Despite the gloom and doom, the online grocery sector isn’t dead
By Kurt Peters
To judge by the struggles for profitability that Webvan Group Inc. and Peapod Inc. have been undergoing, or the high-profile flameout of Kozmo.com, or the crashes of any number of grocery web sites with national distribution ambitions, one would have to conclude that selling groceries on the Internet and delivering them before the food goes bad is a doomed venture.
Webvan lost $217 million in the first quarter on sales of $77 million. Peapod’s majority owner, Royal Ahold of The Netherlands, says it is pleased that Peapod is moving toward profitability faster than expected. That may be good news, but Peapod has been selling groceries online for more than a decade. Kozmo’s initial investment of $250 million is gone. HomeGrocer: bought by Webvan. Ethnic-Grocer.com: gone. And so on.
So is there a future in this market? Some local and regional grocers and their delivery partners are saying yes. “Success in this market is all about the pizza delivery model,” asserts Dan Frahm, CEO of WhyRunOut.com, a grocery delivery service in Southern California that has been in operation since early 1999. “Relatively small distribution centers that are close to the customer make sense.”
Two grocery delivery systems—one on each coast—offer insight into what it takes to make a successful food retailing web site. Both agree on at least one part of the recipe for success: Start small. “Do it so it proves itself each step of the way,” says Alison Berglund, vice president of marketing and business development at HomeRuns.com Inc., based in Sommerville, Mass., a suburb of Boston.
WhyRunOut.com is a throwback to the original model of electronically ordered groceries. Starting in 1989, Peapod, through the Prodigy network, offered home delivery in Chicago. Peapod employees picked the items from local supermarkets.
Sending runners
As the Internet took grip, the imaginations of entrepreneurs saw national markets fulfilled from central distribution points. And so online grocers began building and stocking distribution centers. But the market didn’t develop quickly enough to support such infrastructure and the companies with national ambitions and huge distribution structures today are foundering. Interestingly, Peapod is re-adopting its original model and Albertson’s Inc. began testing delivering from stores in Seattle earlier this year.
Meanwhile, WhyRunOut.com since 1999 has been sending runners to the shelves of Stater Bros. supermarkets, at $1.4 billion in sales, the fourth largest chain—and the largest independent chain—in Southern California. “We use the infrastructure created by retailers,” Frahm says. “It’s not a lot different from what Peapod used to be.”
WhyRunOut’s servers direct customer orders from the web site to a computer in one of 15 stores, depending on the customer’s location. The computer generates a pick list that WhyRunOut employees fill. One of the concerns about picking from store inventory is that operations such as WhyRunOut have no control over what’s available in a store. For that reason, WhyRunOut asks customers to specify: substitute freely; substitute same brand, different size; or substitute same size, different brand.
A further concern about picking from store inventory is the fear that pickers will compete with shoppers for items and clog the aisles. WhyRunOut addresses that issue by shopping in the middle of the day, when store traffic is usually lightest.
For same day delivery, customers must order by noon. Pickers complete their shopping by 2 p.m. The process is completed by 3 p.m., Frahm says. WhyRunOut delivers between 2:30 and 8:30 p.m. It serves customers from north of Los Angeles to the Mexican border, although WhyRunOut does not deliver in LA itself. WhyRunOut also delivers dry cleaning, film processing and prepared meals.
WhyRunOut charges $6.99 for delivery. But where it makes its money—and what sets it apart from other home deliverers of groceries—is that it earns a commission from Stater Bros. on every sale. Stater Bros. is willing to pay the commission—which Frahm wouldn’t specify—because WhyRunOut brings in new customers. “We are giving them the opportunity to sell to new Internet-oriented customers without building new stores,” he says.
WhyRunOut’s surveys of its customers show that 96% are incremental to Stater Bros. stores and that 72% had been shopping at Safeway Inc.’s Vons markets, The Kroger Co.’s Ralphs Grocery Co. and Alberston’s, the leading chains in Southern California. “They can either open up a new location to get those customers, which would cost $4 million, or pay us a fee that is much less,” he says. Stater Bros. accounts for the fee as it would an advertising expense.
Filling a hole
WhyRunOut recently bought PDQuick.com, a same-day delivery service that serves Los Angeles, making deliveries from convenience stores for $2.99 a delivery. Frahm says PDQuick fills a hole in WhyRunOut’s delivery area—LA itself—and offers opportunities to achieve scale by combining the headquarters operations of the two companies. WhyRunOut has no plans, however, to change the PDQuick service, which caters to urban professionals whose orders average $25, to the WhyRunOut model, which caters to suburban families with an average purchase of $100 and charges a higher delivery fee.
Once the PDQuick operation is integrated into WhyRunOut, the company will look at expanding into other markets, using the same model that WhyRunOut has employed. It will look to do deals with smaller, independent chains, reasoning that WhyRun-Out’s success in bringing new customers to Stater Bros. will appeal to the third or fourth largest chain in every market. “We feel we can scale into any location,” Frahm says.
In the Boston area, HomeRuns.com continues to use the central-distribution model for home delivery of groceries. But it differs from Webvan, Peapod and Kozmo in that it started small and only has grown as the market has grown. Its web site went live in November 1996 and HomeRuns.com has been content to prove its model in Boston before expanding. “You have to do it so it proves itself each step of the way,” says Alison Berglund, vice president of marketing and business development for HomeRuns, which started as an operation of Hannaford Bros. Co. supermarkets.
Berglund says verifying each stage as the business builds is important because there are no blueprints to work from. “There is no one who has done it before, so you have to be clear every step of the way,” she says.
Community spirit
Orders from the web site come to a central database at the warehouse in Sommerville. The system places the orders into delivery routes, then creates lists for product picking. Once the products are picked, they are separated into orders for delivery. HomeRuns charges $5.95 per delivery, with free delivery on orders over $125. Minimum order is $50; a customer can’t check out until the order reaches $50. HomeRuns delivers from 7:30 a.m. to 11 p.m.
HomeRuns originally fulfilled orders out of a Hannaford Bros. distribution center near Boston. It outgrew that facility and built a distribution center in Brookline, then eventually moved to Sommerville.
Berglund says one of the reasons HomeRuns is succeeding is that it gets involved in its communities, just as real-world grocery stores and supermarkets do. HomeRuns sponsors amateur and semi-pro athletic teams, supports community festivals, sends executives to speak to community groups and even recruits people to have home parties where their friends can learn about HomeRuns. “We believe that community involvement is important and will continue to be important,” she says.
The market is there
Although HomeRuns is not profitable yet, Berglund says the company is heading in that direction. HomeRuns feels it has been successful enough in its original market that it is now ready to expand. Late last year it announced that it would be moving into Washington, D.C. HomeRuns believes it can succeed in Washington, Berglund says, because the market is similar to Boston. “The density of population, the level of computer use, the education level, all are similar to Boston,” Berglund says.
Online grocers who establish viable business models today will be in a good position to take advantage of the market as it develops—and many observers believe that market development is inevitable. What’s needed, they say, are pricing that consumers can accept, density of population so the number of deliveries per hour gets up and acceptable margin on products.
“Kozmo proved to the marketplace that there is demand for such a product,” says Roger McDonell, CEO of PackageQuest, which is developing package tracking software for online retailers, and former CEO of DeliverEtoday, a same-day delivery service that shut down earlier this year. “What no one has proven yet is that people will pay what it costs.”
For that reason, McDonell likes the WhyRunOut model. “They’ve separated themselves from the pack,” he says. “If they have deep enough pockets, they can get there.”
kurt@verticalwebmedia.com
