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Web grocer Peapod gains traction, potentially triggering a massive expansion of e-commerce into the last bastion of store-based retailing.
In a sprawling fulfillment center outside of Chicago where each section’s temperature is set for the type of food it houses, Peapod produce guru Tony Stallone talks about his fresh tomatoes, coddled at about 50 degrees and waiting for shipment within hours to customers as far away as Indianapolis.
Like the peppers, pineapples and other fruits and vegetables processed through the Lake Zurich, Ill., facility, Stallone says, tomatoes will only retain their best characteristics, reddish, plump and sweet, if they're kept in areas with just the right temperature and air flow, then within a day of arriving at the fulfillment center shipped out in temperature-controlled containers to customers. Stallone, vice president of merchandising, should know. His expertise in handling fresh produce was handed down through a family business started by his lemon-trading great-grandfather.
Eyeing the prize
Because Peapod knows how to deliver fresh produce, meat and dairy products, the online grocery company says, it is also winning over shoppers for all things grocery—shoppers who realize that getting fresh food along with packaged goods on their doorstep doesn't require a trip to a crowded supermarket. It's an expertise, along with other things Peapod has learned while making more than 18 million home deliveries since forming in 1989, that co-founder and president Andrew Parkinson figures sets Peapod apart from the competition.
Already among the 50 largest online retailers with $451.33 million in 2010 sales, according to the Internet Retailer Top 500 Guide, and backed by the resources of Dutch supermarket giant Royal Ahold, Peapod is primed to ride a new e-grocery wave powered by technology developments like mobile shopping apps, digital marketing and a new legion of grocery shoppers who have grown up with the Internet. "I'm very excited about growth," Parkinson says. "Everything is coming together now—the technology, the demographics, and the strength of the e-commerce space in general."
But Parkinson and his co-founder brother, chief technology officer Thomas Parkinson, also realize that they must keep innovating in the face of growing competition. Retailers from Amazon.com Inc. and Wal-Mart Stores Inc. to traditional supermarket chains and smaller retail stores are getting into the e-grocery game. The prize for the big mass merchants: Selling to online customers grocery products that they buy frequently and make up a big part of their budgets. The prize for retail grocers: Staying in the grocery game.
The big question for both kinds of retail chains: Will they invest in the fulfillment centers and truck fleets that Peapod commands? They'll have to do that to allow consumers to buy groceries online the way they do everything else, ordering on the web for home delivery.
Long the last bastion of retailing not to move in a broad way to the Internet, retail grocery can no longer hide behind the old song that consumers insist on schlepping to a store to personally see, touch and smell what they toss in their shopping carts. "The era of grocery ignoring online is at an end," says Nikki Baird, managing partner of advisory firm Retail Systems Research LLC. "If grocers aren't developing their online or cross-channel strategy right now, they're going to get left behind."
To be sure, the web only accounted for 1.4% of U.S. grocery sales in 2010, according to Forrester Research Inc. Grocery sales, excluding food services, totaled $589 billion in 2010, according to the latest estimate of the U.S. Department of Commerce. A report last year by Forrester found that less than 10% of online adults had purchased groceries online, and among online grocery buyers only 16% made such purchases more than once a month.
Nonetheless, "this web category is a promising one," says report author Sucharita Mulpuru, Forrester's senior analyst for e-business. One reason it's promising is that grocery sales are huge: Food and beverage stores accounted for 25% of U.S. retail sales (excluding motor vehicle dealers, restaurants and gasoline stations) of $2.35 trillion in 2010, according to Commerce Department figures.
Making grocery even more attractive is the fact that the base of online grocery buyers skews toward young and affluent consumers likely to increase their Internet spending. 56% of U.S. online grocery buyers in the Forrester report were between the ages of 18 and 43 (compared with 52% for all U.S. online consumers). The report notes that online grocery buyers also have a higher average household income than online consumers as a whole, at $93,000 to $86,000, and that they are more likely to have a college degree.
There are also signs online grocery shopping is picking up in other countries. In the United Kingdom, the web accounted for 3.4% of grocery sales last year, and that will grow to 5.2% by 2014, says market research firm Datamonitor.
While the supermarket chains have mostly held off adopting Peapod's model of online ordering for home delivery, those chains are investing more in the web, in many cases allowing online ordering for store pickup and employing digital marketing techniques.
Rick Tarrant, CEO of MyWebGrocer, a provider of e-commerce and digital marketing technology and services to more than 110 grocers, says store retailers that engage shoppers online win 18-20% more business from them. And using digital instead of paper coupons lets retailers tie offers to specific product SKUs and quickly monitor customer response, says Paul Stanley, vice president of marketing at Cellfire, a provider of online coupons.
Wakefern Food Corp.'s ShopRite supermarket chain is one of several grocery retailers using mobile apps from MyWebGrocer that let shoppers view digital versions of advertising circulars, see items Liked by their Facebook friends, and click to add items to a personal shopping list. Consumers can access those features on ShopRite's web site, and ShopRite recently became the first MyWebGrocer client to offer that functionality on a mobile site.