Instacart’s Secret Deals With Grocery Giants

The deals are mentioned in the firm’s IPO filing, without identifying the grocers. They were part of Instacart’s wooing of retailers after Amazon bought Whole Foods in 2017, which incited fear across the grocery industry.

The deals may provide a financial underpinning for one of the most important messages Instacart executives tried to push on the company’s investor road show last week: Its retail partnerships have largely held up, even in the face of growing competition from well-capitalized competitors like Amazon, DoorDash and Uber.

As part of a road show presentation shared with investors last week, Instacart executives pointed to data from analytics firm YipitData that showed it had maintained its vast majority share of the grocery-delivery market, compared to other third-party delivery firms like Uber, DoorDash and Amazon, particularly in online grocery orders above $75. Instacart still had about three-quarters of sales among that size of grocery orders.

“No other player in the industry or any single grocer can easily and cost effectively replicate what we’ve built,” Instacart CEO Fidji Simo said in the firm’s IPO road show video, which The Information viewed.

Executives are conveying confidence even as they ask investors to buy at a discount to the price where rival DoorDash trades, based on multiples of revenues and profits. Instacart and its bankers at Goldman Sachs will set the price of its IPO on Monday, likely at a valuation close to $10 billion, down from $39 billion in 2021. (When it last raised money, Instacart had a bigger market cap than Kroger, but is now less than a third of the grocery giant’s $33 billion value.) Instacart also said one of its top advertisers, Pepsi, would invest $175 million in a private placement alongside the IPO. The stock will start trading publicly Tuesday.

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.

‘Thermonuclear Bomb’

Instacart’s push to award equity shares to grocery retailers started after Amazon’s purchase of Whole Foods, which sparked a series of new partnership deals for Instacart under former CEO and founder Apoorva Mehta. It had taken four or five years for the company to land deals to offer grocery delivery services from Albertsons or Kroger stores. Instacart played up the threat Amazon posed to grocers. “It really was like a thermonuclear bomb against the entire grocery industry,” Mehta told Forbes in November 2017 after Instacart signed a deal to deliver groceries for Kroger’s Ralphs chain.

The equity agreements with Albertsons and Kroger are identified in the index of Instacart’s IPO filing as “retailer warrants,” or agreements to buy common stock, at an $18.52 strike price, in November 2017 and July 2018, respectively. That was the same price as the Series D round, led by Sequoia Capital. (The Information learned the retailers’ identities from people familiar with the arrangements.)

The deal paid off more for Albertsons if both companies continued to work together, incentivizing the grocer to stick with Instacart. It had about 2.7 million warrants outstanding as of the IPO filing, excluding the shares that Instacart will sell to cover the retailer’s payments to exercise the stock, a roughly $78 million value at the IPO mid-point price.

Kroger got an even larger stock deal than Albertsons. It paid about $170 million between 2020 and the first half of 2022 to exercise its warrants. The value of the shares it held was $163 million by the end of 2021. By the end of last year, it didn’t have any warrants outstanding, meaning it could have sold all of its stake.

Other grocery retailers also received stock in Instacart in 2021, the filing says, but those details couldn’t be learned. Kroger and Albertsons, which have a combined $46 billion market capitalization, are also awaiting regulatory approval to merge.

Albertsons declined to comment. Kroger didn’t respond to requests for comment. Kristin Chasen, an Instacart spokesperson, said the company couldn’t comment for this story.

The fact that the stock was tied to commercial deals raises questions about whether equity agreements allowed the retailers to negotiate better fee rates with Instacart than their competitors. That could raise eyebrows in an industry like grocery, which has low margins and several national and regional rivalries. Competition among retailers is a sensitive area for Instacart. On its own app, Instacart avoids telling customers whether one retailer offers food at a lower price than a rival, for instance.

“When you have a seat at the table, you can negotiate a better deal. You know the people; you have the relationships,” said James Angell, an associate professor of business at Georgetown University.

The nature of the grocery industry, which is dominated by several large firms and a smattering of mom-and-pop businesses, makes it important that Instacart keeps its grocery businesses happy. Instacart said in its IPO filing that 43% of its sales stem from just three grocery companies, opening the door for a big sales hole if one defects or reduces its reliance on Instacart. Its three biggest customers are Kroger, publicly traded warehouse behemoth Costco, and Publix, a regional grocer in the Southeastern U.S., according to YipitData. Albertsons, which owns the grocery chains Safeway and Vons, was sixth-largest.

Instacart’s relationships with retailers have appeared to fray at times. An executive at Kroger, Instacart’s largest retailer customer, told The Information in 2021 that it didn’t want to be “all dependent on Instacart.”

Simo, who took over as CEO in 2021, 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.