00:23 – 0:11
Sylvain
All right, ladies and gentlemen, welcome to Digital Grocer. Season five, Episode three

0:11 – 0:33

Less than two weeks after Digital Grocer Season five, Episode two was published on May 1st 2022 exposing Instacart plan to IPO on May 11th 2022 Instacart files confidential IPO paperwork with the US Securities and Exchange Commission for an initial public offering

0:33 – 0:38
Sylvain
I’m your host, Sylvain Perrier, join by my cohorst *bleep* my cohort *bleep* my co-host.

0:38- 0:44
Sylvain
Sorry, it’s been a long weekend people. Mark how are you?

0:44 – 0:55
Mark
I’m good, I’m good. It’s it’s a lovely Sunday afternoon. I know our team loves it when we date these these videos because they want them to be greenfield, but it’s hot out-

0:55 – 0:59
Sylvain
Well, you can date it by what I’m wearing the length of my beard at this point.

0:59 -1:29
Sylvain
In any case, we have a juicy topic that we want to talk about. You know we broke the news prior to Bloomberg of Instacart filing for their IPO. The news kind of blew up last week. And part of that whole process is Rick Watson put a post out on LinkedIn that got tremendous amount of views, ignited some really interesting conversations around who potentially acquire Instacart, what’s going on in the market and so on.

1:29 – 1:42
Sylvain
What are we hearing? What are retailers feeling out in the space? So we figured we’d invite Rick on the show and kind of jump in and talk about his post, and then we just take it from there and see what kind of conversations we can get around the subject.

1:42- 1:47
Mark
Yeah, and I think the audience is going to want to know if Rick has got a haircut since last time.

1:47 – 1:53
Sylvain
So that’s it. Yes, it was. It was it was long, hairy. I remember that. Yeah.

1:53 – 2:02
Mark
So without further ado here, here’s Rick Watson, CEO and founder of RMW Commerce Consulting. Hey, Rick.

2:02 – 2:06
Rick
Hey, guys. Good to see you. Market Sylvain again.

2:06 – 2:11

E-commerce expert Rick Watson from RMW Consulting weighs in on Instacart.

2:11 – 2:18
Sylvain
So, Rick, share with us your post, what you had put out on LinkedIn. For the listeners out there that may not have come across that post

2:18 – 2:36

In terms of the news, you know, it was kind of based on the recent articles that came out after the IPO or the IPO announcement, which was a confidential filing. So we didn’t really learn a lot about the business from it, but it’s speculating about a couple of different things.

2:36 – 3:06
Rick
Number one is what is, is acquisition on the table for them? And if so, who would be the right kind of acquirer? That’s kind of one question, and we can talk about that. Second question, I think is why now? You know, of all the times that we’re looking at that a company could IPO or why this moment? And I think there’s some obvious, maybe some non-obvious answers to that question.

3:07 – 3:41
Rick
And then three is sort of like, what’s the future hold for Instacart? You know, what’s gone on with the CEO? How’s that been going? And where does a company go from here? You know, in a world where retailers are getting more sophisticated with supply chain and last mile and running a number of experience where three or four years ago, Instacart was the only game in town

3:41 – 3:44
Mark
Three great questions. Yeah.

3:44 – 3:46
Sylvain
Yeah. Those are great questions.

3:46 – 3:49

Instacart IPO, why now?

3:49 – 3:56
Sylvain
Let’s start with like question number two, right, Just kind of set the stage. why now?

3:56 – 4:22
Sylvain
If you look at what we’re seeing in this space, so this is a company that has repositioned itself around its technology ability to license its core technology, access to its advertising engine, and all of those great things you know, we do a lot of research with our friends at Brick Meets Click, David Bishop and his team.

4:23 – 4:27
Sylvain
We also use anciliary firms to help us support other styles of research.

4:27 – 4:45
Sylvain
What we see for the month of April, sales are down to 8.1 billion, declined from 8.6 billion from the previous month. And we can only assume as we get into deeper into the summer months, we’re likely going to see a dip in sales if that is the case.

4:45 -05:12
Sylvain
And that combined with the conversations we’re hearing on the mark on the street from Instacart, pushing features to drive conversion, to drive traffic on their core platform, we can only assume that they’re seeing a decline with respect to their sales. And this is the peak period for them to create the best liquidity event for their shareholders.

5:12 – 5:13
Sylvain
There isn’t going to be a surge.

5:14 – 5:29
Sylvain
Even if there is a surge in COVID19. It’s not going to return to the 9 billion that we saw April of last year, April/ May of last year. So we’re not going to see that. So this is this is the best event for them.

5:29 – 5:46
Sylvain
And also, you know, they’re touting their MFC with a retailer on the East Coast. That’s a shadow game that does not exist. I think they just put enough Band-Aids on the business to be able to get money back, right?

5:46 – 6:18
Mark
Yeah. Yeah. To Sylvain’s point, they came out with the fabric announcement and all of a sudden that’s gone very quiet. We do know that it’s after fabric. They went to a company called Day Matic who works very closely with… Walmart, and Dematic efused to partner with them with their technology. So our we have it on good authority.

6:18:01 – 6:30
Mark
That public’s experiment at the Carrot Warehouse is exactly that, It’s just a dark store with gig workers going in the front and coming in, taking deliveries out the back.

6:30 – 6:33
Sylvain
Well, and investments in MFc have paused. I mean,

6:33 – 6:34
Mark
yeah.

6:34 – 6:50
Sylvain
The nation capital is not being put down on the table, which we present to probably another reason. This rapid expansion of Kroger across the country with with Ocado, I think also sets probably some fears within Instacart.

6:51 – 7:11
Sylvain
We also know that some of their large US retailers have already started building out their own solutions and yet to disclose to Instacart that they will be leaving the Instacart Network.

7:11 – 7:26
Rick
I mean, what you’re describing, Sylvain and Mark, is that this is kind of a following. Yeah, I call it a burning platform, you know, you know, imagine you’re you’re in the middle of the aisle of a lake on a on a dock that somebody sets fire to the end of it.

7:26 – 7:41
Rick
You mean if you wait too long you’re going to have to jump off. And if you wait another year, you know, I imagine … if you’re Instacart, your top customers, Albertson’s and Walmart and Kroger.

7:41 – 7:57
Rick
What percentage of revenue do you think that represents? You know, likely a very high percentage, and so I think one of the things that’s always apparent to me is the loss of any one of them would be a significant hit to the business that is not returning soon.

7:57 – 8:22
Rick
And so if you think that that is likely to happen over the next two years, which it probably probably is and what that could do to the valuation, it’s not like you can grow yourself out of that in the midst of headwinds of, you know, people returning to stores. You’re probably fooling yourself.

8:22 – 8:37
Sylvain
yeah, I would agree. I mean, we we always assume that at some point they would have protected themselves on two fronts in North America, specifically. In North America, what they would have done is they would have jumped more heavily to other, you know, verticals, which they’ve tried.

8:37 – 8:57
Sylvain
Right. The best buyers of the world and Big Lots, and so on. We also assume that at some point they would have really tried to penetrate the European, even the Mexican or South American market, through acquisition or somehow.

8:57 – 9:15
Sylvain
And that diversification just was never a priority for them, and I and part of me just wonders is that maybe they just saw the adjacent revenue tied to grocery CPG dollars, data dollars, research, and so on, just so easy for them to grab.

9:16 – 9:28
Sylvain
But not realizing to your point you lose one key retailer or two key retailers in the mix. It’s a domino effect on your other sources of revenue at this point. Right. It has as a knock on effect.

9:28 – 9:45
Sylvain
So you don’t have that diversification to fortify becomes very concerning if you’re an investor and that … it’s scary. It’s scary in the sense that, and I’m reminded, that you just said something, Rick, that triggered me thinking of something.

9:45 – 10:07
SylvainSylvain
I remember a retailer telling me a year ago, a year and a half ago. “Since we’ve been in business for over 85 years. Do you think we’re not going to learn how Instacart runs their business? And not replicated ourselves under our own terms? In fact, we’re signing deals with them, a deal with them just so we can learn.”

10:07:12 – 10:07:22
Rick
yeah.

10:08 – 10:32
Rick
All right. Yeah, that’s that’s not a good sign generally. And in particular, every grocery retailer has a head of supply chain that you can point to, that understands distribution, that understands warehousing. You know, they may not understand last mile, but it’s not like it’s a foreign concept to them.

10:32 – 11:01
Rick
Whereas Instacart, I still can’t point to the their chief supply chain officer. If they’re if they’re out there, please, please stand up, you know, or maybe contact one of us and and tell us what’s going on because, you know, it’s usually pretty obvious who that person is and they’re communicating with the market about what their roadmap is and those sorts of things.

11:01 – 11:14
Sylvain
Right. Well, it’s I agree what you’re saying. I would say it’s even more interesting is who is in charge of operations at Instacart. listening [Inaudible ]

11:14 – 11:23
Rick
We have market place business– So if you like, when I did these searches, all operational roles or have to do with the marketplace, which means like a software matching, it’s the gig stuff.

11:23 – 11:32
Rick
You know, it’s not it’s not to do anything with MFC’s and all these other things that they’re going to need in the future.

11:32 – 11:42
Sylvain
Right. So, Rick, what are your thoughts in terms of why now? Like we know Mark and I kind of said, hey, this is what we think, but you’re probably looking at it from a different lens.

11:42 – 11:46
Sylvain
Why would you think now is happening?

11:46 – 12:09
Rick
Yeah, I mean, that the short answer is that I think it’s hard for them to raise money again. I think the private markets, that that’s one thing is like if you look at their last funders, Andreessen Horowitz, at high valuations, unless they’re going to go to like SoftBank, you know what I mean?

12:09 – 12:36
Rick
Like you know, it’s almost like a WeWork situation where they’ve kind of grown and, I mean, and who is that next funder that is going to take a riskier bet than your last fundraising? Particularly in this environment, you have to put out a pretty ambitious plan to get, you know, like another 100 and 150 million, or whatever it is they want.

12:36 – 13:04
Rick
They just will do it. Their valuation from 39 to 24 billion. I think it’s going to go down from there. I mean that’s, you know, even that number is probably wishful thinking at this point. What do you think their revenue is? You know, they have a great consumer brand, you know, if they’re, you know, what, a billion and a half of revenue, it’s not completely outside of the realm of possibility that, you know, that number is out there.

3:04 – 13:15
Rick
But in this environment is is the question. In a normal growth environment, maybe that valuation seems more reasonable, but going into this environment feels like it could fall a little bit more.

13:15 – 13:19

What’s in Instacart future? Where do they go from here?

13:19 – 13:22
Rick
Do I think that Fiji Simo is going to be their CEO for the next five years? No.

13:22 – 13:45
Rick
Do I think their valuation has more downward pressure than upward pressure? Yes. Do I think they have a supply chain strategy? No. Do I think there’s downward pressure on their retail revenue concentration? Yes. So all those things are pointing to like, let’s get what we can, even if it’s $0.80 on the dollar of what we just revalued the company at.

13:45 – 13:51
Rick
And that sounds pretty good compared to 50%. $0.50 on the dollar if you if you don’t know what to do next.

13:51 – 14:06
Rick
To your point, time isn’t on Instacart side. The longer Instacart waits, and that they don’t have a great supply chain strategy… like if they had a great supply chain strategy then time could be on their side because their solutions are improving and all these things.

14:06 – 14:33
Rick
But the fact that we still can’t talk to a, look at and point to a supply chain solution that’s improving and to me, that means retailers are … like Kroger’s innovating faster than Instacart in last mile. You know, with its partnerships and learning. So what do you need its cart for in that situation? So all these things, I think there’s like three or four reasons that point to like let’s get some money out now for all these investors that have fueled this tremendous ride.

14:33 -14:55
Rick
Look, I don’t I don’t want to diminish what the poor of Apoorva Mehta has done over the years. Great entrepreneur, really took advantage of our opportunity, saw things a lot of other people did, you know, relatively easy access to capital. Frankly, I’ve been sick with COVID the past two weeks. Instacarts, my favorite company you know, to be like when I need something and I don’t want to go anywhere.

14:56 – 15:05
Rick
So I don’t you know, I’m not saying I don’t like it at all, but when I look forward as opposed to looking backwards, I see more downward pressure right now.

15:05 – 15:16
Mark
And I think. Right. I mean, it’s it’s not like the competition is standing still, you know, and DoorDash just signing up more contracts with retailers that had long been with Instacart.

15:16 – 15:21
Mark
So there’s there’s there’s a drive to the bottom here for last mile.

15:21- 15:47
Sylvain
Yeah. And you tie into that is the correction that we’re seeing on the multiples in the market evaluation multiples on Wall Street. And Instacart has not, you know, through the pandemic, they use the numbers to their advantage to raise a crazy amount of money but it’s been fairly status quo in terms of some of the stuff they’re doing.

15:47 – 16:15
Sylvain
Mercatus, started the business with designing smart cards and taking them to market. So and we ditched that idea ten years ago. And when they turned around and bought this, you know, we know it’s about capturing the in-store data, but what a what a waste of money because it those three on three young entrepreneurs $350 million on unrestricted stock units that are likely going to be worth not a lot of money in the long run right.

16:16 – 16:40
Sylvain
Or some of the other stuff that they’re that they should be working on that they’re not and it’s we’re going to be very unfortunate story for the investors and quite frankly the retailers, I’m concerned about. So Mark and I talk about this. Late at night, we’re like “hey do you think so and so should buy [inaudible 00:16:37]

16:40 – 16:44
Mark
Well, what over phone call, right Sylvain?

16:44 – 16:45
Sylvain
Yes, absolutely.

16:45 – 16:48
Sylvain
And we were driving between retail meetings.

16:48 – 16:49
Mark
That’s right.

16:49 – 16:52

Who could acquire Instacart?

16:52 – 16:56
Sylvain
Rick, who do you think could buy these guys?

16:56 – 17:02
Rick
Well, you know, before naming names, I would love to talk about the criteria.

17:02 – 17:03
Sylvain
oh, yeah. Yeah.

17:03 – 17:04
Mark
Good idea.

17:04 – 17:10
Rick
If I were the board of directors, what are the filters that I would apply to maximize valuation?

17:10 – 17:42
Rick
I think someone that could value nationwide coverage, broad set of retail relationships, across industries, I think Instacart has done a good job with that, not necessarily to the exclusion of DoorDash or Uber, but there are only so many companies that have done this many wide scale partnerships. You have advertising assets, you have the gig worker network. Those things aren’t easy to put together.

17:43 – 18:07
Rick
And if I look at sort of like, what’s the crown jewel of Instacart? First of all,it’s the trust and the relationship with the buyers. You know, it’s an expensive product, but it’s also a it’s a good, convenient product. So that’s not worth nothing and then the advertising technology is, to me, the biggest piece that sort of ties it all together.

18:08 – 18:28
Rick
And I kind of go back to the fact that if you’re going to maximize valuation here, it needs to be a strategic you’re not just valuing it based on revenue multiples or EBITDA multiples. It has to be a client that needs advertising technology in a hurry. And there’s not just a OK, we’re going to create an advertising business.

00:18:28:20 – 00:18:50:05
Rick
We’re going to grow over time. It can be worth this money in five years. It’s like, no, like we need advertising technology to survive because our competitors are kind of in the same space. I think that kind of overlap would be super nice if you can maximize those factors. And to me, that’s that’s where you’re going to maximize the valuation.

18:50 – 18:52
Rick
I wonder you guys thoughts?

18:52 – 19:17
Sylvain
Yeah, I agree. I would add if I was on the board, preferably somebody acquiring us that has a publicly traded vehicle already, so I can just dump my shares and sell them, get out. I think that would be beneficial or quite, quite frankly, see the shares grow over time, hopefully.

19:17 – 19:17
Rick
yeah.

19:17 – 19:22
Sylvain
That would that would be important as well. Mark.

19:22 – 00:19:55
Mark
Yeah, I think there’s there’s opportunity …. You know, of course we can speculate. Using Rick’s lens, his criteria, Google probably not. The other criteria, I mean, Sylvain brought it up earlier, is competition. The FTC is certainly for the next three years going to be looking at these opportunities with a very jaundiced eye.

00:19:55:23 – 00:20:35:08
Mark
So you know, Fiji came from Facebook. Is Facebook looking to extend its reach into the shops the weekly shops that consumers go? I’m pretty sure they’d love to do it. But again, is the FTC going to allow that? And if it was a retailer you know, as soon as the acquisition was announced, you can be pretty sure that all of these two cards, retail clients would be off that platform knocking on Uber and DoorDash more so than they are now.

00:20:36:14 – 00:21:06:08
Sylvain
Yeah, two names come to mind fairly quickly that I think the FTC is fine with. I think one of them definitely would be DoorDash. Consolidation space is not unheard of. I think there’s enough competition, quite frankly, in this space whilst that the FTC wouldn’t necessarily bat an eye.

00:21:08:03 – 00:21:28:12
Sylvain
And I think that if you take a organization that is either in a preexisting well-established career in this space, or a distributor could easily come into this space as well.

00:21:28:12 – 00:21:40:22
Sylvain
Could a UPS just turn around and say, let’s do this? Could a FedEx, an arm of FedEx, do this? Potentially, I don’t know, big stretch for them because they’re not they’re not tech companies really.

00:21:40:22 – 00:22:08:02
Sylvain
They’re logistics but maybe this is what’s needed, quite frankly. Do I think a Wal-Mart or an Albertson’s? Maybe not. But if we had one of our friends on the East Coast that has European head offices, would a strong presence in the United States, but not national, yet could [inaudible 22:06:15]

00:22:08:02 – 00:22:08:13
Rick
Yeah.

00:22:08:13 – 00:22:11:29
Sylvain
Could they get by the Dell Hayes, get by the FTC out?

00:22:11:29 – 00:22:24:24
Sylvain
I think they could. And and they may say, well, this is probably good competition against Kroger and their strategy versus a Walmart or something else.

00:22:24:24 – 00:22:41:13
Rick
Yeah, I think over is off the table in its current form. I have no you know, there’s no way their investors would stomach it. Now they’re desperately looking for profitability and to merge with another company like this, scale isn’t going to get them to profitability.

00:22:41:13 – 00:22:49:08
Rick
I think Uber has learned that lesson by now. Oh, we’re just going to get bigger. The unit economics don’t work. So getting bigger is not going to work.

00:22:51:13 – 00:23:02:18
Rick
So that’s that’s a big challenge for them, I think. And by the way, they already tried this a few years ago, and that’s why the previous CEO wasn’t there or at least one of the reasons.

00:23:02:18 – 00:23:21:19
Rick
I think if Walmart was a different company, Walmart four years ago could have done this fake Walmart. Theoretically, you look at the pieces, they seem to fit, but Walmart is in a build both at ourselves mode generally right now, it seems like they have gotten back to basics.

00:23:21:25 – 00:23:38:18
Sylvain
I mean, they’re building out their supply chain. They just launched Walmart fulfillment services. They’re not as great as its target is and curbside, but they’re they’re improving thing. I mean, Walmart to me is like back to fundamentals. Like we’re we’re a great retailer. We’re great. You know, we’re going to be a great technology. We’re going to be great at fulfillment.

00:23:38:18 – 00:24:07:15
Rick
We’re going to build an advertising business you know, why do they need this? I think Google is not credible to me. I don’t think they need the advertising business. To me, if Google had acquired OpenTable five years ago, you could kind of stare at this and say like, yeah, they could pick up Instacart. But the fact that they haven’t or, you know, they don’t seem to need acquisitions like this to make money.

00:24:07:15 – 00:24:40:24
Sylvain
The names, to me, it kind of goes back to the top retail grocers. I think Kroger has been hedging their bets a little bit. Again, I think three years ago is a little bit different world than it is now. Yeah, I would agree. I think Kroger right now look for them to venture to something like this would be interesting because ROI on Ocado installation is at least two to three years, if not longer, before you see that ROI and this expansion.

00:24:40:24 – 00:25:02:16
Sylvain
This is a big gamble for them to expand as widely as they are doing today? Because if the traffic doesn’t come to them on the quarter side, in the Northeast or, in Flordia peninsula, there’s no brick and mortar business in those markets. The fall back on the drive traffic, too. So you’ve invested into this infrastructure that overnight gets mothballed.

00:25:03:07 – 00:25:13:06
Sylvain
That’s kind of that’s kind of scary. In a sense. So I think would they venture to put their necks further out than what they are today? Don’t I don’t I don’t see it.

00:25:13:06 – 00:25:27:16
Mark
Well, I think that takes us to the end of the show. So, Rick, it was a pleasure having you as always. They hopefully you you get over covered and keep keep pumping out your podcast.

00:25:27:16 – 00:25:31:14
Mark
You want to give it you want to give a shout out because, I listen to it religiously.

00:25:31:14 – 00:25:49:16
Rick
Yeah. No, I last year I started a podcast called The Watson Weekly, and it releases every Monday morning. Just talks about what’s going on and ecommerce marketplaces, supply chain so whatever I find interesting, four or five stories a week and that’s what it’s about.

00:25:50:07 – 00:25:55:07
Rick
yeah, no more no more than 15 minutes any show yeah.

00:25:55:07 – 00:25:58:22
Mark
It’s great show. Sylvain, do you want to throw it out?

00:25:58:22 – 00:26:09:21
Sylvain
Yeah. Great folks. Thanks for tuning in. And don’t forget to keep your ear to the ground for our next episode to drop. Mark and I going to be taking off to the US for two weeks straight of travel.

00:26:10:05 – 00:26:24:26
Sylvain
We’re going to be visiting some stores. We’ll be filming on the road. We’re going to bring you some insights on what we’re seeing in our favorite local retailers, across all the Cities. Hopefully we’ll have some nuggets of information for you and you guys will enjoy it.

00:26:24:26 – 00:26:47:04
Sylvain
Thanks for watching and listening to our show. We’ve got more great episodes on digitalgrocer.com, and we would love to connect with on social media @digitalGrocer on Facebook, Instagram, LinkedIn, and @digital_grocer on Twitter, like subscribe and click that bell icon so you never miss another digital version podcast.