March 31, 2011, 12:00 AM

Peapod keeps on truckin'

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MyWebGrocer's e-commerce model is based on supermarket clients fulfilling online orders from their stores, for either store pickup or home delivery. Although ShopRite and some other chains provide home delivery of online orders in some highly populated areas such as the New York metropolitan area, most offer only store pickup, says Tarrant. He advises new clients to start with the less costly store pickup model if they're not already offering home delivery. MyWebGrocer charges a fee of about $25,000 to set up a single store for e-commerce, plus a per-order fee of $4.

A survey from the Food Marketing Institute, a grocery industry trade organization, however, indicates that consumers respond to web grocers that offer home delivery.

In 2010, 32% of respondents to an FMI survey said their primary grocery store offered online ordering, and 28% of those respondents said they had done at least some online ordering at those grocers. 4% said they shopped online at those grocers 1-3 times per month, and 2% said at least once a week. But 22% said they shopped online at those grocers less than once a month, with another 73% saying they never shopped there online.

By comparison, the FMI survey showed that only 17% of respondents said their primary grocery store offered home delivery—but 13% said they ordered home delivery 1-3 times per month, and 5% said they did so at least once a week, much higher figures than when home delivery was not an option. 17% said they ordered home delivery less than once a month, leaving 65% saying they never did. Those results would seem to favor favors e-retailers like Peapod and its competitor in the New York City market, FreshDirect LLC, which recently received a $50 million investment from U.K. supermarket chain Wm Morrison Supermarkets plc—but not many others. Peapod and FreshDirect, meanwhile, are each reporting rising sales.

Regardless of the demand for it by consumers, home delivery of groceries isn't for all retailers, experts say. "Home delivery is only going to work for really big folks with profitable online grocery operations offered in places where the retailer has a reasonable density of customers," says Jack Horst, a retail strategist at retail industry consultants Kurt Salmon.

The category of "really big folks" surely includes Amazon.com, the No. 1 online retailer, and Wal-Mart Stores, the world's largest retailer and the leading U.S. grocery merchant. Both Amazon and Wal-Mart are experimenting with home delivery of groceries. Amazon is testing Amazon Fresh in its hometown of Seattle, offering "same or next-day delivery" of products ranging from fresh produce, meat and seafood to paper towels and DVDs.

Amazon did not respond to repeated requests for an interview about its plans for Amazon Fresh, and its chief financial officer, Tom Szkutak, was coy when asked about it by stock analysts in January. "Stay tuned to see if we do more there," he said.

Colin Sebastian, an analyst who follows Amazon at Lazard Capital Markets, says he believes Amazon has invested in its own fleet of local delivery trucks but has trimmed back its Amazon Fresh services.

Wal-Mart, meanwhile, offers home delivery of a limited number of dry goods, including breakfast cereals, beverages, snacks and candy, that it fulfills from warehouses or has drop-shipped by suppliers. Those items are delivered to customers through either Wal-Mart's own trucks or contracted carriers, a spokesman says. Walmart.com offers tools for letting shoppers plan in-store shopping of fresh produce and other goods, but the retailer isn't commenting on its plans for other online grocery shopping services.

Other than Peapod, the retail grocer that appears to have the largest home-delivery network including fresh produce is Safeway Inc., which offers the service with products picked from its stores in the densely populated areas of northern California, Portland, Ore., Seattle, Phoenix, Philadelphia, Maryland and Washington, D.C. Safeway did not respond to an interview request.

Avoiding out-of-stocks

The Parkinson brothers, however, say supermarkets can't satisfy customers by filling orders from stores, because 7-10% of items ordered will be out of stock. Fulfilling online orders directly from large fulfillment centers virtually eliminates such problems, Andrew Parkinson says, adding: "Our out-of-stock rate is typically less than 0.5%."

However, Peapod doesn't offer every brand or package size that a supermarket does. Its Illinois fulfillment center contains about 12,000 SKUs, the company says, versus about 40,000 for a typical supermarket.

Peapod tries to keep its customers happy with good service. To deliver its orders efficiently, the company has built a system that collects all its Internet orders into a central truck-routing system at its Skokie, Ill., headquarters, then zaps those orders to one of several fulfillment centers in the Midwest and eastern U.S. Before the orders are picked and packed at those facilities, material-handling systems at each center know which delivery truck will take each order, and the order's delivery time slot. Once an order is packed, the automated system whisks it to the truck delivering to the customer's neighborhood.

Peapod also uses a truck-monitoring GPS software system from UPS that lets it monitor each driver's location, enabling it to make delivery and routing adjustments if necessary and provide delivery status reports to customers.

Although Ahold doesn't break out Peapod's financial numbers, the Parkinsons say Peapod has been profitable for years and invests about 10% of its revenue in technology. Its in-house team of some 60 I.T. developers continues to build better mobile shopping apps, for example, including one for Android phones that lets shoppers use voice commands as well as a scanning feature to place products on their shopping list. "In three years, we'll see 50% of orders through mobile and scanning," Andrew Parkinson predicts.

10-minute alert

The e-retailer recently launched an app specifically for the iPad, and notes that it has already seen iPad users spending more than the typical Peapod ticket of $150. It also plans to soon introduce apps to make it easy for customers to share their shopping ideas and lists with friends through Facebook and Twitter.

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