How Instacart Has Become a Retail Media Power Since Its IPO

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. Instacart Teams Up With Peacock for First Streaming Partnership 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. A challenge and an opportunity One of Instacart’s major successes is the foresight it took to understand it wouldn’t survive in the market by simply focusing on its core offering. Looking at the broader landscape, Amazon's success in retail media is attributed to its extensive customer shopping data and ability to cater to diverse income groups. For Instacart to replicate this success, it faces the challenge of expanding its user base; while it can leverage its targeted data-driven approach, its primary audience consists predominantly of grocery shoppers. This poses a unique challenge and opportunity. Instacart excels in understanding the intricacies of grocery purchasing behavior, which differs from shopping on platforms like Amazon. With the high frequency of repeat purchases and the concept of basket building, where shoppers continually add items to their cart, the ad strategies to drive purchases are different from Amazon’s. Recognizing these distinctions, it becomes crucial to integrate metrics such as “share of wallet” and “new to brand” indicators. Brands seek to attract new customers who haven't previously discovered their products, then aim to retain these customers over time to grow share. Achieving this incremental value is essential, and many prominent brands, such as Pilgrim's Pride—one of the largest chicken producers in the U.S.—have successfully adopted metrics strategies that account for incrementality to boost their media spending on platforms like Instacart. These efforts result in substantial year-over-year spending increases, driven by the tangible incremental value produced from these investments. Incrementality: a rising force in retail media The ultimate goal for a marketer is to grasp the impact of their marketing spend on sales. They want to determine whether their dollars result in incremental sales and profitability. This knowledge enables them to optimize their marketing budgets effectively, which could result in substantial ad spending to drive greater profitability. Traditionally, return on ad spend served as a metric for assessing marketing performance. However, this often falls short in the context of retail media. Consider a scenario involving a shopper searching for Kellogg's cereal on Instacart: If the shopper was already planning to buy Kellogg's cereal, an ad click and conversion may appear to yield high ROAS, but it doesn't indicate real incrementality—Kellogg’s would have gotten that sale anyway. This complexity intensifies when dealing with more diverse product categories. Promoting niche products like keto or protein cereal, for instance, could yield a smaller ROAS, but the incrementality—the actual boost in sales—might be higher. Calculating incrementality involves intricate data science techniques, incorporating factors like attribution, shopper behavior and search patterns. Industry leaders are continually refining these practices to optimize their marketing strategies, and Instacart is one of them. Helping marketers prove the value of their investment with more scientific techniques helps justify larger ad investment on that channel versus deciding to spend incremental dollars elsewhere. One method is to specifically calculate “incremental ROAS,” which combines digital shelf data with advertising performance data to determine how incremental an ad sale is, for any keyword on a given retailer. It represents the amount of sales that would not have taken place in the absence of advertising activities. This is done by evaluating three key factors: The brand's organic share of voice. The propensity to buy based on branded, generic and competitor keywords. The relevance, which is measured by clickthrough rate and evaluates text similarity with content and ability to convert new-to-brand shoppers. The machine-learning model continually evaluates these changing factors. It also accounts for ad-driven organic ranking improvements to continuously optimize investment in real-time across keywords. How General Mills Succeeds in Its Retail Media Partnership With Instacart Ultimately, Instacart played its hand brilliantly in regard to its IPO. The company could have easily been tempted to buy into its own hype based on a high valuation that was undoubtedly inflated by the Covid-19 pandemic. Instead, it has refined its core offering and, more importantly, built up the retail media side of its business to diversify and ensure longer-term success. Now, brands that shrewdly use data science principles to power their media buying and drive sales on Instacart have shown they can win with consumers. And that’s a foundation likely to positively drive Instacart’s business for years to come.

Retail Media Advertising

How Instacart Moved Beyond Groceries to Become a Retail Media Power

The brand refined its core offering and expanded its marketplace with a few smartly delivered pivots

A model of ecommerce success

Himanshu Jain

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Himanshu Jain