In Search of Online Grocery Profits

Discussion
Sep 10, 2009
George Anderson

By George Anderson

Companies have been looking to strike gold with online
grocery services for years. The list of those that have tried and failed is
significantly longer than those that have succeeded.

Peapod is among the survivors.
The Ahold-owned company is celebrating 20 years of taking orders and delivering
groceries to consumers. Today the company, which estimates it has filled 14
million orders, serves 360,000 households in 22 markets.

Thomas Parkinson,
co-founder and chief technology officer of Peapod, recalled the early days
of the business where he helped customers with their dial-up modems.

“There were moments of sweat rolling down my face as I
thought I’d messed up someone’s hard drive,” Mr. Thomas told the Chicago
Sun-Times
. “One woman asked, ‘What do I use this foot
pedal for?’ Turned out, it was the mouse.”

It’s unlikely that one of the newest
players in the online grocery business, GroceryU.com, will find much mouse
confusion among its customers. The service, started by three seniors at Penn
State University, offers students on the campus who do not have a car a means
to get groceries without getting on a bus.

“For the last two years, I’ve lived
with four other guys, and it was a hassle because none of us had a car,” co-founder
Tyler Droney told The Daily Collegian.

GroceryU requires a $40 minimum
order and charges a delivery fee of $5 for orders under $100. Orders of more
than $100 are free, Mr. Droney said.

Discussion
Questions: How do you perceive the state of online grocery today? What
do you see as the future prospects for online grocers? Is there a company (or
companies) that you believe has figured the business out?

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17 Comments on "In Search of Online Grocery Profits"


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Marc Gordon
Guest
Marc Gordon
11 years 7 months ago

Beyond cost savings, if any, I have always wondered if people just don’t trust others to pick out their groceries. After all, would you trust someone you don’t know to smell a tomato, knock a watermelon, or pass on a bruised banana? I think not.

Max Goldberg
Guest
11 years 7 months ago

The online grocery business is not thriving. As the article points out, the path to success is littered with companies that have futilely spent tens of millions of dollars. The questions are how much consumers are willing to pay for convenience and how great the produce and meat are. I don’t see that changing, nor do I see venture capitalists clamoring to pour money into more online grocery businesses.

Len Lewis
Guest
Len Lewis
11 years 7 months ago

After all this time, I don’t know if anyone has the right model. Maybe it’s still something we haven’t seen yet?

Or, maybe it’s never going to be anything more than a staples-type business.

Gene Hoffman
Guest
Gene Hoffman
11 years 7 months ago

The online grocery business pits convenient service versus higher costs. During the current economic climate the upside is minimal if even existent. When the economy recovers and time continues to magnetize more consumer activities, then online grocery will get back into the game, particularly if eating at home continues to diminish.

It comes down to what are you willing to pay to save time and avoid mingling with other human beings in a brick and mortar store in Tomorrowland.

Nikki Baird
Guest
Nikki Baird
11 years 7 months ago
I think this is a nascent space about to see its second renaissance. RSR’s research into retailers’ cross-channel technology buying intentions shows that grocery retailers have big plans–if not big budgets. That said, I don’t think it will be ultimately the “whole store online” that makes the difference for online grocery. People do like to pick out their own fresh produce. But there is a whole world of center store out there that many consumers never see. Between SKU proliferation on the part of CPG manufacturers looking to extend product lines and retailers trying to localize and/or pare down assortments, the natural place for the “long tail” of grocery products is online. I think grocery will be the most cross-channel of all verticals, when the dust settles. Consumers will still make their weekly trips, but it will be in an environment that looks more like the local farmer’s market than the current grocery store environs. I can easily see my local grocery store as stocking only very high-frequency center store items, a larger array of… Read more »
David Livingston
Guest
11 years 7 months ago

No one has figured out how to do online groceries for main-stream America. It’s simply too easy for most of us to get in the car and drive to Wal-Mart or Aldi to chase the low prices. Shopping is still a pleasant experience for most of us. Since online grocers are low volume, they can’t be price competitive. Perhaps when gas gets to be $20 a gallon, we are all 85 years old and can’t drive, or the population density increases to where we don’t want to drive, then maybe we will be inclined to shop online.

Lee Peterson
Guest
11 years 7 months ago

Given how innovation-adverse/operations-first most grocers are, it’s easy to see why on-line ordering/delivery hasn’t succeeded. The facts are there: it failed once, so, let someone else figure it out.

At the end of the day though, the model is going to have to require the customer to pay for delivery, which will limit its size. But if a combo model of order online and pick up along with straight delivery surfaces, then I think you’d have something. Order what you know you’re going to get, but actually shop for the things you consider “fresh.”

Tony Orlando
Guest
11 years 7 months ago

People in rural, low-income areas will NEVER buy online groceries, they simply cannot afford the charges.

Yes, you can do online specialty goods, but the day-to-day goods will always be priced and displayed better at a free standing store. Groceries are being delivered as we read this to many major cities to satisfy urbanites with dual incomes but until someone invents a system that has super low prices, and no delivery charge, I find it impossible to deliver the goods and show a profit as well.

Good luck to anyone who can do this well.

Joel Warady
Guest
Joel Warady
11 years 7 months ago

Certainly Peapod, after a rough start, has seen success. As well, Fresh Express in NY seems to have the right model for the right market. This does not mean that the online model will work in every city. You need a concentrated urban setting, and a large population to make this model work. All that being said, even with those requirements met, there is no guarantee that online shopping will work.

The technology will continue to need to improve. 3-D Imaging. Streaming video. Personal shoppers. Web 3.0 implementation. As all of these things become commonplace on the Internet, the online shopping experience will become more intuitive, and more convenient. Only then will we see the widespread use of the service.

John Bajorek
Guest
John Bajorek
11 years 7 months ago

Online ordering may have peaked before the mass consumer audience was ready, but it is not dead. in addition to the known online services like Peapod and NetGrocer, numerous national (Albertsons, Kroger…) and regional grocery chains (Buehlers) are taking another look into ordering online. Although not perfected, the service could be an ideal service extension to help people that are traditionally “time-starved” as well as an older population that may not want the frustration of pushing a cart. The real test will be in produce and other items like meat and poultry where personal preference is needed. Perhaps the real challenge to the success of the service is tied directly to the level of personalization/customization available–do you want a hard or soft ripe tomato?

Anton Xavier
Guest
Anton Xavier
11 years 7 months ago

As Nikki Baird states, the online grocer niche lies in center aisle products and the long tail.

To take this concept a step further, online grocers will also leverage technology to deliver online services unique from the in-store experience in order to be successful.

This will include tools for comparing prices & food labels, coupon delivery, hyper targeted advertising and product specials, and value added features such as dietary planning and analysis.

It is also true that the low volume, high cost model restricts the development of the online grocer market. A solution to this may be 3rd party sites/services that focus more on pick up than delivery and aggregate the volume of several retailers to lower costs and increase margins. Mysupermarket.com in the UK, and Mywebgrocer.com demonstrate the success of these models to some degree.

It is a tough market to crack but as data services and online retail science progress we expect this market to mature.

Gene Detroyer
Guest
11 years 7 months ago
Maybe I am missing something or maybe because I live in New York City. Without exaggeration, everyone I know purchases their groceries online. It is CHEAPER and more convenient. That doesn’t mean that grocery shopping is inconvenient. I can walk to 3 supermarkets and 2 chain drugs within 200 yards of my home. One supermarket is in the building next door. But, why even do that when you can get everything you want without leaving your home and delivered at your convenience. And it is CHEAPER. The delivery business model makes sense. The cost of delivery is not an addition to costs. The cost of delivery is a replacement for operating multiple brick and mortar stores. And, did I mention time. I (my wife) can do a week’s worth of groceries online in 15 minutes. She can’t do a week’s worth of grocery shopping in a store in less than an hour. Online retailing will be the norm for all types of retail categories. Those retailers who don’t plan on it will be left in… Read more »
Bill Bittner
Guest
Bill Bittner
11 years 7 months ago
When I think about online grocery shopping I am reminded of the articles describing the introduction of shopping carts. The retailers actually hired actors and actresses to push carts around the store so the real customers could learn how they were to be used. Colleges are probably a good place to introduce online grocery shopping, because you are dealing with new shoppers who don’t have old habits to break. I don’t know how it works in a group situation though, as I recall my college experience it was pretty risky to leave anything edible in the refrigerator. Not everyone thinks about buying their meals ahead of time. The challenge with grocery deliveries is always the need to maintain the cold chain. You don’t want to melt the ice cream. For that reason, I think there is an opportunity for both delivery and store pickup. I only have one frequent shopper card, so I can only comment on my experience with A&P. I have been very impressed with their recent ad campaign and the integration of… Read more »
Bernice Hurst
Guest
11 years 7 months ago

Coincidentally, this story appeared in The Guardian today. Al Gore gives Ocado green-cred – and 7m….

I’ve used Ocado lots over the years, and have done a lot of research into the ups and downs of the other supermarkets’ offerings. This one is as close to good as it gets and I still have confidence that if anyone can make it work, Ocado will.

The market is, of course, very different over here because of distances involved but as long as an online retailer works in sensible geographic areas, with extremely well-planned delivery routes, I do believe there is hope. It works in NYC, as most of you know, and I think the new student business discussed has a good chance for the same reason. It’s all about the audience, folks.

Mike Romano
Guest
Mike Romano
11 years 7 months ago

This concept might–might–work in 5% of the US with dense populations, e.g. NYC. For the other 95% of us, online grocery is a losing game for grocers. Stop wasting your investment dollars. You’re better off handing out a $5 off $25 coupon to customers to come to your store rather than your competitors, than losing $5 per online order. As my old grocery boss once told me, “We’re really good at getting groceries into the store, we’re just not very good at driving groceries out of the store.”

Dave Hamel
Guest
Dave Hamel
11 years 7 months ago

When I worked at ShopLocal.com (going on three years) we experimented with decomposing weekly grocery circulars for search by local consumers. It was a dismal failure. As we talked with consumers, the content of those circulars did not represent enough reason to look online (circulars only hold a hundred items or so). Consumers already had a store or two in their considered set; only a handful of price-sensitive consumables, such as diapers and milk, seemed to sway where they were going to shop.

I had lunch with Andrew Parkinson, the founder of PeaPod, when I was leaving ShopLocal. The challenge in their model was travel costs (personnel and out-of-pocket). Efficiency was needed. They were looking at the time at how to become a quick-service supplier of office products, including food, to make trips more productive. Plus, their model perhaps works best in buildings with multiple units and a doorman (e.g. NYC) because of delivery efficiencies and someone there to receive the delivery, and less so in the suburbs.

Marge Laney
Guest
11 years 7 months ago

I hate grocery shopping. I would love to be able to shop on line for center-of-the-store products, and then go to the farmers market for fruits and vegetables and to our local meat market for meat that I want the day I want to use it. But, alas, I live in Houston and with the exception of Rice Epicurian Market, there are no grocers that offer delivery. One web site I checked even suggested that I hire a teenage neighbor to do my shopping for me!

I can definitely see this working as it does in cities like New York, but in spread out cities like Houston, I’m not so sure. There would have to be a major sea change in consumer attitude for it to become realistic on a large scale.

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