The Tough Reality of Online Grocery Business

The online grocery

The online grocery turned out to be a lot tougher than analysts thought a few years ago. Many of the early online grocers, including Webvan, ShopLink, StreamLine, Kosmom, Homeruns, and PDQuick, went bankrupt and out of business. At one time, Webvan had 46 percent of the online grocery business, but it still wasn’t profitable enough to survive. The new business model for online grocers is to be part of an existing brick-and-mortar chain. Large grocery chains, like Safeway and Albertson’s, are experiencing sales growth in their online business but have yet to turn a profit.

Jupiter Research estimates that online grocery sales will be over $5 billion by 2007, about 1 percent of all grocery sales, while it expects more than 5 percent of all retail sales to be online by then. A few years ago, optimistic analysts estimated online grocery sales would be 10 to 20 times that by 2005, but it didn’t work out that way. One of the few online grocers to survive in 2003 is Peapod, the first online grocer, started by brothers Andrew and Thomas Parkinson in 1990.

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However, even Peapod was failing until 2001 when Dutch grocery giant Royal Ahold purchased controlling interest in the company for $73 million. Peapod operates in five markets, mainly by closely affiliating itself with Ahold-owned grocery chains. Peapod by Giant is in the Washington, DC, area, while Peapod by Stop and Shop runs in Boston, New York, and Connecticut. The exception is Chicago, where Peapod operates without an affiliation with a local grocery chain. Peapod executives claim the company is growing by 25 percent annually and has 130,000 customers, and all of its markets except Connecticut are profitable.

Average order size is up to $143 from $106 three years earlier. The online grocery business seemed like a sure winner in the 1990s. Dual-income families strapped for time could simply go online to do their grocery shopping. They has about the same choices of products that they would have had if they went to a brick-and-mortar grocery, about 20,000 SKUs (stockkeeping units). They could browse the “aisles” on their home computers and place orders via computer, fax or telephone. The orders were filled at ffiliated stores and delivered to their homes in a 90-minute window, saving them time and effort and simplifying their daily lives. For all this convenience, consumers were willing to pay a monthly fee and a fee per order for packaging, shipping, and delivery. Since most of the products purchased were well-known branded items, consumer faced little risk in buying their traditional foodstuffs. Even perishables like produce and meat could be counted on to be high quality, and if consumers were concerned, they could make a quick trip to a brick-and-mortar grocery for these selections.

However, while all of this sounded good, most consumers didn’t change their grocery shopping habits to take advantage of the online alternative. Currently analysts do not expect the online grocery industry to take off in the near future, if ever. Miles Cook of Bain & Company estimates that only 8 to 10 percent of U. S. consumers will find ordering groceries online appealing, but only about 1 percent will ever do so. He concludes: “This is going to remain a niche offering in a few markets. It’s not going to be a national mainstream offering. Jupiter Media Metrix analyst Ken Cassar concludes that “The moral of the story is that the ability to build a better mousetrap must be measured against consumers’ willingness to buy it. ”

Question:

1. What behaviors are involved in online grocery shopping? How does online shopping compare with traditional shopping in terms of behavioral effort?
2. What types of consumers are likely to value online grocery shopping from Peapod?
3. Overall, what do you think about the idea of online grocery shopping? How does it compare with simply eating in restaurants and avoiding grocery shopping and cooking altogether?

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