Amazon.com Inc. (AMZN - Get Report) may have pending trillion-dollar valuation, but not every retailer is ready to wave a white flag. Certainly not the grocery sector, which has had five months to steady itself in the wake of Amazon's $13.7 billion acquisition of Whole Foods.
Behind the efforts of Kroger Company (KR - Get Report) , Costco Wholesale Corporation (COST) and even Aldi to ramp up their delivery offerings, one unlikely player has emerged as a threat to the e-commerce giant: the small but growing Instacart, which offers retailers a same-day delivery service to their customers. Since the deal was announced, Instacart has signed on with more than 120 retail partners.
The 320-person startup that boasts a $3.4 billion valuation, in fact, already exceeds Amazon in certain modes of delivery, contends its CEO Apoorva Mehta.
"You have services like Amazon Fresh that's been around for 10 years, but have not been able to scale geographically or tackle same-day delivery," he told TheStreet Monday, Nov. 13.
Read for the full interview, which has been edited for length and clarity.
Q. What did you think when the Amazon-Whole Foods deal hit?
A. We've been telling retailers for the last five years how important e-commerce is, how important same-day delivery is. We showed them how much people want one-hour grocery, or two-hour grocery [delivery].
If there were any grocers on the fence when that happened, it changed minds. That day, we heard from every important grocery retailer in the country. Everyone wanted to figure out a way to come online and meaningfully accelerate their e-commerce. It's exciting because in pretty much any category of commerce, all those have meaningfully moved online. But groceries—a $800 million industry—is still primarily offline.
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Q. When will Instacart go public?
A. At some point, we will. But we're not talking about a timeline now.
Q. Discuss your profit model.
More than 80% of our delivery volume has positive gross margins. We have three sources of revenue: fees from customers, our retail partnerships and advertising revenue from CPG companies.
Q. So what about the volume that isn't profitable?
A. The other 20% is from markets new to us. When we first launch into a market, it's unprofitable.
Q. How do you choose your next geographical market?
A. When we started the company, we thought it was only going to work in big cities. That's why we launched in cities like New York and San Francisco first. We were proven wrong when we saw markets like Rockford, Illinois, that were performing so much better. It showed us that smaller markets have a lot of latent demand.
Initially, we used demographical data. Then we realized that the best way to gauge customer demand is through our own signups and inquiries. That comes through site visits when customers enter their zip codes seeking service.
If it's just a 5,000-person town, I don't think we're there yet.
Q. What's your pitch to grocers?
A. We have been able to launch in markets because our tech allows us to efficiently pick groceries, batch and deliver them. We've perfected a lot of logistical challenges. We've seen many grocers try to do the same, like Amazon Fresh, which has been around for 10 years, but is still unable to scale geographically or tackle same-day delivery.
Q. Is there room in this industry for other big players?
A. There will be a few companies in this space. So far, it's just us and Amazon.
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