Start-up hopes to dominate grocery delivery

  • Article by: HEATHER SOMERVILLE , San Jose Mercury News
  • Updated: February 1, 2014 - 2:35 PM

Instacart contracts drivers to shop at local stores for customers who order and pay online.

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Instacart founder Apoorva Mehta sits in new offices in San Francisco. Instacart is outpacing some big-name retailers in the grocery delivery business.

Photo: Laura A. Oda • Bay Area News Group,

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– On a mission to prove that consumers will pay to have bread and milk delivered to their front door, Instacart is expanding across the country as it aims to right the wrongs of years of failed grocery delivery ventures.

Powered by a twenty-something who practices extreme ocean sports, Instacart hopes to dominate Amazon.com Inc. in the grocery aisle by using computer systems that founder Apoorva Mehta built from his San Francisco apartment.

“Even though it seems we’re doing groceries, we’re actually just building software,” Mehta said.

As ride-sharing, restaurant delivery services and online shopping have trained consumers to expect instant gratification, grocery delivery is an area yet to be fully developed. But many are trying, including titans Google Inc. and Wal-Mart Stores Inc. The fledgling Instacart has the backing of Silicon Valley venture capital powerhouse Michael Moritz, who is gambling for the second time on grocery delivery.

“We all held hands and prayed,” Moritz, chairman of Sequoia Capital, said jokingly about the firm’s decision to lead an $8.5 million investment into Instacart last summer.

That decision came almost two decades after Sequoia, under Moritz’s leadership, partnered with Benchmark Capital to put $10.8 million into Webvan, a high-profile grocery delivery business best known for its bankruptcy in 2001. Sequoia owned 8.4 percent of the company when it went belly-up.

But in 2014, delivery companies have what Webvan could only dream of in the late 1990s: high-speed Internet in nearly every home, mobile devices in nearly every consumer’s hand, and software that can plan delivery routes and predict customer orders.

“I think Instacart is taking every lesson from Webvan. They have a pretty good shot,” said Peter Relan, chief technical officer at Webvan from 1998 to 2001.

Danielle Weintraub of San Francisco said she gets groceries delivered from Instacart, Safeway and Google Shopping Express. She was tired of sitting in traffic and battling for parking to pick up ingredients for dinner.

“I haven’t been to the store in a few months,” she said.

After launching in September 2012, Instacart in just over a year moved across the country, most recently adding service in Boston, and plans to expand to 10 more cities this year.

The company is not yet profitable, Mehta said, but in about a year was making “tens of millions of dollars in revenue.” He declined to release exact sales figures.

Mehta, 27, left his job as a supply chain engineer for Amazon — he didn’t work directly on its grocery service, AmazonFresh — and came to San Francisco, where he found people using Craigslist and TaskRabbit, a website to outsource errands, to get groceries delivered. He said he knew he could come closer to solving the delivery puzzle than his old boss Jeff Bezos did with AmazonFresh.

“I knew what AmazonFresh was doing was wrong,” he said. “It didn’t sit well with me. It wasn’t really solving the customer’s problem.”

Amazon uses a massive network of warehouses, distribution centers and trucks to store and move groceries, and requires that customers order several hours in advance of their delivery. Instacart doesn’t own warehouses, and instead contracts drivers — similar to a ride-sharing service — to shop at local chains for items customers have ordered and paid for online, and can deliver within an hour and late into the night.

“Because they have their own warehouses [of groceries], Amazon is limited in their selection,” Mehta said. “Imagine if you ordered your groceries and one truck leaves a warehouse two hours away and comes to your door to do one delivery of groceries. It just doesn’t make sense.”

But Instacart’s secret to early success may also be its eventual undoing, some analysts say. The start-up sped ahead without any formal agreements with the grocery stores where it buys its customers’ orders, which means Instacart pays full price for groceries, just like any other shopper, and its customers often pay above full price to make the business profitable.

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