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The Return of the Online Grocer

By Denise Purcell
 

Remember WebVan and ShopLink? The rise and fall of once-promising and now-defunct e-retailing upstarts left the impression that the online grocery shopping concept was too ambitious or experimental to succeed. A combination of miscalculations shuttered early online grocers: aggressive expansion; related expenses of establishing warehouses and truck fleets; overly optimistic anticipated order volume; and complex websites.   Now, nearly four years after the highly publicized dotcom downturn, a new generation of grocery e-retailers has hit the Internet. But, unlike dotcom’s bandwagon-jumping heyday, today’s merchants are coming onboard with tested or retooled business models. For many, this means an affiliation with brick-and-mortar stores for buying power, distribution and fulfillment ease—criteria that often eluded their predecessors. Others are still around from the first e-retailing wave but with more user-

GourmetFoodMall's CEO Andrew Restivo (right) and National Sales Director Gerald Williams (left) offer a shopping mall platform for 150 specialty food purveyors.

friendly websites. Together with the influx of high-speed Internet connections common in most homes, these improvements are raising consumers’ comfort levels with online shopping. Finally, rather than low prices—the hallmark of the first generation—today’s online grocers highlight product quality as much as user convenience—a trend that has spawned a surge in sites that showcase fresh, natural, organic and specialty foods.
 

Realistic Expectations
Online grocery is a fast-growing niche. Although consumer usage remains in single digits (around 3 percent, mainly due to shopper hesitation or services being unavailable in certain areas), a market exists, says Christine Overby, principal analyst at Cambridge, Mass.-based Forrester Research. “It is a small e-commerce category but one with high growth curves,” she adds. According to Forrester data, online food and beverage sales could grow from $3.7 billion in 2003 to $17.4 billion in 2008—accounting for 4 percent of total retail food sales.

The failure of some early grocery websites did not mean that consumers disliked the service, just that operations needed evaluation. “After the dotcom bubble burst, people who were shopping online continued to do so at remaining sites. The re-education that is happening is not necessarily from the online consumer,” Overby continues. “It is a resetting of expectations on the business side.”

The focus is now on getting the business model and execution right, explains Scott DeGraeve, senior vice president and general manager of Peapod LLC, Skokie, Ill. Its online grocery shopping site www.peapod.com operates in 15 markets around the East Coast and Midwest, offering about 11,000 items, including produce, meat, seafood, deli, prepared foods, natural and organic, kosher, wine and beer.

Though it launched in 1989, prior to the dotcom boom, Peapod faced some consumer skepticism following e-commerce’s downslide. “We heard for awhile ‘we thought you were out of business,’ but that’s lessening,” DeGraeve notes. “Re-awareness building was required, letting people know we were still here and offering better service than ever.”

With repeat shopping the driving force to success, a main service improvement for peapod.com and others was to the functionality of the sites themselves. Compared to original online shopping lists that needed to be retyped or re-clicked for each visit, now Peapod keeps a master of customers’ previous purchases for convenience. In addition, consumers may sort shopping lists by sales items or lowest unit price or based on nutritional criteria. “One of our greatest advantages is the ability for customers to navigate items to see labeling or ingredients. They can sort by carb or fat content or search for organic foods. It allows customers to be health-conscious while shopping online, which is a big concern now,” notes DeGraeve.

Bricks and Clicks
Most thriving online grocers have benefited by affiliating with traditional retailers, where they can leverage the stores’ infrastructure to provide cost efficiencies and better fulfillment models. In fact, conventional retailers themselves have launched some of the most successful online services. Established chains such as Safeway and Albertsons have grown online businesses in areas where they already had a strong retail presence. Using their own stores as warehouses, they save the cost of setting up distribution centers.

The 2001 acquisition by Royal Ahold nv, an international retail and foodservice company based in the Netherlands, has allowed Peapod to expand its online business by co-branding with Ahold U.S.A. chains Stop and Shop and Giant. In addition to exercising the buying power of Royal Ahold to make higher-volume, lower-priced purchases, the affiliation allows Peapod to manage distribution and transportation costs. Orders are filled from eight warerooms, dedicated areas adjacent to partner stores in Massachusetts, Connecticut, Rhode Island, New York and New Jersey as well as through two 75,000-square-foot warehouses in Chicago and Washington, D.C. Since the acquisition, Peapod has expanded to more than 155,000 customers, boasting annual sales increases of nearly 30 percent, says DeGraeve. Plans call for the online service to expand to new markets in Ahold’s footprint.

Netgrocer.com, an online grocery service since 1995, was acquired and privatized by ShopRite of Oakland, N.J., a member of retailer-owned cooperative Wakefern Food Corporation. Since the affiliation in November 2003, the site has grown to about 30,000 products with nearly 450,000 repeat customers. The e-retailer has increased efficiencies as part of Wakefern, which operates 2.5 million square feet of warehousing and one of the East Coast’s largest private transportation fleets.

“Having Wakefern’s buying power behind us, as well as its fulfillment and quality guarantee is a distinct advantage,” says Owner Bob Clare. When an order comes in, the product is shipped from Wakefern’s distribution center to Shop-Rite of Oakland’s dedicated on-site fulfillment center for shipping within 20 hours to Netgrocer.com customers. Orders are shipped nationwide via Fedex, UPS or standard mail.

Grocers interested in exploring an online business component, but who find the technology or logistics daunting, may opt to partner with companies such as MyWebGrocer.com. Headquartered in Manhattan, MyWebGrocer.com creates and powers retailers’ online ordering systems. Shoppers connect to a grocer’s web store though its own URL, but the page is operated through MyWebGrocer. Customers’ orders are routed directly to the store and can either be delivered or picked up, depending on individual retailer’s fulfillment policies. MyWebGrocer targets independent and chain grocers and serves more than 160 supermarkets in 20 states, including Dorothy Lane Market in Dayton, Ohio, and Harris Teeter in Charlotte, N.C.

A 300,000-Square-Foot Anomaly
An anomaly to the brick-and-click model is three-year-old FreshDirect, which has become a leading online fresh food manufacturing and delivery service. (See sidebar, p. 25). The site, which services more than 100,000 customers in Manhattan, Brooklyn and Queens, recently delivered its two millionth order. “They’re an interesting exception to the traditional-with-online rule because they deliver a valuable service without real offline connections,” notes Overby from Forrester.

Instead, by sourcing directly and preparing food on the premises, the operation has reinvented grocery’s traditional supply structure, resulting in quality control and competitive pricing.

Responding to FreshDirect’s popularity, more sites have cropped up to service New York’s receptive do-it-for-me clientele. Most, such as thefoodempor ium.com or xpressgrocer.com, an arm of Gristedes markets, are affiliated with traditional retailers. “In general, the industry treads lightly with online; sites come in with established stores. We’ve made an impact in pushing stores to develop a web business for the convenience factor,” notes Ken Blanchette, vice president, specialty foods. “But the marketplace is not infinite. Sites that offer the least service and worst products won’t fare well.”

Better Than the Supermarket

Quality is the key to repeat online sales, particularly in perishables, which consumers habitually like to pick out for themselves. While some brick-and-click services rely on a pick-in-store model, other e-retailers opt for centralized distribution or dedicated fulfillment centers to limit handling.

Peapod’s personal shoppers fill orders from its warerooms or warehouses to maintain quality. To ensure temperature control, the merchant relies on its Stay Fresh delivery system, which controls climate from the warehouse, on the trucks and in the delivery bins.

The website also allows consumers to offer personal shoppers directives on perishables, such as to pick unripe bananas. “Produce is the most important category for quality,” notes DeGraeve. “We need to show customers that we can do it better than they do it themselves.”

Multi-Channel Mindset
Rather than fearing them as sales cannibals, online grocers have come to be viewed as another avenue of service that can augment brick-and-mortar sales. “Early versions thought people would only shop online, but over time the concept has changed to a multi-channel idea, with the online business bringing new customers to the offline,” explains Peapod’s DeGraeve. “We find it’s a loyalty builder with our affiliated retailers. If customers in a Stop and Shop trade area order online, they'll likely go to the store, bringing more overall spending to the chain,” he adds.

Online grocers estimate the market’s potential to reach 8-10 percent of brick-and-mortar sales. “If you look at how Internet savvy kids are today, that translates into future online shopping,” believes Netgrocer’s Clare. “It won’t take sales away from grocery stores; it’s just another way to shop.”

Many see the Internet as a complement, influencing sales across other channels. According to Jupiter Media data presented at “The Secrets of Successful E-Retailers,” a 2005 Winter Fancy Food Show Educational Program, for every $1 spent by consumers online, they spend an additional $6 offline as a result of the online search. “Consumers want to determine how they’ll do business with you—in your store, through a catalog or online,” says Andrew Restivo, owner of New Orleans’-based GourmetFoodMall.com. “An Internet purchase increases the overall sales a person will do with you.”

Flourishing of Specialty Foods
Driven by an appreciation of artisan products and a “public food revolution,” online specialty food e-retailers are flourishing, notes Forrester's Overby. In addition to FreshDirect's high-quality perishables and prepared items, consumers can shop Amazon.com's Gourmet Store, cheese and accouterment merchant igourmet.com and myriad others.

“The sites that went belly-up before competed against local grocery markets,” explains Restivo of GourmetFoodMall.com, an online shopping mall that provides a platform for about 150 specialty food purveyors in 40 categories to host websites. “Specialty food has been a slower adopter to the Internet, but the movement is gaining momentum. It’s an area that could see double-digit growth.”

Specialty products are viewed by consumers as an added benefit because of their quality, says Peapod’s DeGraeve. In the Chicago market, where it is not linked to an Ahold retailer, the grocer has experimented with specialty offerings through a Chicago’s Best area, offering lines such as Charlie Trotter products. The e-retailer has also formed a partnership with Wild Oats Markets, to sell its private-label products through peapod.com.

“If I were a specialty food retailer I wouldn’t look at sites as competition. I’d take advantage of their growing popularity and think how I could offer online service to local customers,” says Overby. “There is a powerful urge, especially for foodies, who want to go to wine and cheese shops and sample and talk to purveyors. They won’t stop doing that, even if they shop online.”

Merchants can be at a disadvantage without an online component to enhance growth. It’s another location for educating consumers. Says Restivo, “Specialty foods have a great story. Retailers need to get it out through a number of venues.

“Your customers use the Internet. Let them learn more about products from your site. This is a customer-focused industry and that needs to be replicated online. It will promote more sales per square foot overall.”

Denise Purcell is managing editor of Specialty Food Magazine.