Maplebear - Q3 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to Instacart's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one, one on your telephone. Please limit yourself to one question and one follow-up so that we will have enough time to address everyone's questions. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Rebecca Yoshiyama, VP of Investor Relations. Please go ahead.

Rebecca Yoshiyama (VP of Investor Relations)

Thank you, Gigi, and welcome everyone to Instacart's Third Quarter 2023 Earnings Call. On the call with me today are Fidji Simo, our Chief Executive Officer; and Nick Giovanni, our Chief Financial Officer. Shortly, we will open up the call for live questions. During today's call, we will make forward-looking statements related to our business plans and strategy, future performance and prospects, including our expectations regarding Q4 and full year 2023 financial results and future profitability, financial and operating targets, business and industry trends, market opportunities, and potential share repurchases. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements.

You can find more information about these risks and uncertainties in our financial perspectives for our initial public offering, filed with the SEC on September 20, 2023, and in our Form 10-Q for the quarter ended September 30, 2023, that we will file with the SEC. We assume no obligation to update these statements after today's call, except as required by the law. In addition, we will also discuss certain non-GAAP financial measures. These non-GAAP financial measures have limitations and should not be considered in isolation from or as a substitute for our GAAP results. As a reconciliation between these GAAP and non-GAAP financial measures is located in our shareholder letter, which can be found on our investor relations website. This conference call is being webcasted and will be available for audio replay on our investor relations website in a few hours.

Now, I'll turn the call over to Fidji for her opening remarks.

Fidji Simo (CEO)

Thank you, Rebecca, and hi everyone, and welcome to our table for our very first public earnings call. I hope you all had a chance to read our shareholder letter, which includes lots of information about our third quarter results. For more than 10 years, we have been investing in purpose-built technologies that can solve a wide array of complex challenges in grocery. We are the clear leader among digital shelf platforms in online grocery, with a winning combination of selection, quality, value, and convenience. Our strengths are evident across our business. The breadth and depth of our retailer integrations, the quality of the experience and accuracy of our orders, the size of our baskets, the increased order frequency and spend from our customers over time, not to mention our healthy unit economics. We have a massive head start, and we are getting better every single day with every order.

A significant advantage is our unmatched selection and deep integration with retail partners. We partner with more than 1,400 retail banners across more than 80,000 locations that collectively represent more than 85% of the U.S. grocery market. For us, it's about more than just putting our partner's catalog online. It's about becoming their strategic partner across their entire digital transformation. For example, we build and power many retailers, e-commerce storefronts, and pickup businesses. We support operations at their brick-and-mortar stores and so much more. Another advantage is our highly engaged customer base. Instacart has become an important part of our customers' lives, to the point where people count on us for their weekly grocery shop and many other use cases.

When looking at annual cohort data from 2017 to 2022, on average, our monthly active orderers start by using Instacart 2.1x a month and spend $226 a month in year one. And by year six, they order 3.9x a month and spend $480 a month. On average, this means our customers spend more than $100 per order, which is a key element to unlocking profitable unit economics, along with our next advantage, which is our massive scale in grocery. Over the last 12 months, we completed more than 265 million orders. This gives us the experience and data needed to unlock efficiencies that are unique to grocery and that you can only unlock once you reach that scale.

From our best-in-class search engine and replacement algorithms, to our batching technologies, to our wayfinding inside the store and much more. These, in turn, allow us to improve customer and shopper satisfaction while minimizing our fulfillment costs. Finally, advertising. Our advertising and other revenue operates at a nearly $900 million run rate today. As we continue to scale our ads business, we are also working to drive better results for all our stakeholders, creating new and more effective ways for brands to connect with consumers and generating more sales for our retailers out of their existing locations. Because advertising helps us fulfill orders more profitably, we're able to maintain lower customer and retailer fees as a percentage of GTV. To put this in perspective, our fees are generally about half as much as the fees charged in restaurant delivery.

All of these advantages explain why the Instacart experience remains vastly superior. Based on third-party data, we continue to be the clear leader among digital-first platforms in online grocery, with more than 50% share of small baskets under $75 and more than 70% share of large baskets over $75. When we look at new customer activations in online grocery, our large basket activations are more than 5x higher than new entrants, which leads to our new activation GTV being multiples higher. Once a customer is onboarded to a platform, we closely track the conversion rate of small basket customers to large basket customers, and our rate is more than 5x higher than these other players as well.

These are all critical distinctions because approximately three quarters of online grocery, and likely even more of the profits, sits in large baskets of $75 and above. While our business continues to be impacted by several macro headwinds, our competitive advantages put us in a much better position to navigate this period and come out stronger. We remain relentlessly focused on profitable growth. We're staying disciplined and are managing the things we can control to ensure we continue delivering strong earnings and operating cash flow. Today, we have approximately $2.2 billion of cash and similar assets, and recently established a new $500 million share repurchase program to opportunistically buy back shares. Overall, I'm unwavering in my long-term view on the future of online grocery adoption.

I'm confident that our competitive advantages will allow us to further expand our category leadership, and we are focused on executing our profitable growth strategy. Transforming the world's largest retail category will take time, but we believe we have all of the ingredients to generate long-term value for our partners, teams, and shareholders. Thank you for your support and being on this journey with us. Now, I'll turn the call over to Nick to provide more of an update on our financials.

Nick Giovanni (CFO)

Thank you, Fidji. In Q3, we delivered a solid quarter and our business fundamentals continue to improve. Now, let me provide a bit more color on our Q3 results and our future outlook. I'll start with GTV and orders. In Q3, year-over-year GTV growth improved for a second consecutive quarter. GTV from our mature cohorts collectively declined, but the rate of decline continued to improve compared to Q1 and Q2. Our largest 2020 and 2021 COVID cohorts no longer represent the majority of our total GTV, as we've layered on new customers in 2022 and 2023. In Q4, we expect year-over-year GTV growth to remain in the 5%-6% range, and the composition of this growth to continue to be driven more by orders growth than AOV growth, as the impact of inflation wanes year over year.

Our philosophy on GTV guidance is to share what we expect will happen based on the trends that we are seeing in the business so far in Q4, which are consistent with the past two quarters. We are not providing guidance that we expect to exceed. Now on to transaction revenue. As we expect, we saw transaction revenue as a percent of GTV rebound from 6.8% in Q2 to 7.2% in Q3. In Q4, we expect transaction revenue as a percent of GTV to remain flat quarter-over-quarter. As a reminder, our long-term target for transaction revenue is 6.5%-7.5% of GTV. Now, for advertising and other revenue. Our Q3 performance was much stronger than expected, primarily driven by higher advertiser spending in back to school and fall football campaigns.

In Q4, we expect advertising and other revenue to grow sequentially with seasonality. We expect roughly $20 million of sequential advertising and other revenue growth, compared to $6 million from Q1 to Q2, and $16 million from Q2 to Q3. As a reminder, for the past few quarters, our ad and other investment rate has expanded year-over-year by approximately 30-50 basis points, and that's much higher than the 20 basis points that we aim for on an annualized basis. This was largely due to the ramp-up of Shoppable Display and Shoppable Video launches in the second half of 2022. And as a result, for the next few quarters, it is still our expectation that ad and other investment rate will expand less than 20 basis points year-over-year as we comp against these periods.

Over time, we continue to expect steady expansion towards our long-term target for ad and other revenue, which is 4%-5% of GTV. Achieving our targets for transaction revenue and ads and other revenue would bring our long-term target for total revenue to 10.5%-12.5% of GTV, and GAAP gross profit target to 8%-10% of GTV. Turning to adjusted operating expenses, we generally expect the same trends we saw in Q3 to persist in Q4 as a percent of GTV, but I would call out the following: First, adjusted ops and support typically increases sequentially in Q4 due to seasonality and shopper onboarding. And second, we will be prepared to spend more on adjusted sales and marketing if we see the right opportunities to drive long-term growth throughout the quarter.

Our long-term target for adjusted operating expenses is 4.5%-5% of GTV. Putting all this together, we expect to expand Q4 adjusted EBITDA quarter-over-quarter and year-over-year to a range of $165 million-$175 million. This is an increase compared to the $163 million we generated in Q3 2023, and the $133 million we generated in Q4 2022. It also demonstrates ongoing progress towards our long-term adjusted EBITDA target of 4%-5% of GTV. And finally, we will remain disciplined on share dilution and expect to return to GAAP profitability in the full year 2024.

We have already taken steps to manage stock-based compensation and lower dilution, but expect it will take several quarters for the stock-based comp expense related to pre-IPO awards to normalize, given they are expensed using the accelerated attribution method. We remain committed to being profitable on adjusted EBITDA basis, even after deducting the net value of equity we grant each year, and this framework, which we are on track to achieve this year, is expected to position us to return to GAAP profitability for the full year in 2024. Overall, we believe our fundamentals are solid, and we have delivered improving growth throughout the year at higher levels of profitability. Together with our partners, we believe we can continue to lead the digital transformation of the grocery industry. We're excited about the future and appreciate your support as shareholders.

With that, we'd like to open it up for live questions. Operator, you may begin.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Eric Sheridan from Goldman Sachs.

Eric Sheridan (Partner and Managing Director)

Thank you so much for taking the question. Maybe if I can go back to asking something that would be a big picture question. We continue to get asked by investors about the broader competitive landscape and how you think about your opportunity set and competitive positioning between the small basket and large basket size elements of the broader online grocery landscape. Would love to revisit your broader thoughts there. Thank you.

Fidji Simo (CEO)

Thanks, Eric. As I mentioned, I think it's incredibly important to understand that three quarters of the industry is in large baskets and even more of the profits. We are the market leader in both small basket and large baskets. 50% share of the category in small basket, more than 60% share and more than 70% share in large baskets. But what we're seeing is really that we have built an incredibly defensible business by having this deep integration with grocers, by uploading their entire selection online and making it available to people at the highest quality, highest accuracy over the course of 10 years, which has really allowed us to capture the weekly shop, which is a core use case basket of, you know, more than $75 that are very defensible.

What we're seeing is that, obviously, the grocery industry is an attractive market for new entrants. We expect competition to continue to try to enter that market. But what we've seen is that when they do enter that market, especially new entrants coming more from the restaurant delivery side, they are really focused on small baskets, and we have a much greater ability, more than 5x greater ability to convert small basket customers into large basket customers, and also, 5x greater ability to attract large baskets. And, you know, large baskets means that you have more fulfillment efficiencies. It also means that you have more advertising opportunities, and that's really where you are seeing the strength of our unit economics shine, because we are able to add such a strong share in that part of the market.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Colin Sebastian from Baird.

Colin Sebastian (Senior Research Analyst)

Thanks, and good afternoon. I guess also a bigger picture question from me. I mean, given that there are four sides to your marketplace, I'm curious, how well balanced do you think the supply side is with stores and shoppers versus the demand side from consumers and advertisers? If there's one area or multiple areas that need more focus, or are those in pretty good balance right now? Thank you.

Fidji Simo (CEO)

Great question. Thank you. So, I will go kind of one by one. On the shopper side, supply is extremely healthy. We continue to have a wait list of shoppers in many cities, and we are seeing that we have high satisfaction of our shoppers. 80% of our shoppers would recommend to others to shop on Instacart and saying that Instacart offers good paying, earning opportunities. So on that side, we feel very good. On the retailer side, you know, we have 80,000 stores on the platform. We have a very big selection advantage here. We still have more room to grow on attracting the rest of the market, the long tail of the market, but we certainly have you know a lot of supply already.

We have 85% of the market represented on Instacart. So from that perspective, I think growth is gonna come more from deepening our integration with grocers and offering more services like virtual convenience, like SNAP, like, you know, everything, pick up, everything you have seen us roll out in the last couple years, rather than just expanding number of stores. On the advertiser side, we have 5,500 advertisers on the platform. That number continues to grow, and what we're seeing is that there isn't really any ad scale brands that are sales on the platform that isn't already advertising with Instacart. So here, again, a lot of the game is continuing to attract more emerging brands, but also, in big part, deepening the investment rate from our advertisers by continuing to show them the value of the platform.

I left the consumer side for last because I think that is actually where we have the most room for growth. This is an industry that is still only 12% penetrated online, and so a lot of our focus and some of what you're seeing in terms of investment in sales and marketing, customer incentives are really geared towards accelerating the online adoption. And as a clear category leader, we see it as our responsibility to do that. If more demand, more consumer demand was to come, we would be able to handle that with all of the other sides of our marketplace. And so that's really the thing we're most focused on.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Nikhil Devnani from Bernstein.

Nikhil Devnani (Senior Analyst)

Hi there. Thank you for taking the question, and congrats on the IPO. When you just step back and think about some of your largest partners, you know, some of them have the scale, potentially even the ambition, to bring more of their grocery solution in-house or even use other partners over time. I mean, how do you think about positioning Instacart to minimize the risk of that? And how do you make sure that you're both integral to these large partners and also, you know, retaining positive economics for yourself in the process? Thank you.

Fidji Simo (CEO)

Thank you. So when you think about the percentage of sales that we represent for our partners, we represent 5% of their total sales. That's a very large number, and even with our larger partners, that can be, you know, in the low teens. And so we are already a strategic partner, deeply integrated with our business. You mentioned this idea of, you know, partners having the scale to do that on their own. I will call out that it took us 100 million orders before we were able to get to positive unit economics. So scale matters enormously in order to deliver this business, not only profitably, but also at scale and efficiently.

And so the reason you're seeing, all of our large partners partnering with us year after year, choosing to, you know, continue their relationship with us, is because we are, the most efficient, and we are offering them a service that they know is both efficient for their own P&L, but also allows them to keep the service as affordable as possible for their customers, which does drive growth. And so we feel very good about that, and that's why you are continuing to see us focus on fulfillment efficiencies, because we know that is a very strong competitive advantage, and the reason our partners come to us for, for this service.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Doug Anmuth from JPMorgan.

Douglas Anmuth (Managing Director and Internet Analyst)

Thanks for taking the questions. You've indicated that you'd be prepared to spend more on sales and marketing if you see the right opportunity to drive long-term growth. Just curious if that represents any kind of change to your recent thinking or perhaps any kind of shift in how you think about returns threshold? And then, secondly, the slower ad growth in 4Q and 1Q, could you just talk a little bit more about some of the dynamics there as you're lapping the shoppable launches, and then how you'll work to offset those impacts? Thanks.

Nick Giovanni (CFO)

Thanks for the questions, Doug. First, on sales and marketing, no change to our philosophy. We continue to invest where we see the opportunity to acquire customers that have a high lifetime value, and we'll do so, as long as we see the ability to attract new customers and grow the NPV. And so there has been no change. We just wanted to call out that as we see those opportunities, we'll remain consistent with that philosophy, and that might lead to us spending more in Q4. And as it relates to the ads business, what we wanted to call out is there's no change in our expectations for the level of ad revenue that we'll generate in Q4 and Q1.

We wanted to point out that Q3 was exceptionally strong, and that we didn't expect the sequential increase from Q3 to Q4 to be as strong, because of the outperformance in Q3. As it relates to what we'll do to get the advertising business back on track, I'll turn it over to Fidji to talk about the long-term growth in the ads business.

Fidji Simo (CEO)

Yeah. In terms of long-term growth, there are essentially four levers. One is getting our current advertisers to spend more, and that comes from continuing to roll out innovations in terms of format. So in addition to Shoppable Display and Video, we rolled out Stock Up and Save and Plan to continue to innovate there, and also rolling out more measurement capabilities. We've rolled out Sales Lift and continue to expand that. The second lever is to get more emerging brands to advertise on Instacart. We, we see that emerging brands tend to spend more as a percentage of GTV in general because they want very measurable solutions, which is what we offer. The third lever is penetrating categories that have high investment rates even further. I'll give you a couple of examples.

Alcohol, personal care, pets, tend to have a much higher investment rate than the rest of the selection, and so continuing to deepen online penetration in this category will naturally raise investment rates. And then a fourth, but smaller lever, is actually our investment in offsite through Carrot Ads, where we take our entire ads platform, and we make it available on our retailers' owned and operated properties, so that they can create a retail media business on their own, as well as some of the recent launches that we've announced with The Trade Desk or Roku.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ross Sandler from Barclays.

Ross Sandler (Managing Director and Senior Internet Research Analyst)

Great. Fidji, just one big picture question, and then Nick, more of a housekeeping. So the big picture is on the topic of advertising, one of the questions we heard during the IPO was that while your ad business is great, and it's a nice differentiator in the market, there's a natural tension that exists, that the larger you guys get, the more vendor dollars are moving away from your retail grocery partners. So how would you address that topic? And then Nick, on the transaction take rate, a nice little uptick to this is 7.2%, quarter-over-quarter. What were the primary drivers of that improvement versus last quarter? Thanks.

Fidji Simo (CEO)

Thanks, Ross. So, two parts on how we address what you mentioned. One is, as I just mentioned with Carrot Ads, we have taken all of our ads, technology, ad sales, and are making it available to grocers on their own and operated properties, so they can benefit from everything we've built to create a retail media business of their own. We've done that with Sprouts, for example, and others. And so that's, that's a way in which we completely align the growth of our ads business with our retail partners. A second part of that is that, your question implies that there are finite budgets.

But what we're actually seeing is that because we are able to really demonstrate performance of advertising, online, CPGs are starting to unlock more ads dollars, that to go to our channel and retail media in general, without adding to trade that off with trade spend, because they are seeing that because these dollars return, there is room to actually grow these budgets. If you look at, you know, the rest of the advertising industry, that's certainly been the case in e-commerce. And now that, you know, retail media platforms are making advertising as measurable as e-com advertising, we're starting to see similar trends in CPG advertising, which is really promising.

Nick Giovanni (CFO)

And then on your second question, Ross, yeah, we were really pleased with transaction revenue in the quarter. Year-over-year, we saw about 80 basis points of improvement in fulfillment efficiencies that were offset by about 40 basis points that we reinvested into customer incentives. And quarter-over-quarter, we saw about a 40 basis point improvement in retailer revenue, because the one-time items that occurred in Q2 did not recur in Q3.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Michael Morton from MoffettNathanson.

Michael Morton (Senior Research Analyst)

Hi, thank you so much for the question. I'm sure you're gonna get a lot of advertising questions, so sorry to follow up on that. But I would love to learn a little bit more about what inning you see your advertising product in for the large enterprise? I was at the grocery shop, and you guys had a great presentation talking about, you know, the ability with your shopping carts to measure kind of in-store transactions and the perfect closed loop system for incrementality. That seems to be the big question for CPG brands, right? Incrementality.

I would just love to hear your kind of thoughts going forward into the future on that, and if that kinda allows you to go from unlocking fixed ad budgets to, in theory, unlimited ad budgets, as it becomes more of like a ROAS measurement, if that makes sense. Thank you.

Fidji Simo (CEO)

Yes, thanks for the question. As I mentioned, the last two years have been really a journey of rolling out more measurement capabilities, more optimization capabilities. And initially, we were really just focused on measuring ROAS, which is, you know, very strong. And in fact, during the quarter, we released more case studies like Trump's Kitchen Sauce, showing strong ROAS. But we also rolled out measurement for sales lift specifically. And if you look on average or at our sales lift studies, you see that advertising on Instacart gives you a 15% sales lift, which is really meaningful for brands.

And so we're continuing to roll out sales lift measurement to more and more brands, more and more formats, because that should be the ultimate, you know, measurement that they should look at to decide to invest and continue the trend of increased investment that you're seeing. You mentioned in-store solution. We think that this is a longer term bet for us, especially as part of deploying of all the future Caper Carts in store. And we believe that it provides a really great opportunity to take all of the strengths of online advertising and bring it to the store, because our Caper Carts have a screen on which you can do very measurable, very personalized, very dynamic advertising, and really blend the best of online and the best of offline.

Obviously, longer term vision, but something we're excited about, and our brand partners are very excited about as well.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ron Josey from Citi.

Ron Josey (Managing Director)

Great. Thanks for taking the question. I have two. Fidji, you spoke quite a bit about the technology integration with your partners, and in the letter, I think you talked about found fill rates continues to improve. Just talk to us a little bit more about the integration and what's driving those found fill rates to improvement. Maybe that's not the integration with your partners, but more just better efficiencies within Instacart. And then, Nick, I wanted to understand a little bit more. I think you mentioned a 40 bps sequential investment in customer incentives sequentially. Just talk to us about the results you're seeing on those incentives and perhaps just on incentive spend going forward. Thank you.

Fidji Simo (CEO)

Hi, Ron. So on found rates and fill rates, very excited that we are now at the highest level of Found Rate and Fill Rate, since, you know, the very beginning of the pandemic. That is a result of both deep integration with partners, as well as a lot of machine learning and AIs that we've deployed to continue to improve quality. So just to give you a couple of examples, some integrations with partners include partners passing us their balance on hand data, their inventory data, so that we can better predict what's gonna be on the shelves.

But in addition to that, we have 600,000 shoppers in 80,000 grocery stores, basically capturing on a, you know, daily hourly basis, like, whether our products are on the shelves or not, which allows us to train our algorithms to understand much better what is on the shelves. And in fact, you know, the greatest compliments that we have is that some of our retailers and some of our brand partners use this data to improve their store operations, because thanks to our shopper, we know better what's on their shelves than sometimes the retailers do themselves. And this data helps them improve their store operations, which is a really wonderful virtuous loop. And then the last thing I'll mention is that fill rates really means you know like includes replacements.

We have made 75 million replacements just in Q3 alone, with 95% satisfaction on those replacements. And again, that speaks to our scale and the fact that we have so much, you know, feedback from users about what is a good replacement versus a not so good one, that we can constantly, through machine learning, improve that, refine that, and have, you know, the best quality in the industry based on all of the data that we have accumulated over time. So still, you know, we still continue to wanna improve. We go after every basis point there, but we are very proud of the level of quality we provide.

Nick Giovanni (CFO)

On your second question, Ron, around incentives, just to clarify, what I suggested was year-over-year, we saw about 80 basis points of efficiency gains in transaction revenue, and then we reinvested about 40 basis points of that into consumer incentives, which is part of our plan as we make the service, you know, more affordable, we can pass those savings back on to customers. Quarter-over-quarter, incentives were roughly flat. We like incentives because we can target them to specific customer behavior types, for example, referrals to generate new activations or coupons to resurrect users that have not been active in some time. The framework that we use for incentives is similar to the framework that we use for paid marketing, where we're looking to invest, where, based on our five-year LTV guardrails.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Jason Helfstein from Oppenheimer.

Jason Helfstein (Managing Director and Senior Analyst)

Thank you. Can I ask about Instacart+, any color as to kind of growth rates or how that, you know, how that's gone in the quarter? And then, you know, have you been leaning more into that or not into that based on, kind of what you've been seeing from, you know, customer conversion? And then secondly, just a follow-up on advertising, the The Trade Desk integration. I mean, how- you know, could that be meaningful once it's scaled? Just help us understand kind of where that, that fits into your, your ads stack. Thank you.

Fidji Simo (CEO)

I'll take The Trade Desk, and then maybe Nick will take Instacart+. So on The Trade Desk, we're excited about the partnership. For context for everyone, it is a way to use Instacart first-party data in combination with a programmatic buy on The Trade Desk. This is something that a lot of our brand partners have been asking about. It points to a larger vision that we have around scaling offsite advertising. But I would say in the short term, we don't expect that to be a material driver of ad revenue. We wanna continue building offsite advertising over time through a series of partnerships and are using The Trade Desk integration to see how it goes.

Nick Giovanni (CFO)

Related to Instacart+, per our S1, we had 7.7 million MAU as of June, and 5.1 million paid Instacart+ subscribers. We did not disclose these metrics on a quarterly basis, but I'll comment that we do continue to see MAU growth trending in line with orders growth, and ongoing strength in Instacart+ penetration, which continues to represent more than half of the activity on our platform.

Operator (participant)

Thank you. One moment for our next question. Our next question goes to the line of Justin Post from Bank of America.

Justin Post (Managing Director)

Great. Thank you. Two, Two questions. First, could you talk a little bit about the grocery pipeline, both maybe new partners or maybe more importantly, deepening the relationships with the existing partners? How do you feel about that over the next year? And then, and then maybe for Nick, you mentioned you're at 7.2% transaction take rates, kind of in the upper half of the range, for long term. Could you talk about the drivers as you look out the next 12 months, both positive and negative on take rates? Thank you.

Fidji Simo (CEO)

Yes, thanks for the question. So on the grocery pipeline, as you probably saw in the shareholder letter, we continue to onboard new partners, including large ones like Giant Eagle this quarter, which we're very excited about. And in terms of deepening of relationship, we have several lines of business that we continue to roll out. You saw, for example, in the quarter of just convenience, continuing to roll out with partners like Wegmans, Pickup, starting to roll out with Kroger, which we're excited about. And also us continuing to power the owned and operated websites and businesses of our partners, like, for example, powering delivery for Hy-Vee.

And so this is just kind of a flavor of the type of work that we continue to do, and fundamentally expect to continue doing that over the next few quarters, and are feeling good about these lines of businesses being very compelling for our partners and us continuing to roll that out. I forgot to mention SNAP, which, you know, we have recently announced with BJ's, and we expect SNAP to come back to being a tailwind for us in the future as we roll out new partners on SNAP. As you know, it has been more of a headwind this year with SNAP benefits being cut by 30%, but we expect that to go back to being a tailwind for the business as we onboard new partners.

Nick Giovanni (CFO)

As it relates to transaction revenue, the largest driver of the increase in our transaction revenue as a percent of GTV historically has been efficiencies related to batching. Which means, it can cost us less per order because we have the ability to increase the number of orders that a shopper is shopping for at the same time. We expect to continue to see efficiencies in batching, but we don't flow all of that through to the bottom line. We reinvest it. Sometimes we reinvest it into consumer incentives, as we just discussed, and other times we invest it into new service offerings, like No-Rush. No-Rush is an opportunity for a customer to save money and have no delivery fee if they give us a three-hour window to deliver their groceries in.

That allows us to increase the batch rate on those orders and reduce our cost, but we've turned that into a new product and a new service offering for customers. So our long-term range is 6.5%-7.5%. We're at 7.2%, and we'll continue to balance growth through incentives and new product offerings along with efficiencies.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Andrew Boone, from JMP Securities.

Andrew Boone (Managing Director)

Thanks so much for taking my question. I wanted to ask about grocery delivery elasticity. Is there any thoughts that you can share there? And then are you making progress on grocers offering in-store fees? How is that going as you guys have those discussions with grocers? Thanks so much.

Nick Giovanni (CFO)

Could you repeat the second question? The line cut out a bit.

Andrew Boone (Managing Director)

Yeah, sorry about that. I wanted to ask about grocery delivery elasticity, and the question really is, how do you guys think about that? What are you guys seeing from consumers on that level? And then how are grocers moving towards in-store fees, right? What are you guys seeing on that, that component? Thanks.

Fidji Simo (CEO)

Okay. I'll answer the first question, and then I may wanna ask you to clarify what you mean by in-store fees. On grocery delivery elasticity, basically what we've seen is that ever since kind of the rise of inflation in the middle of last year, pretty much all segments of customers have become more price sensitive. However, within those, there are still some people who value convenience over price, and for them, we have an offering called Priority Delivery, where we charge extra, like $2 for deliveries that are delivered in less than 15 minutes. Meanwhile, on the other end of the spectrum, you have people who prioritize price over convenience, and for them, we have options like No-Rush delivery, which Nick just covered.

And so really what we're trying to do is have offerings on the price to convenience scale that really align with all of the needs of the entire total addressable market. And if you look at our kind of demographics by income, they went from, you know, a couple years ago, being mostly high-income customers, to now mirroring U.S. population pretty closely because of everything that we've put in place in terms of affordability, whether it's our fees or integration with loyalty programs for grocers, deals from brands coming onto the platform that have brought a lot more affordability to the table. Now, I'm curious what you meant by grocers moving to in-store fees. Are you-

Andrew Boone (Managing Director)

Um, uh-

Fidji Simo (CEO)

-do you mean by that, like, same price as-

Andrew Boone (Managing Director)

Yeah, I meant, I meant matched in store. Yeah, sorry about that.

Fidji Simo (CEO)

Match, yeah, it makes a lot of sense. So out of 1,400 retail banners that are on our platform, 425 of them are at price parity with the store. And what we are seeing is that for the three largest grocers that are at price parity with the store, they are growing faster than the rest of the platform. And therefore, we think that, you know, grocers will embrace an omni-channel strategy and embrace giving the same value online as they do offline, because an omni-channel customer spends two to four times as much as a in-store only customers, are the grocers that are poised to gain share in the coming years. And therefore, this is something we highly encourage our grocers to do.

Now, we don't control prices on Instacart, they do, but we certainly give them tools to optimize pricing like Eversight, which is a company we acquired last year, and continue to encourage them to match the same price as a store.

Nick Giovanni (CFO)

Great. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes on the line of Bernie McTernan from Needham and Company.

Bernie McTernan (Senior Research Analyst)

Great, thank you for taking the questions. Maybe just to start, a follow-up question on the integrations where you have access to inventory data with the retailers, is that just with enterprise partners, or is it broader? And is that data exclusive, or do you think your competitors could have access to it over time as well? And then another follow-up on a previous question, just the talk of conversion from smaller baskets to larger basket customers. What percentage of customers generally come to Instacart for the first time, purchasing, you know, smaller AOV baskets versus larger ones? Thank you.

Fidji Simo (CEO)

Thank you. So on the inventory data, I would say, you know, we try to have these integrations with as many partners as possible. That being said, a lot of retailers don't really have the sophistication to have like that depth of integration. So it really varies, and with a lot of them, like, it tends to be more geared towards enterprise. But just to reiterate one more time, what I said earlier, a lot of like, you know, our lead in found rate and fill rate also comes from combining the retailer data with our shopper data and with the fact that we have, you know, so much access to what's on the shelves in real time. It's really that combination that gives us a strong competitive advantage.

I would say, you know, you mentioned, can competitors get access to similar thing? I would say, you know, it goes much deeper than just integration into our inventory system. We're integrated with our retailer CRM system, with our retailer OMS system, with our retailer's point-of-sale system, to do bypass checkout. And so all of these integrations take enormous amounts of time, especially with retailers who have very limited IT resources, and that's why we have such a deep advantage for having just focused on grocery for the last 10 years. We also have, you know, hundreds of millions of orders over, you know, 11 years, and through our AI and ML, all of these data points contribute to us having such a superior experience. On your second question, Nick, do you wanna take that?

Nick Giovanni (CFO)

Sure. Just to give you a framework, 75% of grocery spend in North America comes from large baskets. And so we believe it's critical that an online grocery service can serve that use case, and we think that we're the best at that. If you were to look at market share of online-first players and large baskets, our share is greater than 70%. But small baskets are important too, as a fill-in use case for those customers that are doing their weekly shop, but also as a way to activate with the service. And we have greater than 50% share of those baskets.

We don't break down the mix of our activations in those two tiers, but we do point out, based on third-party data, that our large basket activations are more than five times higher than other new entrants, and our ability to convert a small basket activation is more than 5x higher as well compared to new entrants.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Benjamin Johnson from Piper Sandler.

Benjamin Johnson (Equity Research Analyst)

Hi there. Thanks for taking my question. I was just wondering if you could talk about the progress you've made on increased batching during the quarter, and how you plan to balance increased shopper efficiency with order quality over the long run. Thank you.

Nick Giovanni (CFO)

Thanks for the question. We continue to see that we improve our batch rate, and we've done so consistently. We've been able to do that while making sure that order quality remains high. As Fidji mentioned in the introductory remarks, our order quality is higher than it's been since pre-pandemic, and certainly the highest it has been since we've reached mega scale. For us, it's all about balancing the four sides of our marketplace. We wanna make sure that we provide great opportunities for shoppers to earn, and also to make sure that we keep fees low for our consumers and for our grocers. So, batching is a key differentiator for us. It's something that we were truly able to unlock once we reached very significant scale.

As a reminder, batching is not the result of the number of shoppers we have. It's the result of the density of big basket orders that we have in the same store at the same time. That's something that's incredibly difficult to replicate. As we continue to see batching efficiencies, we will reinvest some of those into consumer incentives and create new service offerings like No-Rush, and we'll balance on an ongoing basis.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Deepak Mathivanan from Wolfe Research.

Deepak Mathivanan (Equity Research Analyst)

Hey, guys. Thanks for taking the questions. One big picture question and another one on exclusives. So as we look ahead beyond Q4 into 2024, can you talk about a few factors that could help the GTV growth rate, you know, at a high level, currently from mid-single digits? Is it more dependent on macro factors, or there are any sort of notable initiatives that you would say that can drive potential acceleration? And then, second one, can you talk about the exclusive agreements you have with some of the retail partners? There is a concern in the investment community that the loss of exclusives could hurt your value prop in the near term. Could you maybe give us an update on the timeline and what happened in the past when you lost some of these exclusives?

Thank you so much.

Fidji Simo (CEO)

Thanks for the question. So on re-accelerating of GTV, well, first off, we are pleased to see some of that re-acceleration from Q1 to Q2, Q2 to Q3. What is gonna, you know, push that to continue is twofold. One is, our recipe of, you know, continuing to provide selection, affordability, quality, convenience. This has, you know, made us into the category leader so far. This is what we're gonna continue to do to re-accelerate growth, but also, some of the macro factors easing up. And so, two things there that can help is, one, our mature cohorts continuing to stabilize. As Nick mentioned, we are pleased to see that, the 2020, 2021 cohort, decreased single digits in Q3 versus double digits in H1.

And so, seeing some stabilization of that would certainly help us. The second thing is that, you know, a big part of the headwind this year is, the fact that SNAP benefits were cut by 30%. We certainly saw SNAP as a tailwind to our business because we were a pioneer in bringing the SNAP program online. That has been a headwind this year, but we expect SNAP to go back to being a tailwind next year as we continue to onboard more, grocers onto SNAP. So that, that will continue to help. Now, in terms of your question on exclusives, I wanna be clear that exclusivity is not our strategy. Grocers partner with us because we offer the best service at the most competitive, prices and with the best quality.

This is something that is very fundamental to our strategy. Now, when these grocers go non-exclusive and decide to sit on multiple marketplaces, what happens is, first, these retailers don't leave us. They just diversify their business, but they also continue to grow with us and deepen their relationship with us because we are the partner that can drive the most growth for them. Finally, one thing that's interesting is that when they're electing to be non-exclusive, it means that retailers elect to get to higher fees with us, so our revenue and profitability can actually continue to grow from this partner going non-exclusive.

Operator (participant)

Thank you. One moment for our next question. Our next question comes on the line of Mark Kelley from Stifel.

Mark Kelley (Managing Director and Senior Equity Research Analyst)

Great. Thanks very much. I just had two quick ones. The first is, just going back to the advertising side. You know, when I see announcements like the one with The Trade Desk and some of the other third-party verification companies, and I know The Trade Desk, you know, is aimed at more offsite, but is there an opportunity to maybe add incremental demand partners outside of the API, API partners that you already have? You know, like a larger scale DSP, like The Trade Desk over time. Does that make sense for your business? And second, Nick, just really quick, you know, with the buyback in place, can you please just remind us what the capital allocation priorities are? Thank you.

Fidji Simo (CEO)

Mark, on the ad side, for now, we're really trying to figure out how to, you know, scale this offsite ad opportunity in a way that is extremely privacy safe and also maintains, you know, what we think makes Instacart really special in terms of the value of our data. I see the partnership with The Trade Desk as just the beginning of, you know, us entering that space, so nothing more to announce at this time, but we are continuing to explore more opportunities to continue to grow that business, as we believe the value of our data is very significant and something that our brand partners definitely wanna use beyond our own properties. Nick, do you wanna take the buyback?

Nick Giovanni (CFO)

On your question on capital allocation, just as a reminder, we have more than $2.2 billion of cash currently. The business continues to produce cash, and we continue to invest significantly in R&D to innovate and support our partners in sales and marketing, to grow our business and the business of our partners. So it's not an and. It's not an or, it's an and. We can do those things and also look to opportunistically repurchase shares to make sure that we are great stewards of shareholder capital.

Operator (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.