The Current State of Online Groceries

Online Grocery Shopping

by Tyson Vozza, Stanford University

CS99I – Business on the Information Highways

March 23, 2001

View other CS99I Projects (2001)

Overview Business Model How It Works Consumer Opinions Testing Webvan Business Problems Current State Future of the Market References

Overview

Online grocery shopping is a modern convenience. One of the first companies to offer this service Peapod.com was founded in 1989 by brothers Andrew and Thomas Parkinson. At first these services actually shopped the aisles of local supermarkets like other customers. Now they have built their own warehouses to improve the efficiency of order picking. Hundreds of companies have ventured into this highly anticipated market. The Andersen Consultants predicted that by 2000, 1/3 of the grocery industry’s $400 billion in sales would come from home shopping.

Although online grocery shopping was pioneered in the U.S., it is available internationally. In fact, the British lead the world in shopping for food via the Internet. Consequently, the world’s largest online grocer Tesco is located in England. The Netherlands is stated to have the second most developed market.

Here are some examples of online grocers:

Business Model

Before investing millions of dollars into an online grocery business, a company creates a business model to give themselves direction. They create a list of positives and negatives of the new venture to evaluate if it is feasible to directly compete with brick-and-mortar stores. An example of such a list might look like this:

Positives of Online Grocery Sales:

Ø Unparalleled convenience to customers – groceries are delivered

Ø More economical structure – warehouse vs. supermarket

Ø Less expensive land – no need for high traffic site

Ø One warehouse to serve an entire city – larger radius possible with delivery

Ø Shopping available when warehouse closed – online computers offer 24/7 service

Negatives of Online Grocery Sales:

Ø Fights convention – consumers accustomed to going to stores

Ø Slim margins – inherent in grocery business

Ø Labor intensive – employees need to gather orders and deliver them

Ø Delivery problems – increased probability of spoilage

Ø Lack huge buying power – hard to stay competitive

Ø Huge startup costs – needs to be extensive system before its profitable

Ø Limited sales – business restricted to large metropolitan areas

How It Works

For Consumers:

The actual process of buying groceries online is a very simple process. First, the customers log onto the online grocer’s web page. Second, they shop for various goods and place them in their virtual shopping cart. Third, they check out by paying for the items with a major credit card. Fourth, they select a delivery location. Finally, the customer picks an appropriate delivery time, one that allows them to be home to receive the delivery of groceries.

For Companies:

Online grocers are continually trying to improve their storage and delivery services to make them as efficient as possible. This is the basic procedure implemented by HomeRuns.com:

All of the employees fulfill several different duties. They work as professional shoppers, deliverers, Internet technology workers, routers, and loaders. When a customer orders online, employees first prepare all perishable food in the requested quantities, such as a half-pound of ground beef, so professional shoppers can later pick them up. Meanwhile, a router studies a map and arranges delivery routes. Professional shoppers, wearing electronic devices on their wrists to read customers’ orders, scan the temperature-controlled aisles of the warehouse for the groceries. Once the orders have been gathered on rolling metal shelves, other workers bag the groceries, packing nonperishable items in blue containers and perishables packed with dry ice in gray containers. The containers are then organized and loaded into HomeRuns.com vans according to route, and delivers take to the streets.

Customer Opinions

Customers who order from online grocers are generally very pleased with the service. They like saving time while avoiding the hassle of grocery shopping. There is no waiting in long lines, searching for parking spots, or walking up flights of stairs with heavy grocery bags. All of the annoyances of shopping are alleviated by the online services.

Here is why two HomeRuns.com customers no longer shop in the supermarket:

Ø Susie Clewell-Clancy – “I can’t stand it when there’s a million people running and banging into me.”

Ø Lee Ann Mawler – The grocery store “is always a madhouse, and the times we can go is when 200,000 of your closest friends are also there.”

Testing Webvan

Since Webvan is the only service presently available in the San Francisco Bay Area, I ordered from them. The website is organized well and very intuitive for first-time users. It only took me about forty minutes to complete my order. Webvan offers an ample selection of items including at least a couple of different choices for everything I wanted. They even offer CD’s and other miscellaneous items. When I forgot to purchase something, I found out that modifying an existing order is also very easy.

The delivery was good. It proved to be punctual, precisely within the 1-hour time window. Moreover, the driver was very friendly as he helped to place the perishables into my refrigerator. Unfortunately, Webvan did forget to pack two of my items. I simply alerted the driver of the error, and he removed them from my credit card bill.

I was impressed with the quality of the perishables. The grapes were firm, and the pears were bruise-free. The dairy products were still cool although the ice cream was a little soupy. Furthermore, I ordered a 1/2 lb of salami, and I received exactly 0.50 lbs of salami which is better precision than in a local supermarket.

The prices were even competitive. I created a chart to compare them to those of two brick-and-mortar stores. If I didn’t use Webvan, I would have purchased my goods from Andronico’s and Borders. After looking at the chart, I discovered that I actually saved money by using Webvan with the help of a special promotion. I received $15 off, since it was my first purchase over $75.

Item	Webvan	Andronico’s/Borders
Green Grapes	$3.99	$1.59
Bosc Pears (2)	$1.99	$1.69
B&J Ice Cream	$3.34	$3.39
Wheat Thins	$4.79	$4.59
Tiscuits	$4.77	$4.37
Peach Yoplait	$0.85	$0.50
Raspberry Yoplait	$0.85	$0.50
Berry Yoplait	$0.85	$0.50
Mango Yoplait	$0.85	$0.50
Salami (1/2 lb)	$3.15	$4.99
Italian Bread	$2.69	$2.59
Mountain Dew (24)	$8.98	$6.67
Lenny Kravitz CD	$14.99	$13.29
Savage Garden CD	$13.99	$16.14
Savings	-$15.00	$0
TOTAL	$51.08	$61.31

Overall, I was very pleased with the service from Webvan. Being a freshman at Stanford who cannot have car, it was very convenient to have the groceries delivered to my door. In addition, Webvan’s mistake was pardonable, since I didn’t need the items right away. I simply can order them next time.

I would give a for this service to anyone who has grown tired of the mundane chore of shopping in a local supermarket and who is willing to try an online alternative.

Business Problems

Online grocers face problems because of flawed business models. For instance, Webvan was unprepared for routine glitches such as bad weather in Chicago and labor shortages in San Francisco. Online companies also underestimated the tremendous buying power of such stores as Safeway and Wal-Mart. They have learned that it is more difficult to compete with these brick-and-mortar stores than they had anticipated.

Most importantly, online grocers have realized that getting people to make online shopping their primary source for groceries and other retail goods is more challenging than they anticipated.

Ø Shoppers like to pick out their own food. “For a lot of people, it goes back to the hunter-gather within us,” said Susan Fournier, a Harvard Business School associate professor. “We like to select and prepare food. It’s how we express our love and concern.”

Ø Other people like to smell the strawberries and touch the tomatoes. Kalman M. Heller, a clinical psychologist, explains, “Food is something we’re taking into our bodies. It is not like buying a book online.”

Ø Some shoppers actually like the experience of shopping. They enjoy the savings, the thrill of weekly bargains, and the chance to bump into neighbors.

Ø Gender differences present a problem. Although grocery shopping is seemingly one of the most unisex household tasks, studies show that women are less likely to try online grocery shopping.

Bud Grebey, a Webvan spokesman, sums up the problem. “I think the biggest lesson that we’ve [Webvan] learned is that consumer behavior is hard to change, especially when we’ve been patterned to shop a certain way for generations.”

Current State

Internet grocers are struggling to stay in business because they simply cannot generate a profit. For example, in its 12-year history, Peapod has never turned a profit. It was reaching bankruptcy until Royal Ahold, a Dutch grocer, bought them. Webvan has also had financial difficulties even though they raised over $1 billion in financing. Aside from Amazon.com, almost no other Internet business started with so much backing, yet they have a stunningly small operation to show for all their expenses. Both of these companies’ stock prices show the current state of online grocers.

Webvan (3/20/01) Peapod (3/20/01)

Online grocers are trying new business techniques to become more profitable. Peapod has significantly improved the quality of their perishable goods by offering farm-fresh produce and restaurant quality meats and seafood. Webvan, on the other hand, has diversified. In November 2000, they unveiled a zippy new company logo (a linked W and V in a sleek wave) to give the company a new image. According to CEO George Shaleen, it gives Webvan the opportunity to extend beyond groceries, peddling pet food, office supplies, electronics, and almost everything able to be transported in a van.

Online grocers are predicting that they will soon be profitable businesses. Peapod claims that it is on track to reach profitability in Chicago and one of its East Coast markets by the middle of 2001. The entire company is projected to be profitable by year-end 2003. Webvan is also apparently on the road to profitability. They assert that they have enough cash for the rest of 2001 and think that they can be cash flow positive in 2002.

Future of the Market

Despite the past failures of online grocers, analysts still envision home grocery shopping to be an integral part of society. Forrester Research predicts that in 2005, 8% of the $500 billion market for U.S. grocery sales or around $40 billion will take place on the web. The Gomez Advisors are also positive, but a little more conservative. They forecast $14 billion in online grocery sales for 2005. Both analyses forecast a favorable future for online grocers.

The future appears to be filled with a different breed of online grocers. Companies backed by brick-and-mortar supermarkets will be providing the online sales. Application service providers (ASPs) will be able to provide grocery chains online sophistication without exorbitant overhead. For the tight-margined grocery business, this elimination of up-front overhead will be attractive, since the fees will be directed to the customers. Customers will either have the option of picking their pre-packed groceries at the store for a minimal charge or waiting for the goods to be delivered for slightly larger fee.

Gary Rhodes of Kroger says, “We believe that supermarkets have the best chance of making online grocery ordering work. Supermarkets with a strong customer base and the confidence of shoppers have a decided advantage in introducing online shopping. Supermarkets can offer multiple ordering alternatives and flexible delivery options.”

References

Reuters– “Online Grocer Leaves San Francisco to Focus on East Coast”

(March 12, 2001)

CBS Marketwatch – “Peapod Ends SF Operation”

(March 11, 2001)

The Atlanta Journal and Constitution – “eFOOD”

(March 8, 2001) Keyword “online grocery”

Red Herring – “Can Offline Grocers fill Baskets Online?”

(March 6, 2001)

Reuters – “For Webvan $1 Billion Doesn’t Go Very Far”

(February 21, 2001)

Reuters – “Peapod Q4 Loss Widens, Company Needs More Cash”