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At a high level, Instacart has taken an intelligent approach that may seem counterintuitive on the surface—yes, the company is best known as an online grocery destination, but its recent IPO proved the company is adept in another area as well: retail media.
Let’s examine how Instacart moved beyond its core business to set itself up for long-term success, the challenges it will continue to face in competing with the Amazons of the world, and how brands can leverage the site and data science best practices to optimize their retail media spending.
A model of ecommerce success
In the context of Instacart’s business model, the introduction of its advertising platform has transformed the company from a three-sided marketplace to a four-sided one. There’s an enduring power of marketplaces in creating network effects, as seen with other successful platforms like eBay and Craigslist. At the core, Instacart’s move into advertising serves a dual purpose: strengthening the platform’s relevance and stickiness while expanding its marketplace.
The transition to an advertising platform also presents a significant opportunity for Instacart to position itself as a high-gross-margin business. In various instances, year-over-year data reveals a 23% average increase in advertising spending on Instacart. This not only brings in new revenue streams but also allows Instacart to access the dollars that were traditionally allocated to sales and marketing efforts. The potential of this new revenue stream has garnered enthusiasm within Instacart and across the market.
Consider the flow of financial resources, not only from Amazon and Walmart but also from national media like Super Bowl ads, billboards or digital platforms like Facebook and Google. To conceptualize this, we can divide it into two streams: driving traffic into walled garden platforms and channeling traffic within these platforms. National media (and even social media advertising) direct traffic into walled-garden platforms, which, in turn, guide traffic toward shopping destinations like Amazon. Conversely, retail media spending, whether on Amazon, Walmart or other similar platforms, focuses on optimizing the user experience within these walled gardens, encouraging shoppers to make more purchases.
It’s important to note that this shift isn’t merely a matter of transferring resources from one sector to another within the retail media ecosystem. Instead, it’s a broader, ecosystemwide phenomenon where dollars previously allocated to national media find their way into the coffers of platforms like Amazon, Walmart and Instacart. As retail media networks mature, however, arbitrage opportunities become scarcer. For example, Amazon’s sponsored search and display ads, as well as its over-the-top television advertising, provide potential revenue streams. In more developed markets, the dynamics tend to align with the concept of a “perfect marketplace”—a term borrowed from economics—which minimizes arbitrage opportunities, benefiting the retail media operators (retailers) but making it less advantageous for brands bidding on ad space as pricing becomes more competitive.
