Another Online Grocery Service Bites the Dust
The consortium led by the Cerberus Group that took part of the Albertsons chain private is closing down the company’s online grocery and home delivery service.
Speculation is the supermarket chain took this step because it was simply not making money (or at least not enough) to justify continuing with the service.
George Whalin, president and CEO of Retail Management Consultants and a RetailWire BrainTrust panelist, told the San Jose Mercury News, “I’d heard it’s been struggling
for some time. I think online is not necessarily a viable way to sell groceries.”
Albertsons LLC called the move “a strategic business decision” and refused to comment on the profitability of the discontinued service.
According to Quyen Ha, a company spokesperson, Albertsons made the move “to make sure we have the best in-store shopping experience. We think this will allow us to concentrate
our resources and capital on store enhancements.”
Albertsons LLC’s decision to close its online grocery and home delivery service opens things up for others in markets where the company has stores.
Safeway, for example, said it would continue to operate its online and delivery service.
Jennifer Webber, a spokesperson for Safeway, said, “We’re very pleased with safeway.com, and the response from customers has been great. Safeway.com is something we are committed
to and a service we are happy to be able to provide for our customers.”
Supervalu, which purchased the greatest number of Albertsons stores, appears committed to continue online ordering and delivery in markets where the service is offered.
Shannon Bennett, a spokeswoman for SuperValu, told The Idaho Statesman, “Online grocery shopping is another channel through which we are able to deliver convenience to
our customers, and it will continue to be an important part of our business going forward.”
Discussion Question: Does the value of online grocery and home delivery or store pickup services go beyond the actual dollars and cents profits these
operations deliver to a supermarket’s bottom line? What are commonalties shared by the (apparently) successful online services that make them so?
As the population continues to age, online shopping is going to become a far more important component of the grocery business. We’re already seeing middle-aged moms saying shopping is up there with housework as a pleasurable pastime.
The real question is, should a grocer lose money while establishing its service or wait until it can be a profitable business? In my opinion, the former is preferable, because it will allow people to try out the service before they really need it. Peapod is building loyalty because its customers have a good experience, are happy with the quality of the goods delivered, and even have a bit of “chic” appeal.
At some point, grocers will find a way to make online shopping less expensive than shopping at a store location, and at that point, the shopping audience is going to split into those who want convenience and perhaps a small price break, and those who want to shop personally to select their own steaks or take advantage of in-store specials.
At that point, it might be too late to get into online retailing.
The question suggests that there is value to a money-losing business proposition. The answer seems simple enough to determine – if the online service brings in more new shoppers to the chain than the chain would have without online services, and if the value of these newly obtained shoppers is greater than the losses they are incurring, then you keep online. This is a simple financial decision.
Cerberus really doesn’t want to be in the brick and mortar supermarket business — why would they want the hassle of a money losing online operation?
Time and money would be better spent doing something with the stores — some of which haven’t seen a paint job in 10 years.
I think Cerberus got out of online shopping for two reasons. First, it is not profitable and second, I don’t think they intend to stay in the grocery business anyway. Since they are in the brick and mortar business, online shopping probably had no value to them or anyone else.
As far as I know there are no successful online grocers in the USA. Just because some are still in business does not mean they are successful. SuperValu did a very detailed study on this a few years ago that clearly outlined why online shopping will not be profitable. Their conclusions still apply today.
Retailers often use loss leaders as a means to project a price image and bring consumers into their stores. Offering online ordering and delivery or pickup services, even at a small loss, advances consumers’ perception of customer service and quality of a store. On the whole it is a plus. For those looking to achieve profitability the quickest, store pickup is the way to go. That is the most logical means to break into the business with delivery to come later when a grocer’s reputation for online excellence is established.
This is a tough one because while I believe that future successful grocery chains need an online service, this group has much bigger immediate issues and challenges to face. It probably makes the most sense to stop these losses in the short term and focus on their more pressing areas. They probably should make plans to re-enter this area sooner rather than later though and not let competition get too far ahead.
This really isn’t that complicated a situation. Cerberus is a financial buyer. The golden rule is to find ways to reduce costs without negatively impacting the positive cash flow. While this service may have many strategic arguments in its favor, and may even have been able to generate profits in the long term, if it isn’t profitable today and won’t generate positive cash flow in the immediate future, it gets cut. The same rule applies to other online and offline services or products that aren’t contributing to positive cash flow.
I think that Cerberus was correct in retreating from the on-line grocery business. Grocery retailing is not their core competency and operating an online grocery service demands a company with vast experience in Grocery retailing. As we have observed, even those with that experience have failed to make the online service viable. However, there are retailers with the commitment and resources to make on-line service work. My expectation is that the large retailers, i.e. Tesco, Safeway etc., will continue to develop and refine online shopping, and that refinement will benefit all retailers with an eye towards starting their own online presence.
The added costs of online grocery retailing are three times as high as the added value for the average consumer. The problem is, that the competition – the traditional supermarket – is so very efficient. Online grocery retailing does not have a chance to get more than a few percent of the market.
In traditional supermarkets the customer executes the most expensive activities of the supply chain: order-picking of single items and fine-distribution to the home. The costs of these two activities constitute on average 12 – 15 % of sales value, about the same percentage of the costs of the entire supply chain from supplier to POS-unit. On the other hand: the average customer is not willing to pay more than 5% of sales value for delivery services. In short: this is not a viable business proposition.
I wrote this analysis in 1997, when market potential of online grocery retailing was estimated at 20% by a big-five consultant.
If you are interested in the 1997 article or in our later analysis of online grocery potential, please let me know.
Now lemme get this straight:
– Albertsons LLC, the entity created by Cerberus to absorb the unprofitable Albertsons stores not acquired by SuperValu, has decided to drop online grocery shopping in several geographic markets.
– SuperValu says it will continue to offer online grocery shopping in those markets where it already exists and/or came with the acquisition of the Albertson stores.
The San Jose Mercury reported on the local angle only, and thus mis-played the story. So…
Is this another ominous sign of the demise of online grocery shopping? Or is it just a logical belt-tightening action by a group of finance-centric investors saddled with a white elephant supermarket business?
It’s well-established that online grocery shopping works well in some markets, for some customers, for some transactions. Peapod, now owned by Ahold USA, is reportedly contributing well. Safeway is staying the course also. Basha’s still offers the option here in Arizona. And FreshDirect in New York. Amazon.com just entered the market with a service so far limited to non-perishables.
With that in mind, let’s review two key points about online grocery shopping:
1) It’s a share-of-pantry game. All shoppers are split shoppers. Online/home delivery, done right, will target and capture a profitable slice of consumption for the most profitable households.
2) After 16 years of history, it’s still here. Peapod was launched in 1990. There have been lots of failures, but its backers still believe there’s money to be made.
Online shopping is similar to Loyalty Reward Programs, unless they are planned, conducted and maintained profitably, it becomes a challenge to justify their continued part in a retailer’s strategy.
It seems online grocery shopping is struggling in the US, which is a surprise considering the amount of online shopping that occurs in the States. Consumers demand convenience due to hectic lifestyles and the perception of in-store grocery shopping is becoming one of boredom and receives “chore” status. We have discussed several times the importance for a retailer to improve the in-store shopping experience due to this perception, and therefore you would imagine on-line scheduled (almost automated) grocery shopping to be the way forward, look at Peapod for example. This would suggest that online grocery shopping may be an area of potential growth in the future in this region.
If you look closely at Tesco in the UK, their online grocery delivery service is a huge part of their business and continues to grow by the year. They have proven that if planned efficiently and committed to throughout the business, online shopping and customer reward programs can be a massive plus to a retailer, both financially and in the form of many other non-financial benefits.
There is a new business model for online groceries lurking out there somewhere and someone is going to figure it out. When they do, others will copy and the retailers who already have a franchise with online shoppers will profit.
I certainly don’t know what the answer is, but I can think of a few things I would try. First of all, realize what you are offering to the consumer. Grocers have a franchise with consumers that is built on having fresh products available and backing up the quality of the merchandise with exceptional customer service. The online experience should do nothing to deter this.
I would try to make my online service offer broader categories than are in the store. I would work with manufacturers to offer appropriate new products and help the consumer pick the appropriate items. Maybe there needs to be an association with an Amazon or some other online retailer to provide a “total shopping experience,” but ultimately it is the grocery retailer who must stand by the experience. Targeted promotions could be a source of revenue, but they cannot be obnoxious.
The fundamental problem with online groceries is that they cannot eliminate the “run to the store.” While they’re there, the customer picks up longer term items and now you are right back where you started because there is no need to order online. Try to make grocery shopping a more planned activity by offering special online discounts for foods that have a longer shelf life and checklists that remind customers of items they might run out of and need to “run to the store.”
Energy costs are a big factor. Try to increase lead times so that more time can be spent coordinating deliveries. Only offer deliveries to certain sections of town on specific days or offer discounts on those days that encourage shoppers to coordinate their orders.
This is all going to take patience. It may not be profitable now or in the near future, but online shopping will become a way of life for many people and the retailers who have established themselves early will benefit.
Providing outstanding customer service isn’t sustainable if it isn’t profitable. There’s a huge difference in the lifetime value of a customer relationship between (1) customer A with 50 transactions annually, of which 3 are unprofitable and (2) customer B with 50 transactions annually, of which 40 are unprofitable. On-line grocery shoppers are much more likely to resemble customer B. The logistics costs often outrun the gross margin. Enhanced volume usually doesn’t enhance the margins enough.