April 2, 2004, 12:00 AM

With a recipe for service, online grocers learn how to win over customers

Online grocery sales are surging thanks to a strategy that focuses on customer service, says a new study from Michigan State University. “Customers feel employees are more responsive, courteous and understanding,’ the report says.

Just four years ago, attempts at online grocery services from the likes of Webvan Group Inc. promised to change the face of retail. But, over-invested in infrastructure without a strong customer base, Webvan soon skidded into bankruptcy.

Today, however, online grocery is surging - thanks to a strategy that focuses on customer service, says a study by Michigan State University. The study, “ITR: Internet Disintermediation of Food Delivery Spanning the Last Mile,” estimates 2003 online sales of food and beverages at $3.7 billion, up 40% from $2.64 billion in 2002.

The current market strength is rooted in customer service, the study says. “Customers generally feel that employees are more responsive, courteous and understanding of their needs in an online/home delivery setting than in traditional stores,” it says. The $250,000 study, sponsored by the National Science Foundation, was based on surveys of more than 4,000 online customers and 250 in-store customers of grocery companies including multi-channel grocers Albertsons Inc., Lowe’s Food Stores Inc., Publix Super Markets Inc. and online pure-play FreshDirect.

“Despite the relatively small size of this market niche, it is extremely important for these reasons: it is growing rapidly, online customers are fairly price insensitive, and they tend to buy higher-margin items,” says Kenneth K. Boyer, a co-author of the study and an associate professor of supply chain management at MSU.

The study also found that the average time spent in placing an initial online order is 66 minutes. The average drops to 25.9 minutes after the seventh order, and to 20 minutes when customers order using saved lists of past purchases.

The study also notes that online customers rate the quality of products more highly when ordering from grocers who fulfill directly from distribution centers instead of stores. Customers of N.Y.-based FreshDirect, Toronto-based Grocery Gateway and London-based Ocado, each of which fulfills online orders from a distribution center, “rate the fresh produce and meats they receive as significantly better than from traditional grocers,” the study says.

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