Let’s take a trip to crazy town, shall we, and pretend for a moment that we are in a precarious tech industry bubble. Imagine, for the sake of argument and not because this could possibly be true, that the rising valuations of the largest start-ups are unsustainable. O.K., now consider the following: If we are in a bubble, which of today’s start-ups is the modern-day Webvan or Pets.com? A decade from now, which company will we look back on and wonder, what on earth were we thinking?

One top candidate might be Instacart, a company that uses smartphones to deploy a battalion of personal shoppers to buy and deliver groceries to people’s homes. Instacart shows great promise — its founders and investors believe it could provide employment to tens of thousands of workers, improve the reach and financial prospects of small and large physical grocery stores, and eliminate what many people consider the drudgery of grocery shopping.

Yet its success may rest on some unproven assumptions about the market: that delivering groceries can be done efficiently enough to sustain its low prices; that it can be done in sprawling suburbs as well as dense cities; and that, if it takes off, it will add to, rather than siphon off, business from large grocery chains.

I first wrote about Instacart’s potential to change the grocery business a year ago, and have been checking in with Apoorva Mehta, Instacart’s founder and chief executive, occasionally since. Last week, I stopped by the company’s headquarters in San Francisco to discuss Instacart’s growth and sustainability as well as how operations have changed during a high-flying year.

Mr. Mehta was willing to answer some, but not all, of my inquiries. I also spoke to several of Instacart’s grocery partners, many of which pay the start-up a cut of each order. Some divulged details about their sales through Instacart, and the information suggested the start-up was doing well. Growth, from what I could gather, may be in the double digits.

But deep questions remain, particularly whether Instacart can make enough money from each order to justify its valuation, and whether the sales gains that retailers say they’re experiencing through the service can be sustained. Instacart looks like a great idea — and, still, a very big bet.

Instacart certainly smacks of the bubble: In two large funding rounds over the last year, its valuation has risen more than tenfold. In January, some of Silicon Valley’s best-known venture capitalists invested $220 million, collectively appraising Instacart at around $2 billion.

The company has used its new money to fund expansion. Last year, it grew from serving just a few markets to 15 cities, and this year, it plans to expand to even more. A year ago, the company had about 50 full-time employees. Today, it employs around 200, and by the end of the year, it will have around 500, Mr. Mehta said. That does not include thousands of contractors who pick and deliver groceries.

“I come in to work now and there are all these people and I don’t know their names,” Mr. Mehta said. “It’s a weird feeling.”

Instacart’s rising valuation is based partly on ballooning sales. In December, Mr. Mehta told me the company’s gross revenue grew by more than 10 times in 2014, to more than $100 million for the year. Last week, he declined to divulge more current information about growth, including whether it had picked up or slowed down since we’d last spoken. He also declined to discuss whether the company was profitable, and its current costs.

In theory, Instacart’s costs should be relatively low. Rather than invest vast sums into warehouses and refrigerated trucks — like many older, unsuccessful grocery delivery companies, notably Webvan — Instacart uses resources that are already built up. Like Uber, it contracts with workers who use their own cars to deliver groceries to customers, and its products are bought from stores in your own neighborhood.

Instacart’s potential to improve grocery sales has led to a new relationship with some of the country’s largest supermarket chains. In its earliest days, Instacart had few formal ties with supermarkets; its shoppers would just go to stores and buy stuff, and stores either didn’t know or didn’t care. The company made all of its money from consumers through a delivery fee of around $3.99 an order, in addition to a markup of around 10 to 20 percent on most items in the store.

Last summer, Mr. Mehta realized that the model was limiting. Customers didn’t like the marked-up prices, and stores didn’t like that they had little say in Instacart’s operations, including its prices.

So Instacart began restructuring. In deals with more than a dozen supermarket chains, the company formalized a new pricing relationship in which stores would pay Instacart a cut of each order. With Instacart now receiving money from retailers, it could eliminate markups for customers in many stores. Last week, the company announced a new “pricing transparency” feature on its site that shows which locations have higher prices than you’ll find on a store shelf, and which ones have the same prices. Most items on Instacart, the company says, are now selling for the same prices as in stores.

Retailers were willing to pay Instacart on the theory that they’d gain more business, because Instacart would let a single store serve people across a wider geography. “Instacart was adding so much more volume and new dollars to the store that it made sense for them to partner with us,” Mr. Mehta said.

He cited data: Instacart has determined that 52 to 78 percent of its orders to a grocery store are “incremental” — meaning they are orders that the store wouldn’t have had without Instacart. What’s more, orders through the service are two and a half to four times as large as orders made inside physical stores, Mr. Mehta said.

Signing deals with stores also let Instacart improve efficiency. In its most popular stores, it now has dedicated pickers who only shop, then store the groceries in Instacart shelves and refrigerators for delivery workers to pick up. Stores also set aside a cash register for Instacart’s use, allowing its shoppers to avoid lines. Instacart has also built software for retailers to integrate with its online system, and it is working on what Mr. Mehta called machine-learning tools to predict inventory shortfalls and the number of staff members it will need in each store throughout the day.

Retailers told me they’ve noticed gains, though the numbers are small. Yvonne Manganaro, senior director of marketing at Gelson’s Markets, which operates 18 high-end grocery stores in Southern California, said that since signing up with Instacart in the summer, the company has had a small but noticeable uptick in orders in at least one of its stores. Also, since Thanksgiving, the number of Instacart orders at Gelson’s has grown by 50 percent.

“We feel like we are making up at least some of the money we are paying out,” Ms. Manganaro said. But “it’s still a very, very small percentage of our overall sales.”

Trey Hall, chief marketing officer of Natural Grocers, a chain of 95 stores across the western United States, echoed those thoughts. Instacart is available in three of the company’s stores, and in those locations, there has been “a nice bump” in the number and size of orders. Natural Grocers is monitoring performance to determine how quickly to introduce Instacart in more locations.

Instacart’s largest retail partner is Whole Foods Market, which reported in a February earnings call that, on average, it was selling more than $1 million a week online. But Whole Foods’ total annual sales top $14 billion, making online sales less than half of 1 percent of its revenue.

Sure, those numbers are likely to grow. But the long-term danger for Instacart may be that as it grows, a declining number of sales will be incremental to physical stores — and, instead, will come at the expense of people going to the store, a situation that may put off retailers from working with the company.

“You can only eat so much,” said Darren Seifer, who analyzes the food and beverage market for NPD Group, a market research firm. “As they permeate throughout a market, the market will saturate, and it would seem to become more cannibalistic.”

Instacart’s future may depend on figuring out how to prevent that from happening.

Source: The New York Times