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.

“The challenge to grocery sales online include the sheer volume of product, with some retailers offering 60,000 or more SKUs on a site, the frequency of price changes, and the complexity of promotion that takes place in grocery sales,” says Rich Tarrant, CEO of MyWebGrocer, which provides e-commerce and e-marketing solutions to more than 85 retailers including ShopRite, Lowes Food Store and other grocery chains.

Another issue is that of perishable merchandise that can melt, spoil or wilt. For the grocery merchants to which it provides full e-commerce services, MyWebGrocer tackles the problem of handling a range of perishable and non-perishable goods with a model that bypasses dedicated warehouses to pick directly from its grocer clients’ stores. “There are over 36,000 grocery warehouses already in the U.S. They are called grocery stores,” Tarrant says. “Our technology is designed to leverage current systems, process and labor already in a retail grocery store. Our model leverages the current infrastructure; it does not try to recreate it.”

FreshDirect, which serves a geographically limited number of markets including parts of New York City, took a different approach: it picks orders from its own warehouse. Chief marketing officer Steve Druckman says the climate-controlled facility has seven temperature zones geared to the storage requirements of different fresh products, which he says beats the two temperatures for fresh foods found in grocery stores (refrigerated and room temperature) and preserves food better for fresher delivered goods.

The warehouse approach didn’t work for Webvan, which built in anticipation of widespread and immediate demand that didn’t materialize. FreshDirect does something different. It has one 300,000-square-foot warehouse and it expands its service area very cautiously, based on a formula that calculates how much demand for service is coming from outside zones it already serves, and when there is enough of it to fill a truck. It captures the demand data on its web site, where first-time customers are asked to supply location information.

Deliberate expansion

Under that strategy, FreshDirect, which launched in 2002, has expanded to all five New York City boroughs and parts of Long Island and Westchester County. “FreshDirect was successful because it expanded deliberately, almost block by block,” says Hauptman. “They’re doing it only in extremely high-density areas and it is much more difficult to do that in a marketplace where everything is more spread out.”

That hasn’t stopped Peapod from growing its service area. Peapod, with centralized warehouses in the Chicago and Washington, D.C., areas, and a number of smaller “warerooms” adjacent to partner stores elsewhere, delivers to a broad range of neighborhoods across the two metro areas as well as parts of Connecticut, Rhode Island, New Jersey, Massachusetts and New York.

Peapod’s expansion has been fueled in part by the fact that it has access to the resources of Royal Ahold since it was acquired by the Dutch food retailing giant in 2000 after launching as an Internet startup in 1989. It’s also grown via an expanded business model in which it supplies e-commerce for the grocery store chains owned by parent Royal Ahold.

Peapod, as does any online grocer that is successful, positions itself in part on what the Internet excels at providing to consumers: information, in an interactive format that allows shoppers to easily customize their planning and shopping experience. For example, Peapod’s online product sorting options include not only unit price or total price, but sort by calorie per serving. A just-launched “Nutri-filter” identifies food products approved for different diet regimens, such as gluten-free or peanut-free.

“If you can combine information, especially nutritional information, to create something value-added for consumers that’s simple to use, long term it’s something that will make people want to shop more online,” Brennan says. “They can shop smarter and faster. It’s harder to do that in a practical way in a store.”

A loyalty driver

MyWebGrocer’s range of services to grocery retailers includes providing interactive shopping lists, electronic circulars, and marketing and advertising services as well as powering a grocer’s entire e-commerce operation. “Through myriad online tools and timely delivery of relevant information, grocers can save their consumers time in completing their shopping. Convenience has always been a driver of loyalty,” says Tarrant.

Grocery merchants that don’t have e-commerce are stepping up to leverage the Internet as a way to drive shoppers to stores and products offline. The web site of Aldi, a German-based discount grocery supermarket with 900 stores in the U.S., doesn’t offer online shopping. What the site, re-launched in September, does offer are shopping features aimed at making it a planning destination for Aldi’s offline customers.

For example, an interactive meal planner, added last year, lets shoppers search for recipes under a range of sorting options such as low calorie, then save those recipes into an on-site “cookbook.” The meal planner allows shoppers to plan meals for a week or a month, then generates a shopping list for the ingredients needed in the recipes.

A click of a button populates the list with the right amount of ingredients needed to double or even triple the listed recipes, if shoppers want. And in a clever cross-channel play, the items in the shopping list appear in the order that corresponds to where the items are located in Aldi’s standard four- or five-aisle store layout, thus saving the shopper a lot of in-store searching.

Laura Bauer, vice president in charge of Aldi’s web operation, says the meal planner feature had 45,000 hits in April—interestingly, from all 50 states even though Aldi operates stores in only 28. About 80% of the meal planner’s users are first-timers. “Once someone gets into the meal planner the length of time they stay is impressive,” says Bauer. “It shows us consumers are using all the tools it offers.”

Optimizing customer data

Online grocers also win by using the web to gather information about customers, tracking what a shopper buys, how much and under what circumstances, and by putting up offers and merchandise targeting different segments. Offline grocery stores also gather much of this information through the loyalty cards shoppers swipe at checkout to get club member prices on what they are buying, but they don’t use it as well as online merchants do, according to Cohen of Kurt Salmon Associates.

“Big retailers that were not formed around caring about that data still are playing catch-up on what to do with it. It’s not that they don’t have it; they don’t know how to use it better,” Cohen says.

Cohen adds that online retailers themselves have a ways to go in figuring out how to optimize use of that data. But programs such as FreshDirect’s still place it ahead of how most bricks-and-mortar grocery chains segment and target their customers.

“We marry all of your order data with your behavior on the site and then we talk to our customers through weekly market research. We combine all of that in a database, where we start to understand our customers as segments and as individuals, which lets us talk to them in a unique way,” Druckman says.

For example, FreshDirect defined a “new family” segment based on shoppers’ orders for products such as baby food. Approaching that customer segment in online research, it asked how well the site’s baby category was meeting their needs. Customers told FreshDirect it wasn’t doing as well as it had thought—they wanted more selection. “We doubled the items in the baby category and re-launched it a month ago.” Druckman says. Category sales have risen 20% since then. “We could do that because our database gives us the ability to know who our customers are, what they need and how to talk to them.”

Merchants in the online grocery space are finding that the key to e-commerce success is to attempt to minimize the channel’s limitations—such as letting shoppers who can’t actually see or touch a banana specify “yellow” or “green”—while leveraging it for what it’s uniquely equipped to do. And that’s to deliver convenience and supply useful and increasingly targeted information to shoppers— a concept that even grocery retailers that don’t have e-commerce are embracing to drive in-store sales.

As more shoppers get comfortable with buying across more categories on the web and also form the habit of researching online before heading out to the store, the opportunity of the grocery category will grow online. And despite operational challenges particular to the category, forward-planning grocery retailers that don’t look to the Internet to take on a bigger role in the future will miss out, experts say.

While only a very small percentage of grocery sales are online so far, the Internet already has a much larger role in driving sales, apart from e-commerce itself. “Today in grocery, the Internet probably has more application as an advertising and marketing vehicle than it does as a significant contributor to sales,” Cohen of Kurt Salmon says. “It should be worthy of serious management over time as it gets to be a double-digit portion of the business. Until that time it’s a marketing and promotions incubator to test and identify the right combination of communications to your best customers. It should be a flow of critical customer information that will help retailers online and in their bricks-and-mortar businesses.” l

mary@verticalwebmedia.com