Photo: Peapod
Does Peapod’s retreat from the Midwest spell trouble for e-grocery?
Peapod, founded in Evanston, IL in 1989, plans to shutter its Midwest division, apparently due to newer competition and a lack of traditional brick-and-mortar locations in the region to support BOPIS.
Ahold USA, which acquired Peapod in 2000, said the closing will allow the company to expand omnichannel capabilities on the East Coast, where Ahold operates the largest grocery retail group. Banners include Stop & Shop, Giant Food, Giant/Martin’s, Food Lion and Hannaford.
“This was a difficult decision given Peapod’s rich history in the Midwest,” Ahold Delhaize USA CEO Kevin Holt said in a statement. He added, “This move will enable us to fully focus on markets where we have strong store density, leading market share and a longstanding heritage of customer loyalty.”
The division, covering Illinois, Wisconsin and Indiana, comprised $97 million of Ahold’s total online revenue of $1.1 billion in the U.S. The company will eliminate approximately 500 jobs, closing a distribution center and food preparation facility in Lake Zurich, IL; distribution facilities in Chicago, Milwaukee and Indianapolis; and a pickup point in Palatine, IL. Peapod Digital Labs’ will keep its headquarters in Chicago. Ahold said it still expects 30 percent e-commerce sales growth in 2020.
Peapod, the first online grocer in the U.S., has faced increasing competition from Amazon in the Midwest. The 2017 acquisition of Whole Foods further provided Amazon with numerous pickup points. Peapod only had one pickup spot, in Palatine.
Instacart also arrived in Chicago in 2013 and quickly signed up Whole Foods, Dominick’s, Costco and Mariano’s for home delivery in the area. Instacart users have access to a wider variety of products across banners compared to the more limited selection Peapod carries.
Speaking to the Chicago Tribune, Scott DeGraeve, a former SVP at Peapod, said it was “surprising and disappointing” that Peapod’s Midwest division wasn’t acquired by another grocery chain with stores in the area.
“It’s becoming clear that the success in the online grocery space is a true omnichannel approach,” added Mr. DeGraeve, now co-founder and COO of Locai Solutions, an e-commerce consulting firm for grocery stores. “What’s successful is the brick-and-mortar retail that also offers the online offerings rather than pure-play online only.”
- Ahold Delhaize USA to Close Midwest Online Grocery Sales Operations; Focus on Accelerating East Coast Omnichannel Growth – Ahold Delhaize USA
- Peapod’s Midwest exit demonstrates lasting power of brick-and-mortar – Crain’s Chicago Business
- Peapod, based in Chicago, is shutting down grocery delivery in the Midwest and cutting 500 jobs – Chicago Tribune
- Ahold Delhaize USA’s Peapod Midwest division to close – Supermarket News
Discussion Questions
DISCUSSION QUESTIONS: Does Peapod’s closure of its Midwest operations underscore that having nearby pickup locations is essential to e-grocery? What other factors may have played a role in Peapod’s exit from the Midwest?
Poll
BrainTrust
Ben Ball
Senior Vice President, Dechert-Hampe (retired)
Michael La Kier
Vice President, Brand Development - IGA, Inc.
Online grocery (BOPIS and home delivery) is a challenging business and profitability on these transactions is extremely difficult to achieve. The last mile of delivery is the most difficult challenge to solve from a profitability perspective. Without the ability for Peapod to offer in-store pick-up in the Midwest, it appears to be a smart financial decision to close those operations and focus on the markets that are more successful for their business model.
It underscores the fact that online grocery is not particularly profitable, especially for retailers that don’t have profitable stores to counterbalance the margin erosion from online. This dynamic is becoming worse as more players enter the market and as free, fast delivery is increasingly expected by consumers.
Peapod was the grand daddy of home delivery many, many years ago. Things have evolved and people have learned how to do it better, at more locations, and with faster service. If Peapod cannot adapt, it must evaluate its options and take action to stop losing money where it cannot win.
It’s not so much adapting as it is recognizing the strengths and weaknesses of the business model. 1) It needs to be linked with stores. They don’t have stores in the Midwest. 2) It was too late for them to work with other stores, who already developed other arrangements. 3) In markets with Ahold stores, it was branded separately as Peapod, but now in those various markets, the Peapod brand is being deemphasized in favor of the store banner.
It is telling that the success of a delivery service is/was based on store density. That seems to bode well for strong national and regional chains who invest in competitive pickup and delivery options. But the core of Peapod’s operational problem in the Midwest division was the centralized distribution center model. FedEx, UPS and even Amazon figured that one out long ago. Ahold did not separate the business models of delivery and stores in the Midwest market. That let Instacart win the delivery business with the contract model that lets customers order what they want from where they want. Peapod could fare better in strong Ahold markets.
Peapod does just fine in Ahold markets.
There are a great series of Spectrum commercials with the theme, “maybe there is a better way?” As so often happens the ones who break ground are left behind by those who take the ideas, adjust them and do them better. ( Remember your favorite search engines, Yahoo!, Magellan, Lycos, Infoseek, and Excite?)
The challenge for online grocery outside of cities is, where do I leave the groceries? There is nobody at home to receive the fresh produce and frozen product. An easy solution for the consumer is to order online and pick the order up when on the way home from work or as one is running errands around town. If you can’t meet this need and others have managed to meet it, you are simply out of business.
I am a Peapod shopper on Cape Cod and I wasn’t even aware of the BOPIS option. I believe this Midwest closure has little to do with BOPIS and everything to do with attachment to the brand and the cost of delivery. Stop & Shop and Hannaford have a loyal following in New England, they have many distribution centers and hundreds of stores. I believe their routes are more economical given the logistics involved with more compact geography and number of distribution options (stores and distribution centers). This would allow them to be more efficient and more competitive in markets where they own retail real estate.
We are still in the early stages of online grocery, which includes home delivery and BOPIS. We will see companies come and go. Some are figuring out the nuances of the business quicker than others. I don’t think Peapod’s closure of the Midwest operation is an issue. There are plenty of competitors waiting to take over retailers looking for a partner in this part of their business.
It remains incredible to me that e-grocery ever reached this level of shiny bauble hype. What grocers should recognize is:
Yep. This is in my feed.
This further reinforces the notion that any e-commerce success is closely tied to the proximity of stores to consumers. This is in turn compounded by the high-cost, low-margin (if any) business of e-grocery without the backbone of stores to offset the costs/losses of e-grocery delivery. BOPIS is a factor here in that most consumers seem to be using more pickup services for groceries than delivery. This makes sense as many consumers (my household included) can’t guarantee they’ll be home at the exact time groceries would be delivered – what do you then do with fresh and frozen foods? Lacking stores, pickup points then become a requirement for a successful e-grocery business. The best indicator of this is that Walmart decides to promote its grocery pickup with a Super Bowl commercial rather than focus on delivery. Peapod may have been the first but, without stores to anchor them, they simply couldn’t innovate enough to make the business worthwhile.
Not exactly the case. It depends on the retail category. Obviously, Amazon’s general e-commerce success isn’t tied to stores–even categories like apparel are proving susceptible to non-store linked e-commerce.
Food is a category with different characteristics and conditions. Not only do many consumers like to pick the products, the margins are abysmal and only helped by the fact that in supermarkets, customers do picking and delivery. If you take on picking and delivery, have to worry about product safety in the supply chain (refrigeration) and the margins are abysmal anyway, how can you make any money?
Well, I’d say only Amazon can be Amazon! 🙂
So, yes, Amazon can demonstrate e-commerce success without stores (although I suspect a number of BrainTrust members will want to chime in here and debate the point of how much money Amazon makes on e-commerce that is profitable), we can look at many examples of online-only brands that felt compelled to open stores to continue growing and have any hope of reaching profitability.
Likewise, there are just as many examples of retailers who see a downturn in e-commerce sales in a zip code where they close a store (see Macy’s for example). Brands like Everlane, Bonobos, and Indochino all started online and ended up opening stores. This didn’t have anything to do with BOPIS per se, it was about growth and profitability. Indochino, for example, has shown a direct correlation to an increase in sales measured in the millions when they open a new store in a given geographic region.
Granted, none of these is grocery — and yes, food has many unique problems to solve for delivery, in particular, not to mention picking and packing that eat away margin like crazy.
One of the most important marketing books I ever read c. 1989, was _Maximarketing_. It promoted omnichannel before that was a term, and it was a few years before the graphical web was “invented.” Amazon, yes, can get away without having stores. They built the platform around books and CDs, which are pretty straightforward, and then as people built their familiarity, Amazon kept growing the platform, and you’re right, probably there is only room for them (as Jet/Walmart is discovering).
WRT “brands” like Warby Parker opening stores, to me it’s merely an example of maximarketing or omnichannel. (Just like Lands’ End has some stores, or REI or L.L.Bean’s store in Maine.)
It’s especially difficult to build brand awareness these days given the decline of mass media (network tv and mass delivered magazines in particular, and national advertising in newspapers, and newspapers generally).
Landmark or flagship stores in highly visible and trafficed areas ought to be a key element in the marketing mix for just about every major brand outside of Amazon.
This is a good example of strategic retreat. The godfather of home delivery recognized the variables to keep its operations profitable and growing. The Midwest operation was responsible for less than 9 percent of Peapod’s sales and I suspect it was not profitable. Given the changing marketplace in the Midwest noted in the article, Peapod retreating to its comfort zone on the East Coast makes strategic and financial sense.
Not sure this is tied to pickup locations. The Midwest is big. It’s rural and suburban, excepting the major cities like Chicago. Less than 10% of the business was coming from these midwestern routes and profitability must have been tight given the number of competitors in the region like Instacart and Amazon.
For Ahold, this is a financial decision more than anything else. The cost to have a driver ship fresh produce and cold chain stuff is not cheap, and the last mile is where the rubber meets the road. Focusing resources in proven markets with stronger growth makes sense. Exiting a market is still difficult.
A secondary reason for this move may be a shift to management at the corporate level for Ahold which is based on the East Coast. Consummation of the acquisition and maybe a way to make their investment work in concert with the parents brick and mortar footprint.
For grocery, curbside pickup and omnichannel are growing at faster rates than delivery for so many reasons. The online pure-play options are not going to cut it.
US online grocery is small but on a rapid rise. The market has grown from $12B in 2016 to $34B in 2019. There is plenty of room to increase as the size of the overall grocery market is over $635B. Big grocery players are investing in e-commerce infrastructure, forcing the smaller players to offer digital services to stay competitive. But almost everyone is losing money. And adoption is low, with 10% of US consumers saying they regularly shop online for groceries.
It is against this background that Peapod closed its Midwest operations this past week. Once a leader in the space, the closing shows how difficult (and expensive) it is to build out a grocery delivery program. Maybe everyone wants to buy their groceries online, but nobody wants to pay the true cost?
“Success in the online grocery space is a true omnichannel approach” which could be translated as “there’s no chance for success in online, by itself.” Interpretation of this closure is likely to be dependent on one’s preconceptions: skeptics (hand raised) will see it as another sign that the concept will never be much more than a loss-leader. Fans will note the “because of competition” claim and take that as proof of a vibrant sector.