In its second-largest acquisition, Amazon buys the company for $970 million.
(Page 2 of 3)
Peapod Inc., Skokie, Ill., was one of the original virtual grocers, beginning with a telephone ordering and delivery service in 1989. By the following year, it served 400 households in Chicago; today it’s the largest online grocery service with more than 98,000 customers. The company offers full-service grocery shopping and can deliver a wide variety of meats, vegetables, fruits and dairy products to customers. Even so, the service is available only in eight metro markets: Boston; Chicago; Dallas; Houston; San Francisco; Austin, Texas; Columbus, Ohio; and Long Island, N.Y.
But retailers will resolve these problems in the next several years, Forrester predicts. Establishment of new distribution centers will expand the markets where Internet shopping is available. For example, Peapod is converting to a centralized warehouse distribution system from one that depended on local markets to fill orders. Thus far, Peapod has established centralized distribution centers in San Francisco, Chicago and Long Island. Peapod predicts the new warehouses will improve the quality and salability of its service, along with improving gross margins for the company allowing it to further lower fees, which will further enhance consumer demand.
Besides logistics, the small market for selling groceries on the Web is also limiting growth. Consumers are currently paying premium pricing for the convenience of at-home delivery.
The price isn’t right
There are usually delivery or membership fees for the service and prices tend to be higher on many items than those found at the local supermarket, says Ramsey. John Furton, chief information officer for Peapod, agrees that the fairly high prices that most services charge are a barrier to growth. And it is necessary to have access to a computer and the Internet. So the current potential market is still limited to high-income individuals willing to pay a premium for convenience.
“It’s a business impossibility to make this appealing to the average household in the next five to 10 years,” says Bishop. “The delivery cost raises the price of items significantly and only a small number of households have the money and desire to pay for the service.”
But experts predict that cheaper PCs and Web-enabled phones and televisions will increase the number of middle-income shoppers who will have access to online shopping sites. And as sales grow and volumes increase, Internet retailers will begin to have the clout to negotiate better supplier deals, and will drop fees to further spur growth.
Peapod’s fees have already dropped from an average of $15 an order last year to between $5-10 an order this year, because increased volumes allowed them to lower costs.
Another issue that must be resolved before Internet grocery shopping can truly take off is paying for online groceries. While Peapod accepts checks and debit cards for its service, most online retailers accept only credit cards. While some consumers are fearful of security issues with divulging credit card information online, a bigger issue is that grocery shoppers aren’t accustomed to charging their purchases. Credit card purchases in traditional supermarkets today account for only about 6% of all purchases. Meanwhile, 99% of all online sales are transacted with credit cards. Unless consumers become less resistant to using their Visa to buy Bounty, e-commerce grocers will have to find another method for their customers to pay for their weekly groceries-and most other e-payment systems are fairly cumbersome.
Largely because of the problems currently limiting the growth of online grocery shopping, many industry watchers believe traditional retail supermarkets will largely ignore the online market until at least 2003. “Currently, no major traditional mass market supermarket chain has an Internet commerce presence equivalent to that of Internet pure plays,” says Forrester analyst Evie Dykema. But, adds Bishop, although only a small percentage of buyers will be attracted to online grocery shopping, losing 3% to 5% of customers to the Internet can still have a significant impact on supermarket profitability.
Some major chains such as Safeway and Marsh offer limited shopping online. Safeway sells only flowers and gift items on its Web site, and Marsh delivers groceries ordered over the Internet only to customers who live within a few miles of its stores in Indiana and Ohio. No major grocery chain has any significant presence on the Internet.
But once Internet grocery sales surpass the $10 billion mark, the major players will take note. “Traditional retailers won’t feel the need to invest in the Internet until 2003,” predicts Dykema. “Internet sales are not keeping traditional supermarket retailers awake at night because they represent such an insignificant percentage of total grocery sales.”
Waiting for Bezos
Once sales do take off, however, she predicts that traditional grocers will buy their way onto the Internet via acquisitions to get up and running immediately. Ramsey agrees: “The biggest threat to Safeway is not the supermarket across the street, but a smart entrepreneur like Jeff Bezos of Amazon.com. Once someone finds a way to quickly and cost effectively deliver groceries ordered over the Web, traditional supermarkets will have a new formidable competitor.”
One traditional supermarket chain dipping its toe into the waters of Internet selling is Whole Foods Market Inc., Austin, Texas. Whole Foods is the leader in natural and organic foods in the bricks-and-mortar world, operating 88 stores in 19 states and the District of Columbia under the names Whole Foods, Fresh Fields and Wellspring Grocery. The company launched its Internet counterpart in March, shipping non-perishable items from a central warehouse via UPS. Shipping is 25 cents per pound plus a $4.99 shipping and handling charge that is waved for grocery orders of $70 or more.
Once the non-perishable business takes root, the company will explore shipping perishable items as well, according to John Fischer, interactive marketing director at WholeFoods.com. The company is making a concerted effort to promote the new business. Prices online will be as much as 35% cheaper than prices in the stores, and the company is sponsoring an incentive program for employees to promote the site in its stores.