A previous version of this story included an incorrect title for Whole Foods executive Jason Buechel. He is chief information officer. The story has been corrected.

NEW YORK (MarketWatch) — One-hour delivery of online grocery orders may be coming soon to your city, if it’s not already there.



On Tuesday, the Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers — which has invested in such notable names as Uber, Twitter TWTR, +2.03% , Amazon and Google — led an investor group in closing a $220 million financing round for Instacart, a 2 ½–year–old startup that delivers fresh groceries from retailers including Whole Foods Market Inc. US:WFM and Costco Wholesale Corp. COST, -0.86% through a network of 4,000-plus personal shoppers in, according to Whole Foods, 15 cities.

Consumers can place orders online or via the Instacart mobile app, and personal shoppers then make the purchases at area stores and deliver the groceries using their own transportation — at a cost of $5.99 plus tips for one-hour delivery and $3.99 for other options. Consumers can rate the personal shoppers, in much the way that Uber riders rate drivers.

Instacart said the funding will be used to improve its product and expand into new markets and categories.

“ ‘We found [Instacart] to be the crown jewel in the fulfillment layer.’ ” — Mood Rowghani, Kleiner Perkins

“There’s a mainstream, everyday purchase potential with this,” Mood Rowghani, a Kleiner Perkins partner, told MarketWatch, adding that the VC firm had approached Instacart. “Americans go to grocery stores two to three times a week. The market potential is massive. Instacart is loved by consumers and retailers. It’s much more nimble and efficient. We found it to be the crown jewel in the fulfillment layer.”

Only about 1%, or $8 billion, of U.S. food-and-beverage spending occurred online last year, and that’s expected to increase to 4.5%, or $50 billion, in 2020, according to the retail consultancy Kantar Retail. The food-and-beverage category is forecast to see annual growth of 35%, outpacing all other online-retail categories, including electronics.

If Instacart is successful, the reward can be big for venture firms like Kleiner Perkins. Uber reportedly commands a $41 billion-plus valuation.

“I buy everything online and [grocery shopping at physical stores] doesn’t sit with me,” said Instacart founder and CEO Apoorva Mehta, a former Amazon engineer. “We want to make sure everyone is able to get their groceries online.”

Amazon Fresh AMZN, -1.78% and Google Express GOOG, -2.37% don’t offer one-hour delivery.

Instacart declined to say whether it’s profitable and doesn’t disclose its terms with retailers. In 2014, customer orders totaled more than $100 million, 10 times the 2013 total. It doesn’t guarantee payment levels for personal shoppers, but it does say they can make up to $20 an hour plus tips during busy shifts.

“ ‘[Instacart’s is] an economic model that has a lot of challenges.’ ” — Sucharita Mulpuru, Forrester Research

“I have no doubt [Instacart] can get to $2 billion in goods delivered,” said Forrester analyst Sucharita Mulpuru, adding that the company’s cut is probably 5% to 10% of each order. “Everybody thinks [Instacart] is going to be this hot thing, but it’s an economic model that has a lot of challenges. Most Americans live within two miles of multiple grocery stores. Consumers don’t really want to pay for grocery-delivery service. They have a significant challenge in scaling. I’m skeptical.”

The analyst noted that Fresh Direct and other existing fresh-grocery delivery services are barely profitable, if they are at all. “Instacart is just a courier service right now. It’s not like they discovered secrets that FedEx FDX, -0.53% and UPS UPS, -0.05% haven’t been able to.” Instacart likely pays its personal shoppers more than what it’s collecting in revenue, she said.

According to the workplace-information site Glassdoor, Instacart’s personal shoppers give it a rating below the average Glassdoor score, with only 38% of reviewers recommending working for Instacart.

While Instacart still has to prove itself, it makes sense to retailers like Whole Foods seeking to expand online without making their own logistics investments, analysts said. Whole Foods, which provides its own delivery service from some stores and also partners with such services as Google Express, views the Instacart partnership as allowing it to “scale” online delivery and gives it “national reach,” according to Jason Buechel, the grocery chain’s chief information officer.

With Instacart, Whole Foods is able to offer one-hour grocery delivery to about 50% of its total customer base — in Atlanta; Austin, Texas; Boston; Boulder, Colo.; Chicago; Denver; Houston; Los Angeles; New York; Philadelphia; Portland, Ore.; San Francisco and San Jose in the Bay Area; Seattle; and Washington, D.C. It aims to expand that to about 85% of its customer base. One motivating factor: Orders placed through Instacart are 2 ½ times the size of the average customer basket.

“We tried a number of options, and Instacart is the best cultural fit,” Buechel said.

Costco, meanwhile, hopes that the nonmembers ordering from the members-only warehouse store through Instacart — whose personal shoppers are able to use their own memberships — will sign up after experiencing the quality of Costco products and perhaps deciding they’d prefer to avoid the Instacart markup, Paul Latham, Costco’s vice president of membership, marketing and services, told MarketWatch.