With Webvan’s Implosion as Cautionary Tale, Instacart Slowly Begins to Expand, Starting With Chicago
When same-day grocery-delivery startup Instacart raised its recent $8.5 million Series A round, it named Sequoia Capital’s Michael Moritz to its board. The fact that Moritz was once a board member at Webvan, the poster child for what can go wrong when grocery-delivery businesses expand too quickly, is not a coincidence.
So, as Instacart contemplated when and where to expand first, CEO Apoorva Mehta said he called on Moritz for advice.
“One of the main reasons that Webvan failed was that it expanded too quickly,” Mehta said in an interview yesterday. “Mike really encouraged us to get a lot of the important things right in San Francisco before considering expanding into a new city.”
As a result, Instacart spent the last 14 months honing its service in the San Francisco Bay Area, even though Mehta said he was confident early on that the service could work in different regions.
Then, as he decided on its next market, he and his team created a “feasibility matrix” to help identify promising markets. Among the characteristics Instacart looked for in a new market was a high concentration of households without cars, at least a decent median household income, and a city where precipitation occurs often, since Instacart has learned in San Francisco that delivery requests spike when there’s inclement weather.
Mehta also looked for another factor that may appear counterintuitive: The presence of a competitor, which Chicago offers in the form of the Peapod delivery service.
“There’s already existing behavior that we like to tap into,” he said.
Mehta may someday rue those words. Peapod, FreshDirect and even Amazon all have launched grocery-delivery businesses ahead of Instacart, and have built sizable businesses along the way.
But Instacart is different from those competitors, as well as Webvan, in many ways. Instacart does not carry any inventory, while the others do, or did.
Instead, Instacart hires a network of shoppers who pick up and deliver the goods once an order has been placed. As a result, it does not need to open new warehouses when it moves into new cities, nor worry about how much demand there is for a given product.
It also can commit to delivering groceries on the day they are ordered, while the other companies are mostly limited to next-day delivery, unless you order through Amazon early in the morning.
The potential downside of Instacart’s approach, though, is that its service is only as good as the contract workers it hires as shoppers, meaning that training and retention are crucial. And since it doesn’t deliver its own groceries from its own warehouse, it won’t know whether one of the stores it buys its goods from is out of a given product until the shopper gets there.
When the service launches in Chicago, customers in 13 neighborhoods will only be able to order from Trader Joe’s to start, while San Francisco customers can order from Trader Joe’s, Safeway, Whole Foods, Costco and discount grocers that Instacart includes under its Instacart Plus brand. But the Chicago service will add deliveries from Whole Foods, Costco, and some local stores in the coming weeks, Mehta said.
While it has taken more than a year to expand outside of San Francisco, Mehta said he would not wait as long to expand beyond Chicago, should things go smoothly there.
Where’s next? He won’t say, but the company’s sign-up page for shoppers hints at potential launches in Philadelphia, Boston, Dallas and New York City.