August 27, 2008, 12:00 AM

Supermarket sweep

Where the web powers more than e-commerce.

Picture this: Busy Mom has drained the last bit of the last carton of milk in the house into her bowl of cereal. Before tossing away the empty container, she scans its bar code on a device built into the front of her refrigerator. That device populates a grocery list, where milk joins eggs, peanut butter and other depleted items in need of replenishing. On Tuesday, that list automatically generates an online order at the local supermarket, which delivers it on Thursday. All Busy Mom has to do is open the door for the delivery man and of course, pay the bill.

Are we there yet? Actually, yes-on a very small scale. Ikan Technologies Inc. has begun selling the Ikan, a $400 home bar code scanner that resembles the average white kitchen appliance. A consumer can set the Ikan on a counter or mount it to a wall. She scans the bar code of a product, which, via a Wi-Fi connection to her computer, automatically is added to her online shopping list.

When it’s time to buy, she signs into her Ikan account, which sends her list to the nearest participating grocer. Nearly 1,000 consumers are using the Ikan, and that number has been growing 15% monthly, the company reports. Ikan has relationships with six companies, including Brach’s Supermarket, D’Agostino’s, KRM, Peapod, Pioneer and West Side Market.

The Ikan offers a glimpse into how grocery shopping, one of retail’s most challenging categories, might one day become one of the most cutting-edge categories online.

“As technology continues to evolve, we can’t foresee yet what the ultimate manifestation of Internet grocery retailing will be,” says Bruce Cohen, a principal at consultants Kurt Salmon Associates and industry leader of its consumer packaged goods practice. “It’s hard to judge the nature of the opportunity because we are at the very front of it.”

Operational challenges

Interesting that at this point in the evolution of online retailing a consultant can say the industry is at the very front of the online grocery shopping opportunity. Peapod LLC was one of the first online sellers of anything, launching in the pre-Internet days of 1989. Yet even after all these years, Cohen calls the opportunity “limited” because it is challenged by operational issues such as fulfillment and little acceptance in a consumer public accustomed to buying groceries in a store.

These are among the issues that sank online grocer Webvan, a notable flameout of the dot-com bomb era that marked the beginning of this decade. There have been other category bail-outs: Albertson’s LLC, for instance, which dropped its e-commerce channel in 2006 after it was acquired by an investment banking firm. Then there is the far larger number of grocery stores that never tried e-commerce at all, as reflected in the fact that analysts estimate the percentage of all groceries bought online in the U.S. at only 1% to 2%.

Across retail categories, the Internet has proved itself most rewarding to merchants when they use it to inject into the shopping process what other channels can’t supply. A small number of retail grocers have figured out how to leverage the channel’s unique opportunity while containing costs so as to thrive online by presenting their own brand to the buying public, by powering the e-commerce operations of bricks-and-mortar grocery stores, or by a combination of the two. Forward-looking grocery merchants who aren’t ready for e-commerce have figured out that even when a site is not transactional, it still pays to use the online channel for marketing, advertising and communication with customers in ways that can’t be duplicated offline.

More than low price

What do these merchants do differently from online competitors who floundered, and what lessons are there for other online and multi-channel retailers in how they leverage the Internet?

The U.S. grocery market was about $428 billion in 2006 across traditional grocery store formats, according to retail grocery consulting firm Willard Bishop. Add other venues where consumers buy grocery items, such as C-stores and wholesale clubs, and that figure was about $859 billion. Though large in sales volume, the grocery category has arguably the thinnest margins in retail. The average net profit for supermarkets after taxes was 1.9% in 2006/2007, according to the Food Marketing Institute, a trade group.

Though lower prices in categories such as books, music and movies can be part of what impels consumers to buy online, lower, Internet-only prices aren’t necessarily a driver of grocery sales across the board. While parts of an Internet-only grocer’s overhead are much less than a traditional grocer’s overhead, web grocers have had to invest in specialized warehouses, trucks and other infrastructure to support delivery.

“The delivery model is expensive and difficult,” says Jon Hauptman, a partner at Willard Bishop. FreshDirect, for example, claims prices “up to 25% lower than supermarket prices,” while Peapod, which powers e-commerce for The Giant and Stop & Shop grocery chains, aligns online prices with prices in those stores. In the Chicago and Milwaukee areas where Peapod.com sells directly to consumers under its own brand, prices track to prices in the largest local grocery chains, says Mike Brennan, senior vice president of marketing.

Even where online and offline prices may be generally equal, consumers who shop online bear the extra expense of delivery charges that start at about $5 per order. Many online grocers have recently added a fuel surcharge, tied to gasoline prices, on top of the delivery fee.

Price isn’t the sole criterion shoppers use in deciding to buy groceries. “If it were, everybody would be buying groceries at Wal-Mart,” says Hauptman. In fact, Wal-Mart has a 10.5% share of supermarket spending, according to TNS Retail Forward.

Other differentiators

But in an economic climate that is increasingly price-driven, online grocery merchants need to find other ways to distinguish themselves. They seek to accomplish this by stressing convenience and customer service-including web-based shopping and planning tools-and selection.

Before they even get to the customer-facing side of the business, however, online grocers face operational issues unique to the category.

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