Grocery delivery company Instacart launched its initial public offering (IPO) yesterday, raising $660 million with a $30 per share price that was at the top end of its offering range. The price reflects a $10.2 billion valuation; the company is making less than 10 percent of its shares available.
Public trading of Instacart's shares will begin today on the Nasdaq. Its ticker symbol: "CART."
Axios writes that the current valuation is "well below the $39 billion valuation it received in its last private round more than two years ago. It's also lower than a subsequent internal valuation reset.
"Instacart originally planned to price its shares at $26-$28, before boosting the range to $28-$30.
"In addition to the IPO proceeds, PepsiCo agreed to buy $175 million of preferred convertible stock in a concurrent transaction."
Meanwhile, The Information reports that the public offering means that "at least one shareholder likely to make money is its own customer: grocery giant Albertsons, one of several retailers that quietly struck stock deals with Instacart years ago that remained a closely held secret inside the delivery company, people familiar with the matter said.
"The grocery company’s stock deal, which hasn’t been previously reported, was tied to a commercial partnership it struck with Instacart several years ago.
"Albertsons, with a market capitalization of about $13.5 billion, stands to profit roughly $80 million from its stake."
In other words, in addition to availing itself of Instacart's services, Albertsons got a stake in the company - a deal that was made in the wake of Amazon's acquisition of Whole Foods in 2017, which created industry-wide anxiety about shifting competition.
The Information reports that Kroger - which has proposed a $24.6 billion acquisition of Albertsons - also made a similar deal with Instacart, "but it wasn’t clear whether it already sold its shares."
Some more context from The Information story:
"Instacart said in its filing that it makes up about 5% of its top 20 customers’ total sales, up from 0.6% five years ago. 'They’ve done a good job for us,' said Richard Galanti, Costco’s chief financial officer, in an interview. 'We started with them a number of years ago. Volume and efficiencies have grown.'
"That’s not to say there aren’t notable cracks in those relationships. Walmart, the largest supermarket chain in the country, has built up its own grocery-delivery operations to about three times the size of Instacart’s by sales, according to YipitData. Kroger, the fifth-largest retailer in the U.S. by sales, has invested heavily in building warehouses that can handle grocery delivery around the country. Albertsons and Aldi now work with DoorDash in addition to Instacart for delivery, rather than working exclusively with Instacart.
"Instacart has a kind of 'frenemy' relationship with grocery retailers, said Matthew Hamory, a managing director at consultancy AlixPartners, which consults with those businesses. Retailers have several reasons to be cautious about their relationship with Instacart, including the delivery firm’s competition with them for advertising dollars and customer data, he said.
"Hamory said the stock deals help explain why large grocery firms who might have money to build their own delivery operations 'put up with the risks of working with' Instacart. 'If you have skin in the game and you have more than a purely commercial relationship - but a joint relationship - that makes a fair bit of sense,' he said."
Some more context from The Information, which reports that Instacart CEO Fidji Simo "has tried to broaden the types of services it offers retailers. More than 60% of its top 20 grocers, including Kroger, Publix and Costco, pay Instacart to run a delivery service from grocers’ own websites, the company said in its IPO filing. More than 40% use Instacart to power a curbside grocery pickup service, including Kroger. 'We are in the business of growing our partners’ businesses,' she said in the road show video.
"Still, fewer grocery retailers are willing to work exclusively with Instacart as they may have in previous years. Suzy Monford ran the Seattle-based chain PCC Community Markets when it renegotiated its contract with Instacart a couple years ago. She held firm on one point in particular: She wanted to keep her options open. 'If you’re Instacart, you need to stop me from going to DoorDash or Uber Eats,' said Monford, also a former Kroger executive.
"Monford, who now consults for grocery chains, counsels firms to take the approach she did in negotiations. But she acknowledged Instacart’s crucial position in the grocery industry. 'If grocers want their fair share of the [market] in e-commerce, you’re going to want to be on Instacart’s marketplace,' she said."
- KC's View:
MNB readers will recall that I've long been an Instacart skeptic, in the sense that I kept wondering why companies of all sizes were willing to sign deals that essentially allowed Instacart unfettered access to their customer data - which allowed them to market against their own customers. The story in The Information makes that point, noting how Instacart competes against its own customers "for advertising dollars and customer data."
Well, this story provides at least a partial explanation - companies like Kroger and Albertsons (and heaven knows how many others) were essentially being compensated for putting their own customers in play. It was a risky move, because it depended on Instacart having a successful IPO, but it would appear that at least for Albertsons, the gamble paid off.
I wonder if smaller retailers got the same deal, or were they persuaded to do business with Instacart because the like of Kroger and Albertsons, which had the resources to develop their own e-commerce offerings, were opting in. If it was the latter, there may be some annoyed retailers out there this week.
Look, let's be clear. Instacart has engineered a successful business model that provides retailers with a capacity that would be costly and time-intensive to achieve on their own. They continue to innovate, developing a multi-layered ecosystem that feeds on itself for growth, helping retailers scale the innovation curve while embedding its own DNA deeper and deeper into retailers' systems. And, I am told, it has forged a new approach to deals that is more respectful of retailers' customer data.
Now, with this IPO, Instacart has more money to invest in innovation, and many of its employees' equity investments are going to be rewarded. Good for them.
But as with all IPOs, this new structure adds another layer of pressure to Instacart's leadership - there now will be a lot of shareholders to whom attention must be paid. It will be critical for Instacart to retain a laser-like focus on its own retail customers, putting their priorities first, trusting that if they do a good job in this arena, the share price will take care of itself.