the dark side of dark stores by warren poh

Warren is a veteran in proptech and worked on new veriticals at CloudKitchens. You can find him on Instagram and Linkedin. Warren currently works in Growth Strategy at Metropolis. He graduated from USC without cheating a single time.

When Apoorva Mehta graduated YC’s summer batch in 2012, he likely did not expect his entrepreneurial ambitions to produce a $40 billion dollar enterprise. But 10 years later and over a billion dollars raised, the future of Instacart is opaque. In order to understand my pessimism, let’s break down the art of grocery delivery and why competition in a growing market will lead to Instacart’s demise.

Let’s begin where value is captured in Instacart’s business model, a two sided marketplace.

Value is captured when a customer tips a delivery driver, effectively subsidizing the low hourly rate an independent contractor absorbs when he/she is incentivized to continue delivering for Instacart.

Value is captured when a customer experiences the immense pleasure and convenience of having their groceries delivered at a fair price–they will order again.

The value proposition is simple, if not obvious for both sides, which is why there is competition.

Instacart, Prime Now, Doordash, Uber and every single dark store really competes for one thing: eyeballs. Billions of dollars have been poured into these companies, from startups that conquered Europe (Gorillaz) to dark stores that are capturing the hearts and eyes of college students (Duffl). Even GoPuff went from peddling drugs to Drexel students to other convenience store items.

Unlike ridesharing, online travel agencies and other “winner-take-most” marketplaces, Instacart exists in a market so large that it attracts the fiercest competition. With no customer loyalty, these sharks can smell blood from a quarter-mile away (literally, because it’s delivery).

Before I discuss why Instacart’s growth may slow, let’s discuss where value is created in this industry. The irony in all of this is that original grocery stores actually hold the secrets to the kingdom of delivery: the supply chain. A beautiful, efficient supply chain and forecasting algorithm allows demand prediction to drive proper inventory management. This optimization results in efficient pricing and purchasing, enabling a grocery store to manage decaying inventory (40,000 items) while maintaining manageable profit and volume dynamics.

An intermission: GoPuff is hardly a delivery company. In fact, its weakest link is that it fails to attract adequate demand from delivery drivers (low wage, no benefits). GoPuff is a supply chain company, aiming to deliver alcohol and soon groceries at a palpable price. The same applies to 15-minute dark stores like Food Rocket that hire full-time workers and focus on exceptional demand prediction with a phenomenal supply chain. As a customer, I noticed that their pricing was dynamic like their inventory, adapting to the hyper-local needs of their loyal clientele.

Instacart’s digital ads and fufillment-as-a-service businesses can disguise itself as a higher margin B2B e-commerce player. But if we boil it down to the fundamentals of a marketplace, delivery drivers and buyers, it’s value proposition is weaker than most. Not a $40 billion dollar business today, not one tomorrow.

When all players reveal their hands, Prime Now has the nuts. 15-minute dark stores have a two-pair, extremely confident but easy to overreach (cheaper to buy than kill). CloudKitchens…we never find out what hand they have. But Instacart isn’t even playing poker. Instacart is a three-chip pony playing black jack, a platform failure.