Instacart’s IPO flops due to stock slump 7 reasons.

Instacart's IPO flops due to stock slump 7 reasons.

Instacart’s IPO Struggles: The Challenges Facing the Grocery Delivery Giant

Instacart, the popular grocery delivery service, faced a disappointing start to its initial public offering (IPO). The company’s shares slumped 11% on the second day of trading, leaving investors concerned about its future prospects. Finance professor Aswath Damodaran posted a harsh analysis of Instacart’s core business, further dampening investor sentiment. While Instacart’s CEO Fidji Simo has successfully built an impressive ads business, the company’s main grocery delivery operation faces significant challenges.

To have a healthy digital advertising business, there needs to be something substantial behind it, luring customers to visit the site and spend money. This is one of the concerns that has turned Instacart’s IPO into a flop. The lackluster performance of its stock reflects the skepticism surrounding the company’s ability to deliver significant returns to investors.

Successful IPOs typically deliver a significant pop to investors who buy stock during its debut. Gains of 20% or more are considered solid. However, after a brief surge on its first day, Instacart failed to provide substantial returns for new shareholders over the two days of trading. The company’s valuation has plummeted from $39 billion during the pandemic to just over $8 billion at present. Late-stage investors, including D1, Fidelity, DST Global, and T. Rowe Price, are likely facing substantial losses.

Aswath Damodaran, a professor of finance at NYU’s Stern School of Business, conducted a detailed analysis of Instacart’s business, valuing the company at $29 per share. Damodaran focused his analysis on the grocery delivery business, as the future growth of Instacart heavily depends on the number of customers and their spending habits.

The analysis highlights several key challenges faced by Instacart:

• TikTok payment for views, as per creators.
• First ever photos of lost Japanese shipwreck from Battle of Midway ...
• Synchrony High Yield Savings Rate 4.75% APY

Grocery is a low-margin business

Instacart’s take rate over the past 12 months was 7.5%, significantly lower than other companies like Airbnb and Doordash. The reason behind this lower rate is the inherently low-margin nature of the grocery business. As an intermediary in a low-profitability industry, Instacart has limited room to increase fees for its services.

Most people prefer traditional grocery stores

For non-processed food, particularly fresh meats and produce, being able to see and touch items before making a purchase is an integral part of the shopping experience. Online photos simply cannot replace the sensory aspect of in-store shopping. Many individuals, like myself, enjoy the tactile experience of selecting avocados. Additionally, frequent product substitutions from rushed Instacart Shoppers are often frustrating for customers.

The COVID hangover

Instacart experienced substantial growth in orders and revenue during the COVID-19 pandemic when people were stuck at home. However, once the pandemic subsided, consumers started returning to their local grocery stores. Many people wrongly assumed that the shift to online grocery shopping would be permanent and expected Instacart to dominate the industry.

Growth limitations

While some customers have continued using Instacart, believing that the convenience outweighs the downsides, the grocery industry itself is not a growth sector. Unlike other areas of e-commerce, the ceiling on online grocery retail remains relatively low. Even with optimistic projections, the share of online grocery sales is capped at around 20%. Consequently, Instacart’s growth potential may be limited.

Increasing competition

In response to the pandemic, many grocers began offering online shopping services directly to their customers, often favoring pickup options over delivery. These offerings are cost-competitive and eliminate the need for additional service fees, utilizing existing store employees as shoppers. Moreover, Instacart faces competition from other food delivery platforms like Uber Eats, DoorDash, and GrubHub. Consequently, Instacart’s ability to retain its market share is uncertain, further limiting its growth potential.

Cost structure

Instacart’s expenses are primarily driven by payments to its Shoppers, fluctuating with the number of orders and deliveries made. While this variable structure reduces risk, it also means that the company can’t leverage economies of scale effectively. Most tech companies experience rising profits as sales increase, as their expenses don’t rise proportionally. However, Instacart lacks this advantage, according to Damodaran’s analysis.

Slowed growth

Quick growth is often expected from tech companies, but Instacart’s core business fails to meet these expectations. The company’s order volume for 2022 was almost stagnant compared to the previous 12 months. Similarly, gross transaction volume in 2022 was only slightly lower than the preceding year. These figures indicate a lack of significant growth in the company’s core operations.

Instacart declined to comment on both its share price decline and Damodaran’s analysis. The company faces numerous hurdles as it strives to maintain its position in the competitive e-commerce landscape. While Instacart’s advertising business has shown promise, the success of its future growth depends on overcoming the challenges associated with the grocery delivery market.

• Advertising
• Grocery
• IPO