October 31, 2002, 12:00 AM

GroceryGateway makes the centralized distribution model work

Toronto-based GroceryGateway.com is taking a steady-as-she-goes approach to building its market and now has enough customers in a concentrated area to justify its own warehouse. It started by fulfilling orders from local store shelves.

The boom-and-bust cycle of the dot-com era has been particularly hard on pure-play online grocers, resulting most notably in the fast rise and fall of Webvan Group Inc. One of Webvan’s downfalls was the lack of a fulfillment infrastructure to support its aggressive marketing. But in Toronto, GroceryGateway Inc. has found a formula based on a steady build-up of infrastructure that the company says has contributed to its more than doubling since it began operating in 1999.

The company processes 1,000 to 1,500 orders a day, at an average value of $140, serving 105,000 households, CTO Brian Miller says. The company initially targeted its service at higher-income families with children, but quickly learned that its market covered a broader demographic. “We found demand among all income levels, kids or no kids,” Miller says. “The common thread is customers who are time-starved.”

Miller attributes growth of the privately held, independent company mostly to word-of-mouth, plus advertising on billboards and its fleet of 100 trucks. It charges a delivery fee of $8 per order, but offers discounts of $1 or $2 for orders outside of the peak periods of mornings and early evenings.

GroceryGateway is not directly tied to any food stores or chains. When it started in 1999, it filled orders from stores operated by other companies. But once it established market demand within the first year, it began filling orders from a 50,000-square-foot warehouse. A year later it moved to a warehouse of 300,000 square feet.

Miller adds that GroceryGateway believes it fulfills about 80% of customers’ grocery needs, and that most customers still go to a store about once a month. “Online grocery is not a replacement for food stores,” he says

To better understand what drives customer purchasing behavior, GroceryGateway is installing a new data warehouse from IBM Corp’s. Tivoli division designed to analyze the reams of online customer data it collects every day. “We have all this information, but it’s not consolidated into one data warehouse,” Miller says. The new system will enable it to offer improved product assortments, set prices that support the best combination of profit margins and sales volumes, and better understand customer preferences for delivery. The next step will be to implement a web-based storage area network to make data more accessible and easier to manage.

GroceryGateway plans to migrate its data warehouse to a SAN once it reaches a critical mass of business and SAN prices drop further. SANs provide extensive data storage and management capabilities by tapping the power of multiple storage servers.

The improved data storage management will also enable it to better prepare for surges in demand, Miller says. “Our business is very cyclical,” he says. “The first time a snowflake falls, business goes up.”

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