Die Another Day

MyWebGrocer.com, an Internet services company that helps grocers sell on the web, started out just as the boom of the Internet began turning to bust, in late 1999. “We’re a survivor,” says president Michael Spindler. “We’ve hung on through a couple of tough years for online grocery, but now we’re seeing growth.”

Like many survivors of the dot-com bust, MyWebGrocer is picking up the pieces of fallen competitors. In November, MyWebGrocer bought some of the assets of NeXpansion. With that sale, NeXpansion, formerly known as NetGrocer.com, became the latest casualty of the dot-com implosion. NeXpansion offered online non-perishable groceries through NetGrocer.com, fulfilling orders from 16,000 SKUs in a 30,000-square-foot warehouse in North Brunswick, N.J. It also offered retailers its Endless Aisle service, a kiosk and web-based assortment of exotic products that supermarkets don’t commonly stock. It fulfilled those orders out of the warehouse as well.

MyWebGrocer bought the NetGrocer.com and Endless Aisle brands, but not the warehouse. Analysts say MyWebGrocer is following a strategy opposite of that of NetGrocer.com, Webvan Group Inc., and other once-high-flying startups that toppled after over-investing in distribution infrastructure, including dedicated warehouses, and equipment without first securing a customer base. “It can cost $10 million to $12 million to build a grocery warehouse, and the break-even point could be five to 10 years,” says Mark Hugh Sam, analyst who follows the grocery industry for investment research firm Morningstar Inc.

The more cautious approach

MyWebGrocer, Hugh Sam adds, is taking the more cautious approach of fulfilling online orders from stores, avoiding the cost in infrastructure and personnel of maintaining a warehouse. With that approach, it is following the trail blazed by the leading retail chains that offer—and are now succeeding with—online shopping, including Safeway Inc., Albertsons Inc., Royal Ahold’s Peapod and the U.K.’s Tesco plc who use their stores to fill online orders. The big difference is that MyWebGrocer doesn’t operate any stores of it own.

Rather, MyWebGrocer is working with retail partners to leverage infrastructure and cautiously add staff. It has devised a formula for limiting the costs of operating an online grocery business while offering its retail partners, at a cost of about $4,500 in startup and hardware costs plus a few dollars per order, a mostly automated, web-based system for channeling online orders.

MyWebGrocer is two parts a provider of services to grocers who want to offer online shopping to their customers and one part b2c online grocery sales. It provides e-commerce systems to grocery retailers who want to sell online through their own branded web operation and fulfill orders from their own stores. It also provides Endless Aisle specialty products as a separate online service to retailers who want to let their customers order goods not carried in their stores. And it operates NetGrocer.com, a stand-alone web grocery service. With no stores or warehouse of its own, it fulfills NetGrocer orders from a ShopRite store in New Jersey and Endless Aisle orders from an Amelia’s store in Indiana.

To Spindler, who spent 25 years in the consumer products industry, MyWebGrocer’s strategy is all about offering grocers different means of serving customers in a market where competition is forcing them to differentiate themselves from mega-chains. “If you can’t compete against Wal-Mart on price, you better figure out things you can do that Wal-Mart has a hard time doing, for example, customer service and convenience that you can provide to your local customers,” Spindler says.

NeXpansion operated NetGrocer.com as a shopping service that shipped online orders of non-perishable goods anywhere through FedEx. To serve grocers who wanted to offer goods not stocked in their stores, NeXpansion offered its Endless Aisle shopping service as a link to NetGrocer. It promoted the idea of offering Endless Aisle shopping through in-store kiosks, where shoppers could log onto the Endless Aisle web site. It also provided retailers the option of offering Endless Aisle from their web sites, either alone or in combination with the store kiosks.

Hard to generate profits

Although it was still signing on retailers last summer, NeXpansion buckled under its operating costs before selling out to MyWebGrocer in November. Efforts to reach former NeXpansion executives were unsuccessful, but Spindler notes that the company faced mounting costs while failing to lure enough shoppers to its kiosks.

“The kiosks weren’t very popular, but they cost a lot of money,” he says. In an effort to recoup the costs of the kiosks, which Spindler says can run $30,000 to install, NeXpansion tried offering multiple services in addition to Endless Aisle shopping, such as information on pharmaceutical products. “But it was too hard to make them a profit maker and 90% of Endless Aisle sales were generated on retailers’ web sites,” Spindler says.

Although MyWebGrocer retains the rights to use Endless Aisle kiosks, it has no plans to re-deploy them. Instead, it’s focusing on offering Endless Aisle services on retailers’ web sites while completely reconfiguring the way its orders are fulfilled.

MyWebGrocer has replaced NeXpansion’s fulfillment strategy with a system that leverages existing store inventory. Because MyWebGrocer doesn’t operate its own stores, it searched for new fulfillment partners from the ranks of its customer base. “We looked for folks who could handle high volume and were excited about the opportunity,” Spindler says. It settled on two fulfillment partners—both retailers with strong brick-and-mortar businesses.

MyWebGrocer chose an 80,0000-square-foot ShopRite supermarket in Oakland, N.J., to fulfill NetGrocer orders, and northern Indiana-based Amelia’s, a specialty foods market unit of G.A. Foods, to fulfill Endless Aisle orders. Endless Aisle, which dissolved as a service after NeXpansion went out of business, is starting to reappear this month with a handful of retail clients, including Harris Teeter and Winn Dixie.

3 ways to deliver

The NetGrocer service, which never completely stopped operating, now fulfills orders with more than twice as many SKUs, 35,000, through the ShopRite. Business is brisk, says Bob Clare, one of the principals of the family-owned store, part of the 200-plus store ShopRite cooperative in several eastern states. Although he declines to provide sales information for the privately held business, he notes that a FedEx trailer sits outside every day waiting to be loaded for regular ground shipments. A FedEx panel truck also arrives daily to pick up expedited one- or two-day shipments, he adds.

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Clare is also one of 45 retailers with 250 store locations, that use the MyWebGrocer e-commerce system to offer online sales to its local customers; it calls its service ShopRite From Home. As with NetGrocer, ShopRite From Home orders are fulfilled in-store, but instead of loaded onto FedEx trucks, they’re held for customer pick-up or delivered directly for a fee. Other retailers include Lowes Foods in North Carolina, Dorothy Lane Market in Ohio and Roth’s in Oregon.

One of the advantages of working with MyWebGrocer, Clare says, is that, except for shipping and delivery, his store uses the back-end e-commerce system on MyWebGrocer’s web servers to process orders for both NetGrocer and ShopRite From Home. It’s been a learning experience that will pay off in the long run, he says.

Although MyWebGrocer provides and maintains the web-based suite of e-commerce software, including order management, credit card processing, and communications with shippers and e-mail order confirmations with customers, there is still work for retail partners in order to participate.

For starters, merchants need a browser and high-speed Internet access to receive online order information over the web. They also need to place a link on their web site to a site created and hosted by MyWebGrocer. That’s the easiest part.

Getting store operations right

More complicated is arranging store operating hours, staffing levels and physical store layout to accommodate online orders and fulfillment. At Clare’s ShopRite, for example, online order fulfillment starts after the store closes at 10 p.m. And store personnel need to learn, in training over a day or two provided by MyWebGrocer, how to operate the web-based order fulfillment system.

In addition to the one-time fee of about $2,000 and per-order fees of under $5 that MyWebGrocer charges to use its system (fees vary depending on the size of the retailer), merchants must also invest in industrial strength handheld computer devices from Symbol Technologies. The devices, with attached bar code scanners, cost about $1,200 each and are designed with protective cases. Most grocers starting out with online orders get by with one or two handhelds, though some of MyWebGrocer’s busiest clients have a dozen or more, Spindler says. MyWebGrocer provides the software that lets the handhelds download order information from office computers.

MyWebGrocer forwards order information to the retailer’s in-store web-connected computer. Pickers plug their handhelds into the computer to download the order. Because the handheld software includes mapping information on a store’s aisle layout, pickers receive instructions on how to most efficiently find the products to fill each order.

Pickers scan products as they pick them off shelves; the device alerts them if a product doesn’t match what’s on the order. Once an order is picked, the staffer loads the handheld data back in the MyWebGrocer-connected computer to print out a report that shows the customer information and if any ordered products could not be fulfilled. Once the order is packed and ready to be shipped, the packer scans the bar code on the order report, a step that automatically prints out a FedEx shipping label. When FedEx picks up the order, the carrier sends a message to MyWebGrocer confirming the shipment, a step that automatically forwards a bill to the customer’s credit card company and an e-mail order confirmation to the customer.

Once a retailer becomes accustomed to operating the in-store fulfillment system, the system’s automation is designed for ease of operation, Spindler says. “The setup is the key element here,” he says. “Once a store is set up, the system takes over.”

Still, there are other tasks a retailer must undertake to get maximum use of its online operation, particularly promoting the web as an alternative way to shop in weekly marketing materials and training store employees to inform customers of their shopping options. Endless Aisle subscribers also need to compile all their store’s product data, then send it, usually in an FTP file, to MyWebGrocer so it can check for duplicate products in the store and the Endless Aisle selection. Synchronizing product databases can take a few weeks in back-and-forth communications.

Proving scalability

MyWebGrocer must still prove, however, that its Endless Aisle and NetGrocer services are scalable to meet growth, analysts say. While NeXpansion took the more costly route of operating a dedicated warehouse, that approach may have given it more control over fulfillment had online grocery sales taken off as many had expected in the mid-1990s, analysts say.

But Spindler and his retail fulfillment partners say they’ll be able to quickly ramp up if necessary. “Should the volume of NetGrocer ever exceed our Oakland ShopRite, there are more than 200 other ShopRites to choose from,” Clare says. Although that assumes cooperation from other independently owned and operated stores, such cooperation is likely, says Hugh Sam of Morningstar. “They’d work it out, because there’s a cost benefit to all retailers doing this, and there’s always room to cooperate if it makes sense for everyone,” he says.

Spindler adds that a retailer doesn’t have to attract large numbers of online buyers to reap rewards. With an online shopping service like ShopRite From Home, he says, a retailer with 12,000 to 20,000 weekly in-store transactions can earn a profit from online orders with as few as 25 web orders per week. “Online customers tend to be big spenders, spending on average $120 per order, and they don’t cherry pick deal items,” he says.

Clare, though he won’t divulge sales or growth figures, says his store’s foray into the online grocery business with NetGrocer and ShopRite From Home has been more than worth the trouble. In addition to incremental sales, it has given customers more of what they want, he says. He’s also considering offering the Endless Aisle service on his web site. “People want to have options, so we had to learn how to get into this online business and master it,” says Clare. “This is the future.”

paul@verticalwebmedia.com