelerate that online penetration? That’s why you’re seeing us invest in marketing more because we really think that as a market leader in the space, we need to continue educating people about the service, and it’s interesting because many people have told me, “Wait, after the pandemic, everyone knows that Instacart exists, everyone knows that that grocery delivery exists” and the reality is that our brand awareness is actually still pretty low. We still have a big opportunity to just get in front of more consumers, really show them the value proposition and continue to drive that adoption.
There’s also a big thing that I’m focused on, which is how do we make all of this way more affordable? That’s really how you increase online penetration. In fact, if you looked at Instacart three years ago, it was a service that was vastly over-indexed towards affluent audiences. If you look at us now, we are actually indexed pretty closely to US population in terms of income, and that’s because we’ve rolled out a series of initiatives, whether it’s bringing the food assistance program online, whether it’s bringing more discount and club retailers online, whether it’s rolling out new benefits for our Instacart plus membership program, new payment options, all of that has contributed to making the service more affordable. That’s something that especially during this time where it’s so hard for families to put food on the table given inflation, I’m very, very focused on because I want to make sure that this is a service that is accessible to everyone, not just for young people.
That’s the other announcement you had just this week about Instacart Health. What I thought was really interesting and inspiring about this was your first bullet point under Instacart Health was expanding affordable payment options, and this idea that it’s one thing to put information in front of people or “Do X, Y, Z”, but there is a really fundamental question of can you buy fresh vegetables or not? I thought the bit about you can identify in place whether you use your SNAP benefits for this product or not? I thought that that was pretty compelling and it’s actually quite heartening from my perspective to hear your point that your demographics now match the US, because I absolutely had in my head that you have mostly affluent customers. That’s really interesting and exciting.
FS: The point that you’re making about the food assistance program is another benefit of platform approach. We have now 50% of the retailers that accept the food assistance program online, have been approved through Instacart because we work directly with the government to get all of these retailers approved. That’s the value of having one platform that works across the entire grocery industry. We can provide some of these payment solutions, we also launched this week something called Fresh Funds, which is a way for any organization, whether your health insurance company, whether you are an employer, a nonprofit, to direct funds so that people can buy certain types of grocery, produce being an example. Again, if you’re an health insurance company right now, it is actually a very, very good idea to fund the cost of healthy food, because you will save on healthcare costs down the line, but there hasn’t been a platform by which you can do that really seamlessly. You would’ve had to partner with Safeway and Kroger and Publix and Wegmans. Whereas, if you come to Instacart, you have 80% of the grocery industry already there, and we have built all of the technology products, so that these funds can be directed to the right people and these people can choose any of their favorite grocers through our platform.
Towards that end, the maybe-not-fun question or maybe you probably have a built-in answer here — who is your competitor? Some options I can think of is Amazon, obviously, there’s Uber and DoorDash in the delivery options they’re trying to take on, there’s grocery stores rolling their own, and then I think there’s a fourth, which is your own cost structure. If this market doesn’t fully manifest or fast enough where you can stay ahead of the cost it’s going to take to build out this massive vision, or maybe it’s just labor challenges with your shopper network, where do those rank or am I missing something when I go through that list?
FS: I think you were pretty exhaustive, Ben. Here is how I see the landscape, I think Amazon is a very big competitor to all grocers, and so we see our role as being really easy —
Amazon’s a great customer acquisition tool basically!
FS: (laughing)I wouldn’t say it that way, but I think it’s a really clear signal that the grocery industry needs to adopt technology. So I see ourselves as really needing to develop all of the tools so our grocers compete with them. If you look at the new entrants in the grocery space, whether it’s goPuff, DoorDash with DashMart, Uber, a lot of them have a model that is about really disrupting grocers and getting in between grocers and their customers.
Right. What I was talking about at the beginning with Aggregation.
FS: Yeah, exactly. They’re building first-party retailer businesses. They’re owning inventories, they’re adding warehouses, and so that’s not our strategy at all. We might compete for the same customers, but fundamentally we have 80% of the supply, 80% of the grocery market is on Instacart, and that’s a massive structural advantage. On top of that, the more these players continue building a retailer business, the more retailers feel like they don’t want to partner with them and really want to partner them with someone who’s not going to compete with them.
It feels like Hope Springs Eternal as far as this “We’re going to have a warehouse” approach. The take I had on Amazon about Whole Foods is you have this problem of perishable goods, and if you’re not riding on the existing habits of people of going to the grocery store and driving high inventory turnover, so you’re not having spoilage, even Amazon couldn’t get over that valley of “We have all this fresh meat and vegetables in our warehouses that are all going bad and it’s destroying our cost structure”. It seems like that’s going to be a same, I just don’t know how you get past that. I guess maybe if you make the market big enough then they can get enough scale, but seems like a big challenge.
FS: It’s actually relevant to the point you made on retailers doing it to themselves. The thing that’s interesting is our model is incredibly capital efficient because we are delivering from 75,000 stores that are already close to the customers where retailers are already paying for all of that fixed cost infrastructure. So any additional 1% of sales that they get from that store is massively marginal credit for them because they’re already paying for all of the fixed cost. Disrupting that model is really, really hard — making a model that is better than that economically is really hard. We saw it with some models that were about these giant warehouses and it works when you aggregate so many of these orders in one place. You save a little bit on the cost of picking, but you lose on the cost of delivery because you’re so far away from the customers that you cannot get to them in an hour. A lot of customers like speed, you never bet against speed when you’re in e-commerce, and it costs a lot of money to have your trucks and your cars driving for three hours. So we really haven’t seen a model that makes this all work in a more efficient way than what we’re doing right now, which is delivering from 75,000 stores that our grocers have already invested in.
Well, it’s a fascinating business. I didn’t fully appreciate it, honestly, until I talked to you, but the opportunity does seem clear. I love Amazon as a customer acquisition driver, I’ll keep that one if you don’t want to adopt it. But before I go, I do have to ask to take this full circle. Do you have any advice for your old employer in Instagram as long as you’re here?
FS: (laughing)I think they’re doing just fine.
Fidji, it was great to talk to you. I think it is really interesting. We didn’t talk about finances or the IPO because you can’t right now, you’re in a quiet period, so just disclosure about that. But we’ll look forward to the S-1 and what happens as far as that goes and thanks for taking the time.
FS: Really appreciate chatting with you, Ben.
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