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Pricey and perishable, online supermarkets struggle to deliver on their retail promise
Editor in Chief
One of the great perceived differences between American and European cultures is that Americans spend less time than Europeans shopping for food. While Europeans go to the market several times a week, goes the conventional thinking, Americans make one mega-trip every seven days.
Figures from A.C. Nielsen reveal that the average American household makes 94 trips a year to supermarkets and nine to warehouse clubs-and that’s not counting trips to the convenience store. Andersen Consulting reports that the average shopper spends 47 minutes at the supermarket. Assume 20 minutes of travel time to and from the store, that adds up to more than an hour a trip, twice a week. And that doesn’t count the time spent at convenience stores or warehouse clubs.
The future would seem bright, then, for online supermarkets. Customers could order groceries from home or office any time of day, arranging for delivery when it’s convenient for them. But Internet grocery shopping has been a slow starter, and even the most optimistic projections indicate it will be no more than a drop in the basket of overall grocery sales for at least the next five years.
The obstacles to overcome are related directly to the product and not to the technology: Unless the customer lives relatively close to the distribution center, the Internet grocer will have a hard time delivering perishables before they perish. And home delivery systems are expensive, jacking up the cost of products that consumers have traditionally bought based on price, observes Willard R. Bishop of Willard Bishop Consulting Ltd., a leading supermarket consultant based in Barrington, Ill.
Long time coming
But while online grocery sales may be a slow starter in the short term, most are predicting that sales will begin to increase at a much faster rate early in the next century. Andersen Consulting reports that 30% of consumers would pay a fee for more convenient grocery shopping and predicts that by 2007, 15% of U.S. households will prefer to shop for groceries online. And new online merchants will doubtless emerge to chase after the market.
In fact, the trend is already under way. WebVan Group Inc., an Oakland, Calif.-based Internet retailing company headed up by Louis Borders, the founder of Borders Books, has ambitious plans to build a multimillion-dollar online grocery business in just a few short years. WebVan already has its own warehouse and distribution plan in place and expects to start selling online this summer.
“There’s no question that the Internet will play a role in grocery sales in the future,” agrees Bishop, “but it will take a long time because the costs associated with delivery are quite substantial.”
In terms of demand, there is incredible growth potential for this category, says Geoffrey Ramsey, statistics manager at eMarketer, a New York-based aggregator of Internet news, information and statistics. “Food and beverages are something everyone needs, and one of the biggest issues with grocery shopping is convenience,” he says, adding that dual-income families are looking for quicker and faster ways to do things.
Online grocery shopping fits into the trend toward a speedier completion of household chores. First companies shortened cooking and cleaning times. Now they are working on shortening shopping. But while the pent-up demand is there, the supply is not, says Ramsey, because none of the current online grocers has figured out how to overcome the logistical problems of delivering perishable and bulky grocery items outside of major urban areas.
Internet grocery shopping for the most part is still available only in certain large urban markets, and the companies that do deliver nationally, like North Brunswick, N.J.-based NetGrocer Inc., use outside delivery firms, which makes buying groceries online cost-prohibitive for the average household. “Nobody has figured out how to do it so that it makes sense for the retailer,” says Ramsey. “It’s the retailers who are slowing up the pace of growth of the market because they haven’t figured out how to make it cost-effective for them.”
The U.S. retail grocery market rings up $430 billion in sales each year, with another $40 billion being spent on gourmet/specialty foods. According to Forrester Research Inc., Cambridge, Mass., e-commerce grocery sales totaled only $235 million in 1998-less than one-tenth of 1%-so there is an enormous amount of growth potential. While Forrester predicts that online grocery sales will reach $10.8 billion by 2003, even that will represent only 2% of total industry dollars.
Frozen in time
The biggest logistical problem that Internet grocers will have to overcome prior to their services becoming popular is delivery. Delivery of perishable foods such as frozen foods, meats, dairy products and fresh vegetables is extremely time sensitive, and e-grocers still have not found a way to cost-effectively meet consumers’ need for on-time deliveries to a broad range of geographical areas.
Many of the current crop of online grocery services work with local supermarkets. The customer orders online, then either shoppers from the online service go to a local supermarket, fill the order, and deliver it to the customer’s home, or the local supermarket both fills and delivers the order.
Other online grocers use delivery services such as Federal Express and United Parcel Service to make deliveries from centralized distribution centers. But that approach severely limits the kinds of food that are likely to be delivered and significantly raises the price. Costs vary, but Federal Express shipping costs for NetGrocer range from $5.99 an order for orders under $60 delivered to the Northeast and $13.99 for a delivery west of the Mississippi to $56.99 for an order more than $800 shipped to the Northeast and $78.99 for delivery west of the Mississippi. But, says NetGrocer CEO and President Fred Horowitz, when people figure out their actual expenses for going back and forth to the store, they often find that ordering from NetGrocer and paying the delivery fee is cheaper.