Online grocery delivery startup Instacart achieved a valuation of $4.2 billion in February 2018 after raising $200 million in funding—up from $3.4 billion the previous year. But how realistic is this figure? By working backward and breaking down the business model’s economics and revenue projections, we can analyze whether this valuation holds up under scrutiny.
For over 12 years, I’ve valued numerous public companies across industries as an equity research analyst, using methodologies ranging from discounted cash flow (DCF) to bottom-up modeling of unit economics. As private companies like Instacart stay private longer, applying such valuation techniques to startups not only provides a sense of fairness but also grants insight into high-growth industries and their potential.
This article explores whether Instacart’s valuation is justified, outlining a step-by-step approach to estimate the underlying economics and business potential.
Overview: What is Instacart?
Instacart is an online grocery delivery service that works similarly to on-demand platforms like Uber. Customers place orders through the Instacart app or website, selecting items from grocery stores they already shop at. Instacart’s contractors shop for and deliver the groceries to their doorstep.
Revenue is generated from:
- Delivery fees: Paid by customers.
- Partner fees: Paid by grocery stores for driving sales through the platform.
- Markups: Differences between store pricing and customer pricing on some items.
- Placement fees: Paid by brands or manufacturers for promoting products on Instacart.
The $4.2 billion valuation raises the question: Are these revenue streams and Instacart’s business model robust enough to justify such a figure?
Step 1: Evaluating the Economics of Each Order
Estimating Order Size
We start by estimating the average order size.
- The average American spends $100 per week on groceries, across about 1.5 trips, resulting in an average spend of $67 per grocery trip.
- Instacart primarily appeals to higher-income households, so I estimate an average order size of $75.
Revenue Breakdown per Order
- Delivery Fees:
Instacart offers delivery options starting at $3.99 for two-hour delivery and $5.99 for one-hour delivery. Many customers subscribe to Instacart Express ($149 annually), which offers unlimited free deliveries for orders exceeding $35, equating to just over $1.90 per delivery.
Assuming:
- 60% of customers use Instacart Express ($3 average delivery fee).
- 30% pay $3.99 per delivery.
- 10% pay $5.99 per delivery.
The blended average delivery fee is approximately $3.00 per order.
- Partner Fees:
Grocery store partners pay Instacart a percentage of the sales value per order.
- Let’s assume partners represent 90% of orders and pay Instacart a 3% fee (similar to outsourcing costs for ecommerce and advertising).
- For a $75 order: 3% = $2.25 per order.
- Markups:
While most prices match in-store pricing, some items carry a modest markup (e.g., 15% markup recorded on Costco items in Manhattan). Let’s assume 20% of orders feature a 5% markup, generating $0.75 per order. - Placement Fees:
Instacart charges brands like Procter & Gamble for promoting items (e.g., targeted promotions or product samples). Assuming 10% of items sold are promoted and incentives are 10% of sales:
[ $75 \times 10\% \times 10\% = $0.75 \text{ per order.} ]
Summing Up Revenue per Order
Combining these components:
- Delivery Fees: $3.00
- Partner Fees: $2.25
- Markups: $0.75
- Placement Fees: $0.75
Total Revenue per Order = $6.75
Cost Breakdown per Order
Labor is Instacart’s largest expense.
- Estimate: Each order takes 15 minutes to shop and 15 minutes to deliver, totaling 30 minutes of labor at an average hourly rate of $10/hour ($5 per order).
This leaves just $1.75 per order to cover marketing, technology, and overhead costs—a slim margin.
Step 2: Endgame: Moving from Order Economics to Valuation
How does Instacart’s current per-order economics translate into the $4.2 billion valuation? Investors funding the startup expect significant growth and returns in the next 5-8 years, likely targeting a 3.0x multiple for a $12.6 billion valuation at exit.
Step 2.1: Implied Earnings at Exit
Using a Price-to-Earnings (P/E) ratio of 30x (similar to Costco’s valuation), Instacart’s implied earnings need to reach:
[
\text{Earnings} = \frac{\text{Exit Value}}{\text{P/E Multiple}} = \frac{12.6 \, \text{billion}}{30} = 420 \, \text{million annually.}
]
Applying different P/E multiples suggests a wide range of required earnings ($315 – $630 million).
Step 2.2: Revenue Implied by Earnings
Assuming a net margin of 2% (similar to grocery stores), $420 million in net income implies revenues of:
[
\text{Revenue} = \frac{\text{Earnings}}{\text{Net Margin}} = \frac{420 \, \text{million}}{2\%} = 21 \, \text{billion annually.}
]
Step 2.3: Market Context
Instacart’s $21 billion in projected revenue represents a 21% market share of online grocery sales, estimated to reach $100 billion by 2025 (Source: Nielsen). Given its focus on high-growth online grocery ordering (currently $13-28 billion), this market share appears achievable given current dynamics.
Step 3: Instacart’s Long-Term Challenges
Labor costs pose a significant challenge for maintaining profitability:
- Labor Dependency: $5 per order for labor leaves only $1.75 for all other costs, assuming $6.75 total revenue.
- Automation Necessity: To achieve scale and sufficient margins, Instacart may need to invest in technologies like automated fulfillment or batching more efficient deliveries.
In addition, customer acquisition and retention costs are key to reducing churn and turning first-time buyers into long-term users.
The Verdict: Is $4.2 Billion Reasonable?
Yes, but with caveats.
- The Positives:
Instacart’s valuation is supported by massive growth potential in the grocery delivery market, a scalable revenue model, and promising partnerships with grocery retailers. The online grocery market tailwind boosts the plausibility of capturing a meaningful share (20-30%). - The Challenges:
Achieving profitability on a per-order basis remains difficult due to high labor costs and slim grocery margins. Significant cost efficiencies and automation will be crucial as Instacart scales toward its projected revenues.
Key Takeaways for Business Analysis
The analysis highlights the importance of combining unit economics with market dynamics. Similar frameworks can help finance professionals evaluate other private startups or internal business lines, providing clarity on long-term sustainability and estimates of market value. For Instacart, success will depend on scale, operational efficiencies, and continued growth in online grocery demand.