A fisherman’s daughter may have caught Tech’s next big trend. Instacart’s CEO Fidji Simo has been at the centre of this year’s hottest IPO. Her beaming smile and thick spectacles are now familiar.
The grocery delivery platform is up 20% in the first two days of its listing. It is trading at US$12 billion ($16. 4 billion), 40% higher than its private market valuation in July.
Instacart pairs grocery shoppers with independent suppliers. The suppliers source products from Walmart Inc., Kroger Co and CVS Health Corp. The products are dispatched to the customer’s doorstep within hours. It is similar to Sheng Siong, Singapore’s online grocery, except it is on a much larger scale.
Fidji grew up in the South of France in a hard-working family. Her old man went to work at around 2am. Fidji’s mother often waited to go to bed until he left. Fidji has continued the family habit. She sleeps and rises a lot later than the rest of Silicon Valley.
Her company may have awakened the IPO market from a slumber. The last two years have seen an IPO drought. Since January 2022, the number of IPOs has been 10% in 2021. The markets are not just cheering the end of the IPO drought. Instacart may have discovered a magic formula for monetising e-commerce.
In the pre-internet days, Fidji’s father’s fishing expeditions were inefficient. He often ventured into the waters where the fish were sparse. Today, fishermen have access to satellite maps to guide their catch.
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Fidji seems to have gone a long way in helping advertisers hunt in the right place. We are now in the third decade of the Internet age. Online advertisers are still facing uncertainty about its impact. This may be about to change.
Instacart invests heavily in its advertising segment. Its advertising segment has operating margins that are twice that of its delivery business. Instacart Ads helps consumer brands like Pepsi promote their products on its app.
Almost a third of Instacart’s revenue is from advertising. Though it is billed as a delivery service, over US$740 million was generated through advertising. This is more than the average listed advertising company on The New York Stock Exchange (NYSE) generates in revenue.
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Advertisers have long struggled with inefficiency. With Instacart data analytics, advertisers like Pepsi Co can track their ad campaigns. Instead of wasting money on TV ads or billboards, the advertisers can be targeted. For instance, Pepsi can advertise its health drinks to people searching for that product on Instacart’s app.
Fidji joined Instacart in August 2021 from Facebook. She had been in charge of the Facebook app. Her arrival led to an advertising push. In an early masterstroke, she struck a deal with e-commerce enabler Shopify, which provides the infrastructure for an enterprising individual to sell cakes from home.
The move was bountiful for both Instacart and Shopify. Shopify has over two million merchants on its platform. Most of them are independent operators operating from their dining tables. Through Instacart’s analytics, these merchants got insight into its customer base. A seller of Balinese coffee in Minnesota could zone in on the preferences of the potential drinkers.
Instacart is operationally profitable. The market expects an ebitda margin of 15% in FY2023. This is a rarity among the gig economy players like Uber, Grab and Shopee. The advertising segment has been the clincher.
There are serious risks in online grocery shopping. Instacart’s own gross transaction volume (a measure of the scale of its business) has risen only 4% in 1HFY2022. There are doubts whether online grocery sales could reach the scale of other forms of e-commerce.
Only about a tenth of grocery spending is online. The pandemic may have boosted this figure. In Singapore, Sheng Siong’s growth has faltered since the reopening.
However, e-commerce players in this region may follow Instacart’s lead. Coupang, South Korea’s Amazon, boasts delivery within seven hours of the order. The swiftness of its platform is unmatched. It is now developing its advertising business to provide better consumer analytics.
Asean e-commerce players like Sea, Bukalapak and GoTo should take note. Instacart may have found a way for the industry to deliver profits — not just packages.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column. This column does not constitute investment advice of any kind
