Instacart, the pioneering grocery delivery platform, is gearing up for its much-anticipated initial public offering (IPO), and investors are hungry over the prospect of another tech success story. What makes Instacart's recipe for success unique? Surprisingly, it's not just about delivering groceries—it's about leveraging the power of advertising.
In a recent filing for its IPO, Instacart revealed a strategic focus on advertising that's hard to overlook. The company's S-1 document is replete with references to advertising, tallying up an impressive 249 mentions of the word "advertising." Expanding the search to include related terms like "advertise" or "advertiser" pushes the count even higher, reaching a substantial 301 references. Advertising is referenced more than “delivery” (171 times), “pickup” (63 times) or “CPG” (46 times).
This emphasis on advertising might seem peculiar for a grocery delivery platform, but it has been a central strategy for Instacart since 2019 when it first introduced paid search. Since then, Instacart has been on a whirlwind journey to diversify and expand its advertising offerings. The company's innovative initiatives include a self-serve ad platform, customer product landing pages, targeted promotions, coupons, sponsored product ads, shoppable videos, off-site placements, and a suite of measurement tools and analytics.
Instacart's efforts have yielded remarkable results. The company's S-1 filing highlights that over 5,500 brands are now using Instacart Ads, representing a fivefold increase since late 2019. The financial numbers are equally impressive, with ad revenue reaching $295 million in 2020. In the subsequent year, Instacart's ad revenue nearly doubled to $572 million, and in 2022, ad revenue hit a substantial $740 million, accounting for a significant 29% of the company's total revenue. Notably, this surge in ad-driven profitability also coincided with Instacart reporting a positive net income, raking in $428 million in profit compared to a $73 million loss the previous year.
One standout advertising method on the Instacart app is branded search, allowing brands to bid against competitors to appear prominently in searches or on competitor product pages. Instacart asserts that its ads generate an impressive 15% or more incremental sales lift on average.
The scope of Instacart's operations is equally striking. The company partners with 1,400 retailers spanning 80,000 store locations, including industry giants like Kroger, Safeway, and Costco. The platform processed an astounding 260 million orders in the previous year, a testament to its remarkable scale. This impressive volume of transactions generates a trove of consumer data, making Instacart an appealing and effective advertising platform.
Why such a big focus on advertising? Despite the remarkable growth of its ad business, Instacart's actual delivery orders remain relatively stagnant, hinting at potential challenges. The delivery service itself operates on lower profit margins compared to advertising, raising concerns about over-reliance on the latter for profitability. Critics point out that if the advertising venture doesn't yield the expected returns or if Instacart's user base falters, the company could face potential setbacks.
So, what does it signify when over a quarter of a grocery delivery company's revenue arises from advertising rather than the core service? It underscores the transformative power of creative and strategic advertising initiatives. As Instacart sets its sights on the public market, it's clear that advertising has played a pivotal role in propelling its growth and profitability.
Looking ahead, Instacart has no intentions of slowing down its advertising efforts. The company plans to introduce new display advertising offerings, including shoppable products brand pages that serve as compelling destinations for both on-site and off-site media. Instacart is poised to expand its ad tech to even more retailers through its Instacart Enterprise Platform, providing its partners with fresh opportunities to monetize their platforms while extending the reach of advertisers.
Instacart isn’t the only delivery app to put a focus on advertising. Glovo, a Spain-based multi-category app with 240,000 restaurants and stores, runs Glovo Ads, where vendors see an average ROAS, ranging from 5-7x, with over 6000 vendors onboarded in the first year.
Instacart's journey to IPO success is a testament to the transformative potential of advertising in unconventional spaces. As businesses seek growth and profitability, they can take a page from Instacart's playbook and consider how innovative advertising strategies can complement their core services. Instacart's remarkable pivot towards advertising underscores the notion that in the modern business landscape, creativity and adaptability are key ingredients for success.
As the IPO fervor around Instacart continues to grow, the lesson is clear: if you want to achieve monumental success and rival the giants, embracing the power of advertising could be your way forward.
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